On March 10, 2021, the market regulator Sebi (SEBI) had decided to extend its maturity to 100 years by issuing a circular called Additional Tier 1 (AT1) Bonds, also called Perpetual Bonds, creating a big crisis for banks and mutual funds. happened. This rule was to come into force from April 1, 2021. But now the Finance Ministry has instructed SEBI to withdraw this circular. The Department of Financial Services (DFS) of the Ministry of Finance has sent a memorandum to SEBI asking it to withdraw the decision.
With the maturity of AT1 bonds to 100 years, SEBI has fixed the limit for investment in debt (debt) with special features by mutual funds. However, the Finance Ministry does not object to this new rule. According to the SEBI circular, Mutual funds will now be able to invest only 10% of their assets under management (AUM) in debt (debt) with special features that can be converted into equity. SEBI said that it would include Additional Tier 1 (AT1) and Additional Tier 2 (AT2) bonds. According to the SEBI circular, mutual funds will not be able to invest more than 5% of their assets on a single issuer’s debt.
The maturity of AT1 bonds brought the mutual fund industry to 100 years, because the revaluation of these bonds would have caused a loss to investors. For this reason, the mutual funds body AMFI opposed this decision of SEBI. AMFI said that this rule is fatal for banks and capital markets, it will make it difficult for banks to raise capital and banks will have to depend on the government for capital. Therefore it should be withdrawn. The AMFI said that a slight change in interest rates by 100 years of maturity would lead to a huge loss for those investing in these bonds and investors would not invest in it for fear of a loss.
What is AT1 bond
Let us tell you that AT1 and AT2 bonds are also called perpetual, as they have no fixed maturity date. However, banks continue to repay them at regular intervals. If the bank’s capital falls due to high NPA, then these bonds absorb that deficit. The AT1 bond is called a Tier 1 bond. These are permanent bonds with no expiry. They are helpful in meeting the capital requirement of banks.
RBI is the regulator for AT1 bonds. It pays fixed interest rate at regular intervals. It has a higher interest rate than non-permanent bonds where investors are not required to pay back the principal. However, holders can sell it if they need the money. In this, investors cannot return the bond issuing bank but banks have the option to recall the AT1 bond.
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