It also clarified that the maturity of all perpetual bonds should be treated as 100 years from the date of issuance for the purpose of valuation.
With new limits, the incremental ability of mutual funds (MFs) to buy bank bonds would be constrained and this would result in increase in coupon rates, the Department of Financial Services said in an office memorandum dated March 11 marked to Sebi chairman and secretary, economic affairs.
"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the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100 year tenor be withdrawn," the memorandum said.
The clause on valuation is disruptive in nature and instructions that reduce concentration risk of such instruments in MF portfolios can be retained as fund houses have adequate headroom even within the 10 per cent ceiling, it said.
Putting in place restrictions on MFs' exposure to debt instruments with special features, the Securities and Exchange Board of India (Sebi) on Wednesday said a mutual fund under all its schemes will not be permitted to own more than 10 per cent of such instruments issued by a single issuer.
Presently, there are no specified investment limits for such instruments.
Talking about the likely impact of the Sebi circular, the memorandum said it could lead to panic redemption by mutual funds, impacting overall corporate bond market as fund houses would resort to selling other bonds to raise liquidity in debt schemes.
This could lead to higher borrowing cost for corporates at a time when the economic recovery is still nascent, it said.
Besides, it said, capital raising by PSU banks from the market will be adversely impacted due to limited appetite from other investors. This could lead to increased reliance on the government for capital raising as AT1 and Tier II bonds would need to be replaced by core capital.
MFs are one of the largest investors in perpetual debt instruments and currently hold more than Rs 35,000 crore of outstanding AT-1 issuances of about Rs 90,000 crore.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.