InvestorQ : Is it true that HNIs are exiting debt funds after the recent SEBI rule on AT-1 bonds?
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Is it true that HNIs are exiting debt funds after the recent SEBI rule on AT-1 bonds?

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1 month ago
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It has been clarified that there are no instances of any panic redemptions by large investors as reported in sections of the press. This has been confirmed by the large mutual fund players and also by AMFI. However, many funds have admitted about getting enquiries from their high-net-worth investors expressing their intent to exit the debt funds after the latest AT-1 bonds rule that SEBI has proposed to bring in.

SEBI, despite a lot of protests from the banks and the mutual funds, appears to be keen to go ahead with the proposed changes to the AT-1 bond rules. This is clearly in the larger interests of the mutual fund industry and the mutual fund unit holders as the right picture of risk would be reflected only if appropriate provisions are made. Mutual funds have been getting enquiries on this matter from many large investors who have expressed their intent to explore redeeming their substantial debt fund holdings.

The apprehension of many of these investors, and rightly so, is that if the 100-year maturity rule prescribed by SEBI comes into effect from 01 April. Once the rule implemented, then those debt fund holding AT-1 bonds and Tier-2 bonds will have to make substantial provisions leading to erosion in NAV. As of the now, the situation is that fund managers are urging investors to wait for greater clarity on the issue.

When HNIs finally decide on this issue of redemption, the decision will be taken based on whether SEBI clarifies categorically that these provisions are being put off. After the Templeton issue, when redemption window was suddenly shut down, it does not look like HNIs would really want to take chances with their money unless there is absolute clarity on the regulatory front.

It is estimated that mutual funds could have an overall exposure of Rs.70,000 crore which would be approximately equally split between AT-1 bonds and Tier-2 bonds. That is nearly 29% of all the AT-1 and Tier-2 bonds issued by the banks and that is a lot of risk on the books. Currently, most of these AT-1 bonds and Tier-2 bonds find a ready market among the Credit risk funds, short duration funds and medium duration funds.

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