SEBI headquarters. | Representative image
The Securities and Exchange Board of India (SEBI) on March 22, 2021, issued a circular giving time to mutual funds (MFs) before they will be required to treat perpetual bonds as 100-year papers for valuation.
However, fund managers say they are not sure how the bond markets will see these new rules, and if there may be still some impact on prices of bonds held by debt MF schemes.
“The impact is likely to be less compared to what it would have been if these bonds were to be valued as 100-year maturity papers. The bonds of good-quality banks, where there is low probability of not exercising the call option, the yields would not rise much,” said a fund manager, requesting anonymity.
A company can terminate bond and return money to bondholders using call option.
“The move should help in calming the nerves of investors that held perpetual bonds in their portfolios,” said another fund manager, requesting anonymity.
For now, fund houses will be treating perpetual bonds as papers with ten-year maturities from April 1, 2021. Fund managers say this may have an impact as such bonds were being valued, depending upon the next call date, which is usually at five-year intervals.
“From April 1, 2022, these papers will be valued with 20-year maturity. Right now, such papers are valued depending upon the next call date, which is usually at five-year intervals,” said a fund manager, requesting anonymity.
Creating a glide path
SEBI in its circular said that it is creating a “glide path” for bringing in the 100-year maturity rule.
After the ten-year maturity treatment, these bonds will get treated as 20-year maturity papers for six months between April 1, 2022 and September 30, 2022.
“The impact on these bonds when valuing them at 20-year maturity could be the same as 100-year maturity,” another fund manager said, requesting anonymity.
For another six months — between October 1, 2022 and March 31, 2023 — perpetual bonds will be treated as 30-year papers.
From April 1, 2023, these bonds will get treated as papers with 100-year maturity. The SEBI circular also said that if the bond issuer did not exercise call option for any bond, the valuation would then have to be done using the 100-year maturity rule.
On March 10, 2021, SEBI’s circular requiring perpetual bonds to be valued as 100-year papers had led to concerns in MF industry as new valuation rule would require such bonds to be valued lower by MFs when these are not traded in markets. MFs feared that this would have an impact on NAVs of the debt MF schemes.
Later, the Finance Ministry also wrote to SEBI to withdraw the 100-year maturity rule, as if MFs didn’t buy such bonds, it would make it difficult for PSU banks to raise capital.