With the Yes Bank crisis threatening to singe several mutual fund houses due to the write down of AT1 bonds of the private lender, the Association of Mutual Funds in India (AMFI) wants equity and preference shares to be marked down before AT1 bond investments.
"We have written to RBI and said that first equity shareholders, then preference shareholders and then AT1 bondholders should be asked to mark down the value permanently," said NS Venkatesh, Chief Executive Officer, AMFI.
A copy of this letter has also been sent to the Securities and Exchange Board of India.
The letter to RBI also pointed out that the perpetual bond market will dry up and yields will be affected.
AMFI has decided to write the letter to RBI as 11 mutual fund houses have nearly Rs 3,000 crore invested in AT1 bonds of Yes Bank and AMCs may stand to lose their money if RBI’s draft rescue plan is approved.
As per data sourced from Morningstar India, in all, 11 fund houses had exposure worth Rs 2,819 crore via 30 schemes as on Jan 31, 2020.
"The instruments qualifying as Additional Tier 1 capital, issued by Yes Bank Ltd under Basel III framework, shall stand written down permanently, in full, with effect from the appointed date. This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework." said the RBI's draft plan.
Almost all fund houses have side-pocketed their exposures to Yes Bank bonds in a bid to prevent the distressed assets from damaging the returns generated from more liquid and better-performing assets.
A perpetual bond is a bond with no maturity date that is not redeemable but pays a steady stream of interest forever.
A reading of terms and conditions of AT1 Bonds for capital adequacy suggests that since bonds are perpetual in nature, these carry a fixed interest rate called coupon.
The issuer, in this case Yes Bank has a call option i.e. close the bond after 5 years.
However, before that period RBI has stepped into the management of Yes Bank, initially writing down the entire value of AT1 Bonds which MFs are now trying to rescue by negotiations with RBI.
"Bond holding by debt mutual funds was considered a safer option by many retail investors, generating higher returns than bank fixed deposits," said an ex-SEBI Officer who worked in its MF department.
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