New Delhi, The National Financial Reporting Authority (NFRA) has suggested that the valuation methodology of AT-1 bonds, which are issued by banks to raise funds, should be reviewed at least every three years to consider changes in line with the market practices. .
Banks can issue AT-1 bonds, which are perpetual debt instruments with loss absorption features and have a higher coupon rate due to the associated risks. They are considered an important source of quasi-equity capital for banks around the world and investors in these bonds include mutual funds, corporates and other institutional investors.
The authority has prepared a report on the valuation methodology for AT-1 bonds following a government reference.
In January this year, the Ministry of Corporate Affairs forwarded a proposal from the Department of Economic Affairs (DEA) to the NFRA for deliberation and recommendation on the valuation methodology for AT-1 bonds.
"Since Ind AS 113 emphasizes valuation based on market practice, our recommendations are also based on current market behavior. However, market behavior is dynamic. Hypothetically, it may happen that market practice becomes such that most AT-1 bonds are not called by the issuers.
"In that case, the market may value these bonds at YTM (Yield To Maturity) or yield at the worst. Therefore, it will be necessary to monitor market practices and see if there are any changes over time. Therefore, it is recommended that at least once "In three years, the valuation methodology may be reviewed to take into account changes in market practices, if any," the report says.
The NFRA considered the bond valuation methodology in sync with Indian Accounting Standard 113 (Ind AS 113). The theme underlying fair value measurement in IAS 13 is a market-based measurement that considers traded/quoted prices, data and information observed in markets, and the assumptions and practices of market participants.
The fair value principles of IFRS require the determination of valuation assumptions or approaches generally used by market participants.
In March 2021, markets regulator Sebi issued a circular stipulating prudential investment limits for mutual funds for AT-1 bonds. Among other things, it was stipulated that the maturity of all perpetual bonds would be considered 100 years from the date of issuance of the bond for valuation purposes.
In this context, the NFRA has prepared the report on the valuation methodology.
Banks can issue AT-1 bonds, which are perpetual debt instruments with loss absorption features and have a higher coupon rate due to the associated risks. They are considered an important source of quasi-equity capital for banks around the world and investors in these bonds include mutual funds, corporates and other institutional investors.
The authority has prepared a report on the valuation methodology for AT-1 bonds following a government reference.
In January this year, the Ministry of Corporate Affairs forwarded a proposal from the Department of Economic Affairs (DEA) to the NFRA for deliberation and recommendation on the valuation methodology for AT-1 bonds.
"Since Ind AS 113 emphasizes valuation based on market practice, our recommendations are also based on current market behavior. However, market behavior is dynamic. Hypothetically, it may happen that market practice becomes such that most AT-1 bonds are not called by the issuers.
"In that case, the market may value these bonds at YTM (Yield To Maturity) or yield at the worst. Therefore, it will be necessary to monitor market practices and see if there are any changes over time. Therefore, it is recommended that at least once "In three years, the valuation methodology may be reviewed to take into account changes in market practices, if any," the report says.
The NFRA considered the bond valuation methodology in sync with Indian Accounting Standard 113 (Ind AS 113). The theme underlying fair value measurement in IAS 13 is a market-based measurement that considers traded/quoted prices, data and information observed in markets, and the assumptions and practices of market participants.
The fair value principles of IFRS require the determination of valuation assumptions or approaches generally used by market participants.
In March 2021, markets regulator Sebi issued a circular stipulating prudential investment limits for mutual funds for AT-1 bonds. Among other things, it was stipulated that the maturity of all perpetual bonds would be considered 100 years from the date of issuance of the bond for valuation purposes.
In this context, the NFRA has prepared the report on the valuation methodology.
