Hello Readers!!

Recently on March 10, 2021, SEBI announced that it is going to make some changes in the provision of Perpetual Bonds. The circular issued by SEBI (Security Exchange Board of India), states that the maturity of all perpetual bonds needs to be treated as 100 years from the date of issuance of the bond for the “purpose of valuation”.

Well, this announcement has taken a tight spot in the mutual fund industry. People from the industry say that applying the 100-year maturity rule to value perpetual bonds might lead to great volatility in the NAVs of mutual fund schemes, exposed to such bonds.

What Was The Scene With Perpetual Bonds Earlier?

Perpetual Bonds, also known as a perpetual or perp, earlier was a bond with no maturity date. Thus, it was treated as Equity and not debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal.

It is worthy to note here that in India, perpetual bonds are usually issued by banks to meet their capital requirements.

What The Experts Has To Say About The New Law?

Experts say that with the new rule applied, there are chances that the perpetual bonds will be valued at the higher yield to maturity on non-trade days. And this would ultimately lead to volatility in the prices of these bonds.

And the higher yield will result in lowering the bond prices thus affecting the NAV of the MF’s scheme exposed to perpetual bonds when these don’t get traded. They might get lower; however, they will recover when the bonds are traded again at the yield to call date.

A fund manager says that “Investors who are more tuned into debt markets may be able to take advantage of price fluctuation of such bonds. On days when there is no trade-in these bonds, such investors would invest in MF schemes as prices of these bonds fall and redeem when a trade happens”.

Industry executives say SEBI’s new rule can end up giving an advantage to some investors over others. They further said that while SEBI has come up with this rule to with the intention of protecting investors, however, this rule may unnecessarily put investors in a difficult situation.

Another Fund manager said that they have prepared their presentation to request to think once again on this provision. They are hopeful the regulator will be open to suggestions and concerns raised by the MF industry, as it has shown in the past.

What Other Changes SEBI’s Circular Include?

SEBI has proposed some more changes basically introducing investment limits on perpetual bonds, that are listed in its circular. Some of these changes are as follows:

• Mutual funds should not be investing more than 10 percent of the scheme’s corpus in perpetual bonds, the Sebi circular read.
• The exposure should not be more than five percent to a perpetual bond of the same company.

Now it will be worth waiting on how the regulator reacts to the request of the Mutual fund industry and what changes will it bring to save the interest of investors.

Keep reading for more updates on Mutual Fund Investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).