Market regulator Securities and Exchange Board of India (SEBI) is likely to amend its earlier Additional Tier-1 (AT-1) rules with respect to valuing the bonds on a 100-year maturity. According to sources, the broad principles of original notification remain, but the implementation will now be allowed in a phased manner.
The phased implementation of AT-1 valuation change will provide relief to the industry, according to SPJIMR’s Professor Ananth Narayan.
“I think a phased implementation would provide some relief to the industry and it also would be a step in the right direction. I think the valuations need to change and a phased approach of this kind would be less disruptive,” he told CNBC-TV18.
He also said that mutual funds are the largest participants in the AT-1 market and they will be influenced by any change in valuation norms.
Narayan believes that value-to-call or yield-to-call is not the right way to look at AT-1 bonds.
“Value-to-call or yield-to-call is not the right valuation. These instruments are complicated and there are multiple things that could happen. One is the coupon need not be paid. It is not like a standard bond; the coupon is paid only under certain circumstances. Second, the company might choose to not call and extend the maturity. Third, as we saw in the earlier cases, if there is a point of non-viability or if under some extreme circumstances the bond actually could get extinguished, the entire amount could get written down. So, this is not like a standard bond and therefore pricing it to call date is not correct,” he said.
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