Clarification on the valuation of bonds issued under Basel III framework

Last updated: 24 March 2021

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The Securities and Exchange Board of India (SEBI) has issued a circular clarifying the valuation of bonds issued under the Basel III framework. This update introduces a glide path for the deemed residual maturity of Basel III AT-1 and Tier 2 bonds, starting from March 31, 2022, and gradually increasing to 100 years by April 1, 2023. These changes aim to provide a consistent approach to bond valuation and Macaulay Duration calculations for mutual funds.

Securities and Exchange Board of India

CIRCULAR

SEBI/HO/IMD/DF4/CIR/P/2021/034

March 22, 2021

All Mutual Funds (MFs)/Asset Management Companies (AMCs)/
Trustee Companies/ Boards of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)

Sir / Madam,

Subject: Clarification on the valuation of bonds issued under Basel III framework.

1. SEBI, vide para 8 of the circular SEBI/HO/IMD/DF4/CIR/P/2021/032 dated March 10, 2021, has inter alia stated that the maturity of all perpetual bonds shall be treated as 100 years from the date of issuance of the bond for the purpose of valuation.

2. Based on the representation of the Mutual Fund Industry to consider a glide path for implementation of the policy and request of other stakeholders, it has been decided that the deemed residual maturity for the purpose of valuation of existing as well as new bonds issued under Basel III framework shall be as below:

Time Period	Deemed Residual Maturity of Basel III AT-1 bonds (Years)	Deemed Residual Maturity of Basel III Tier 2 Bonds (Years)
Till March 31, 2022	10	10 years or Contractual Maturity whichever is earlier
April 01, 2022 – September 30, 2022	20	Contractual Maturity
October 01, 2022 – March 31, 2023	30	Contractual Maturity
April 01, 2023 onwards	100 *	Contractual Maturity

*100 years from the date of issuance of the bond.

Macaulay Duration for bonds issued under Basel III framework shall be calculated based on the deemed residual maturity as mentioned in the above table.

3. Further, if the issuer does not exercise call option for any ISIN then the valuation and calculation of Macaulay Duration shall be done considering maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds, for all ISINs of the issuer. In addition to the above, if the non-exercise of call option is due to the financial stress of the issuer or if there is any adverse news, the same shall be reflected in the valuation.

4. Further, AMFI is advised to issue detailed guidelines with respect to valuation of bonds issued under Basel III framework, which shall be implemented by April 01, 2021.

5. Further, all other provisions mentioned in the circular SEBI/HO/IMD/DF4/CIR/P/2021/032 dated March 10, 2021 remains same.

6. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Lamber Singh

Deputy General Manager

Tel no.: 022-26449667

Email: lambers@sebi.gov.in

FAQ :

The circular provides clarification on the valuation of bonds issued under the Basel III framework for mutual funds.

A glide path for the deemed residual maturity of Basel III AT-1 and Tier 2 bonds has been introduced, which will be used for valuation purposes.

The deemed residual maturity starts at 10 years until March 31, 2022, increasing to 20 years until September 30, 2022, then 30 years until March 31, 2023, and finally 100 years from April 1, 2023, onwards.

Macaulay Duration for bonds issued under Basel III will be calculated based on the deemed residual maturity specified in the circular's table.

If the issuer doesn't exercise the call option, AT-1 bonds will be valued considering 100 years from issuance, and Tier 2 bonds will consider their contractual maturity.

AMFI is advised to issue detailed guidelines for implementation by April 1, 2021.