“We estimate the system level AT-1 and Tier-2 bonds at Rs 3.5 trillion, of which mutual funds hold a sizable 19 per cent share. While we do not have a segregation of mutual funds’ exposure by type of bonds (AT-1, Tier-2, Infra bonds), we believe most of it will be AT-1 and Tier II bonds,” said the brokerage said in a note.
On March 10, the market regulator said that no MF under all its schemes shall own more than 10 per cent of AT-1 bonds and Tier-2 bonds issued by a single issuer. The circular also specifies that no MF scheme can hold more than 10 per cent of its net asset value (NAV) of its debt portfolio in such bonds, and not more than 5 per cent of the NAV of the debt portfolio should be due to such bonds from one issuer.
These norms come into effect from April 1.
“There may not be any immediate repercussion as Sebi has allowed grandfathering of excess investments, but such mutual funds won’t be allowed to invest further instruments until the investments come below the specified limit. However, we do expect some tightening of the AT-1 / Tier-2 bond market going forward depending on individual mutual funds’ appetite,” Nomura said in a note.
Based on the figures available at the end of January, several fund houses don’t meet the at least one of the criteria laid down by Sebi, says Nomura.
For instance, Franklin Templeton MF, ICICI Prudential MF, HDFC MF, SBI MF and Kotak MF hold more than 10 per cent of AT-1 and Tier-2 bonds issued by a single issuer. Similarly, debt schemes of over half a dozen MFs have exposure of more than 10 per cent to such bonds and/or 5 per cent to single issuer of these bonds.
Nomura has computed limits at an asset management company level after excluding debt assets under management (AuM) for short duration, ultra-short duration, money market/liquid and GILT schemes.
Meanwhile a study conducted by rating agency Crisil has revealed that 36 schemes spread across 13 fund houses breach the cap of 10 per cent on such bonds at scheme-level. The analysis by Crisil is based on data at the end of February 2021. The rating agency also analysis finds that the banking and public sector undertaking (PSU) fund category has the highest number of schemes (seven) exceeding the 10 per cent cap in such securities. It is followed by the credit risk fund (five), medium duration fund (four), medium to long duration funds (four), and dynamic bond fund (three) categories.
Piyush Gupta, Director, CRISIL Funds Research, said “In the medium to long term, with the restrictions in place, it could reduce appetite among MFs for these securities, thus limiting the risk for investors. This is also prudent given the advent of hordes of individual investors in to debt funds. They may not have the ability to understand MF portfolios and gauge risk, especially in such type of bonds – we saw how they were caught unaware by the recent write-offs.”