Following the demand of mutual funds and the direction of the Ministry of Finance, the market regulator SEBI has amended the rules regarding AT-1 bonds i.e. perpetual bonds. SEBI said that the maturity of perpetual bonds will remain the same for 10 years till March 31, 2022.
According to the revised rules of SEBI, the maturity of perpetual bonds will be 20 years from 1 April 2022 to 30 September 2020. At the same time, its maturity will increase to 30 years from the next six months i.e. from 1 October 2022 to 31 March 2023. According to the new regulations of SEBI, the maturity of AT-1 bonds will be 100 years from its issue date from 1 April 2023 onwards.
Let us tell you that on 10 March 2021, SEBI had decided to 100 years of maturity of Additional Tier 1 (AT1) Bonds or Perpetual Bonds by issuing a circular, causing a big crisis in front of banks and mutual funds.
This rule was to come into force from April 1, 2021. But the Finance Ministry directed SEBI to withdraw this circular. The Department of Financial Services (DFS) of the Ministry of Finance sent a memorandum to SEBI asking it to withdraw the decision. After this, SEBI has revised its rules today.
With the maturity of AT1 bonds to 100 years, SEBI has fixed the limit of investment in debt (debt) with special features by mutual funds. 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. Mutual funds body AMFI had said that making the maturity 100 years a slight change in interest rates would lead to a huge loss for those investing in these bonds and fearing that the investors would not invest in it.
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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