Govt, regulators plan to revive AT1 bond market, re-examine rule for valuation
'perpetual bonds' — complex securities that have sparked debates and court battles but without which many high-street banks would find it tough to raise capital in the coming years.
Financial market authorities are examining a possible change in the way the securities are valued to stoke investor interest in the quasi-equity papers, better known as 'additional tier-1', or AT1 bonds, three persons familiar with the discussions told ET.
The government, financial market regulators, banks (which issue such bonds), and asset managers (which invest in them) have discussed the matter in the weeks before the Diwali holiday. Banks and mutual funds chiefs have had meetings with the Securities & Exchange Board of India (Sebi) which formulates the valuation rules.
A few senior CEOs of asset management companies have separately put across their point to officials of the finance ministry.
Though AT1 bonds typically have a call option that lets the issuing bank redeem the papers at the end of five years or later, Sebi's new valuation regulation require investing funds to treat the securities as papers with 100-year maturity. This, banks believe, have lowered the appetite for AT1 bonds.
BANKs Vs MFs
However, 'what ails the AT1 bond market' has emerged as a contentious subject with banks and fund houses differing in views. The banking industry firmly believes that a change in the valuation technique — by lowering the bond tenor from 100 years to the year of the call option (as was the practice earlier) — would improve AT1 bond valuation in investors' books and rekindle institutional demand.
