The Securities and Exchange Board of India (Sebi) on Monday relaxed the rules on the valuation of perpetual bonds by mutual funds.

The capital market regulator has announced a glide path to prevent the immediate erosion in fund values of the perpetual bonds or additional Tier-I (AT-1) bonds .

In a late evening circular, Sebi said the mutual funds can adopt “deemed residual maturity’’ to value existing as well as new bonds issued under the Basel III framework.

Consequently, the deemed residual maturity will be 10 years till March 31, 2022.

It will rise to 20 years from April 1 that year to September 30, 2022 and 30 years from October 1, 2022 till March 31, 2023.

However, from April 1, 2023 onwards, they will be considered as 100 years from the date of issuance of the bond.

Sebi had consulted the mutual fund industry to prepare the glide path.

After the market regulator’s circular on March 10, the Department of Financial Services (DFS) of the finance ministry asked it to withdraw the directive to treat these bonds as of 100-year-tenor.

North Block’s apprehensions arose from the fact there was no 100-year bond on the market to value the security.

It also feared the abrupt drop in valuation will lead to NAV swings and the capital raising by PSU banks through AT1 bonds will be affected. Fund houses value the perpetual bonds to the call option date which could be five years or 10 years.

Sebi’s current rules on valuation of securities that have a call date stipulate they should be done “at the lower of the value as obtained by valuing the security to final maturity and valuing the security to call option’’.

Sources said that the relaxation announced by Sebi should be welcomed as it is now giving the industry sufficient time to converge towards the 100-year maturity valuation.

Sebi had come out with the circular to protect retail investors from exposure to riskier instruments such as AT-1 bonds.

Last year, the market regulator had said that banks can only issue these instruments to qualified institutional buyers. Further, the minimum allotment should be at least Rs 1 crore and the minimum trading lot size should be Rs 1 crore. This was made to put these bonds out of reach of the retail investor.
Perpetual bonds which are generally issued by banks offer high interest rates and therefore they are popular with debt mutual funds but carry more risk.

For instance, the issuer can even skip coupon payments in case of certain adverse events or they can even be written-down if a bank’s common equity tier 1 (CET1) ratio falls below a certain threshold.