Regulatory updates

Additional Tier (AT)-1 bonds, popularly known as perpetual debt instruments are issued by banks to raise money and build up their core equity capital. Banks have a call option that permits them to redeem these bonds after a certain period. Prior to the report on valuation of AT-1 bonds issued by the National Financial Reporting Authority (NFRA), the valuation of the bonds was prescribed in the following manner:

• By SEBI: AT-1 bonds were required to be valued basis Yield To Maturity (YTM), where the maturity of these bonds was considered 100 years. This valuation was applicable to mutual funds and insurance companies¹⁹ The Insurance Regulatory Development Authority of India (IRDAI) vide a master circular required insurance companies to comply with the valuation directions issued by SEBI for mutual funds. .
• By RBI: Banks were required to value AT-1 bonds on Yield to first Call (YTC) basis²⁰ Yield to Call is the expected return an investor gets if they buy a bond and hold it until the issuer repurchases it on call date, before maturity. . These valuation norms were in accordance with the principles of Ind AS 113, Fair Value Measurement.

Considering the divergence in the valuaton requirements by SEBI and RBI, the Ministry of Corporate Affairs (MCA) requested NFRA to suggest a methodology for valuation of AT-1 bonds, which would be in sync with Ind AS 113

Based on market consultation and its study, in July 2024, NFRA issued a report on ‘Valuation methodology for Additional Tier (AT)-1 bonds’ (valuation report), which recommended that valuation of AT-1 Bonds should be on YTC basis (adjusted with appropriate risk spreads)²¹ The rationale for such valuation is that based on market practice, AT-1 bonds have been observed to trade at or quote prices closer to YTC basis- accordingly, this basis of valuation is in line with the principles of valuation stipulated by Ind AS 113. . However, NFRA also clarified that the issue of deemed maturity date for other purposes is outside NFRA’s remit.