Call options are where the issuer can call the bond back after paying principal and interest, in the middle of the tenure.
While some money managers believe that the renewed norms will not bring any material change to mutual funds’ appetite, others believe that demand may slightly increase as they can be added to balance funds, medium-term funds and medium to long-term funds.
SEBI’s decision, followed by the National Financing Reporting Authority’s recommendation has come as the secondary market of corporate bonds continued to trade these instruments on a yield to call basis. They consider the call option of typically five years or 10 years from the date of the issuance.
Calls and messages to a spokesperson for SEBI were left unanswered at the time of filing this story.
What prompted SEBI to tighten valuation norms for mutual funds in the first place was the Yes Bank fiasco and some concerns around mis-selling of these papers. In early 2020, Yes Bank had to write off perpetual bonds worth Rs 8,415 crore as it was strapped for capital.
As demand from mutual funds took a hit, issuances of tier-I bonds by banks also declined in the primary market. According to PRIME Database, banks issued tier-I bonds worth Rs 16,363 crore in 2023-24 (April-March), lowest in the past four financial years as compared with Rs 34,394 crore in 2022-23.
This also drove the pricing on such papers, making it difficult for banks to garner enough demand.
With the latest change in regulation, supply of these papers and liquidity may increase. Merchant bankers believe that State Bank of India and other public sector banks may start lining up their tier-I bond issuances.
However, concerns over mis-selling of such instruments remain.
“Going forward, we will see demand for such instruments. However, the biggest issue with such bonds is mis-selling. There has to be severe penalties for mis-selling of such instruments. That loophole has not been closed yet,” Deepak Sood, Head Fixed Income at Alpha Alternatives said.