‘Most of such bonds have lower ratings compared to the parent bonds.’

New Delhi: After the Securities and Exchange Board of India (SEBI) withdrew the restriction on mutual fund (MF) investments in additional tier-1 (AT1) bonds, an expert said that the SEBI wanted retail investors to understand the risk behind this investment. This concern was only after the Yes Bank episode which happened last year. The SEBI did not want investors to buy the AT1 bonds purely on the basis of yield.
Nitin Shanbhag, Head-Investment Products, Motilal Oswal Private Wealth Management, told The Sunday Guardian, “AT1 bonds are quasi-equity. These are the bonds are released by the banks as equity capital. Because they are equity in nature, most of the bonds have lower ratings compared to the parent bonds. For example, if SBI bonds are rated AAA, then the AT1 bonds will be rated AA+.”
He further said, “These (AT1) bonds carried higher yield compared to other bonds. So they always attract investors. Now, due to last year’s Yes Bank incident, the SEBI wanted retail investors to assess the risks behind these investments.”
Shanbhag added, “According to the circular for MFs, the banks need to cap the exposure to 10% within the MF portfolio and bonds need to be valued at 100 years correctly. SEBI has also said that it is fine if the banks are holding the exposure of more than 10% prior to the circular, but you need to value it as per the market norms. So, it will be traded as per last traded price and at the same time from the financial year 2021-22, the maturity for these bonds will be like a 10-year bond.”
Asked whether investors who are holding perpetual bonds in the secondary market are at risk, he said, “It is not so much of concern for these investors. Whatever volatility had to happen has happened for now. From here, we will see far lesser volatility.”
Asked why the Finance ministry intervened, Shanbhag said, “The Finance ministry concern was that for banks this is a very large segment for raising capital and if the SEBI imposes restrictions, there would be large fluctuations in the prices. The ministry was fine with the exposure limit announced by the SEBI. Going forward, these bonds will be favourable for institutional investors.”
Talking about the volume, he said that within the mutual funds industry, they are holding around Rs 39,000 crore perpetual bonds.