SEBI’s big decision on debt schemes of mutual funds, rules related to perpetual bonds changed

SEBI has implemented a new scheme for mutual funds. According to this rule, no mutual fund will be able to invest more than ten percent of the total investment of its debt schemes in bonds that can be converted into equity. This includes the quota of putting five percent of the portfolio in Additional Tier One and Additional Tier Two Bonds. They are also called perpetual bonds.

These are issued under the Basel 3 framework. Their special thing is that when facing a crisis, they can be converted into equity. But after the Yes Bank crisis, it was revealed that there could be a lot of risk in them. Since then, this change was decided.

Lessons from Yes Bank case

The risk in additional Tier 1 and Additional Tier 2 bonds is very high because if the capital of the bank goes below the fixed level due to any reason, the investment in the bond can be harmful. Though this rule will be applicable from the next financial year its effect will start showing from now. This may increase the bond yield significantly.

Investors of perpetual bonds may suffer losses

The new rules will come into force from 1 April 2021. Actually, some mutual funds were continuously investing in Yes Bank’s Additional Tier 1 Bonds for the last few times. Although a consortium of investors took out Yes Bank from the crisis, the investors of this bond have suffered a lot. Analysts say that the implementation of these new rules of perpetual bonds on behalf of SEBI may cause substantial losses to such bondholders. In the case of Yes Bank too, investors of Additional Tier 1 and Additional Tier 2 bonds had to suffer a lot.