Amfi backs Sebi capping MF exposure to perpetual bonds

NEW DELHI: Industry body Amfi on Friday said it fully supports the capital markets regulator Sebi’s new rule, which puts a cap on mutual fund exposure to perpetual bonds.

The industry body recognises that the risk profile of such instruments is higher than regular bonds. The Securities and Exchange Board of India (Sebi) came out with a circular on review of norms regarding investment in debt instruments with special features and the valuation of perpetual bonds on Wednesday.

Under the new rule, mutual funds cannot invest more than 10% of the scheme’s corpus in debt instruments, with special features such as perpetual bonds, and the exposure cannot not be more than 5% to such debt instruments of the same company. In addition, 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”.

In a statement, the Association of Mutual Funds in India (Amfi) said it “fully supports the need and spirit of the circular in capping exposure to perpetual bonds”. It further said most of the mutual fund schemes are well below the cap specified in the circular.

In few of the schemes where perpetual bond exposure is higher than the Sebi prescribed cap, grand fathering is permitted by the regulator to ensure that there is no unnecessary market disruption, the industry body noted. It said Sebi had engaged with Amfi on treatment of perpetual bonds as it is a hybrid instrument and carries a differentiated risk reward ratio than a normal debt instrument.

Treatment of perpetual bonds was discussed in the Mutual Fund Advisory Committee (MFAC) where Amfi members participated. Perpetual bonds or Additional Tier-I bonds are issued without any maturity date but are usually issued with call options and qualify for Tier-I capital.

UNDER THE RULE, MUTUAL FUNDS CANNOT INVEST MORE THAN 10% OF THE SCHEME’S CORPUS IN DEBT INSTRUMENTS