Valuation of AT-1 bonds held by MFs will be based on yield to call: Sebi

The Securities and Exchange Board of India (Sebi) on Monday stated that mutual funds need to value additional tier-1 (AT-1) bonds held by them based on the 'yield to call' methodology, in line with the recommendation of the National Financing Reporting Authority’s (NFRA) report to the Department of Economic Affairs.

AT-1 bonds are perpetual bonds issued by banks to raise money to meet regulatory capital requirements. Perpetual bonds do not have a maturity date, so banks make periodic interest payments throughout the life of the bond. However, they have a “call option” whereby the issuer can redeem or repay investors after a specific period.

 

NFRA in its report has recommended that since the market practice for AT-1 bonds has been observed to trade at or quote prices closer to a yield-to-call basis, valuation of AT-1 bonds on a yield-to-call basis, adjusted with appropriate risk spreads, will be consistent with the principles of market-based measurement under Ind AS 113.

Further, NFRA in its report has stated that the recommendation on the yield-to-call methodology is confined only to the interpretation of Ind AS 113, with reference to the valuation of AT-1 bonds and the issue of deemed maturity date for other purposes is outside NFRA’s remit.