“The clause on valuation is disruptive in nature,” said Jnanatosh Roy, Under Secretary to the government of India in a notification. Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised valuation norms to treat all Perpetual Bonds as 100 year tenor be withdrawn.”
However, the ministry retained the cap of 10 percent citing concentration risk of such instruments in mutual fund portfolios, where an erosion of net asset value was widely expected following the SEBI order.
“Instructions that reduce concentration risk of such instruments in MF portfolios can be retained as MFs have adequate headroom even within 10 per cent ceiling,” said the government bureaucrat.
Earlier in the morning, some top fund houses approached secondary market bond traders offering to sell perpetual papers, compliant with Basel III norms, an international capital benchmark that qualifies for the SEBI’s new rule.
“We are asking about 20-30 basis points higher yields amid an evolving chaos,” a dealer working with a large financial house had told ET before the FinMin diktat came in. Speculations were rife that yields could climb as much as 100 basis points.
Investors in debt mutual funds holding perpetual bonds were staring at losses with the new valuation norm for the instrument expected to spark a sharp selloff on Friday, ET reported on March 12.
Money managers said accelerated redemptions in debt schemes could trigger a crisis as mutual funds will be forced to dump such securities, causing yields to spike and making it costlier for banks to borrow funds from the market.
Banks too were preparing to approach the Reserve Bank of India seeking relaxation of norms. They are the largest issuers of perpetual bonds along with other institutions. They have issued nearly 93 per cent of total outstanding perpetual bonds, pegged at Rs 1.46 lakh crore all inclusive, show data compiled by JM Financial. Others include non-banking finance companies (NBFCs) and various institutions that have sold perpetual bonds since 2007. About one-third of total perpetual outstanding is compliant with Basel III, an international capital standard that applies to the new Sebi rule.
“It would have been a bigger problem for public sector banks, which mostly raise capital via such instruments. This has likely prompted the government to act,” said a treasury head from one of the top banks.
Private banks find favour from global investors, who take interest to infuse equity capital.
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