‘Allow temporary write-down of Yes Bank’s additional tier 1 bonds’

AMFI plea to avoid huge hit to net asset value of schemes

Motorists pass in front of a Yes Bank branch as a customer makes enquiries with the security personnel, in Bangalore on March 6, 2020. - Shares of India's fourth-largest lender Yes Bank tanked over 57 percent Friday as the country's central bank limited withdrawals triggering panic as huge swathes of customers lined up outside ATMs. (Photo by Manjunath Kiran / AFP)

The Association of Mutual Funds in India (AMFI) has written to the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) to allow fund houses a temporary write down of additional tier 1 bonds of Yes Bank to avoid a huge hit on the net asset value of schemes that hold such bonds.

The industry body wrote to the banking regulator after the proposed restructuring scheme of the troubled private sector bank mentioned that such bonds would be permanently written off. “As an industry body, we have written to both RBI and SEBI,” said AMFI chief executive N.S. Venkatesh during a media call on Wednesday. “We have written before the cut-off date [for submitting comments] of the restructuring scheme of Yes Bank. Our comments have been given. Now they will examine it,” he added.

This assumes significance as many fund houses including, Nippon India Mutual Fund, Kotak Mutual Fund and Franklin Templeton Mutual Fund, among others, stand to lose thousands of crores if the additional tier 1 bonds are completely written off. Such bonds, known as AT1 bonds in market parlance, are perpetual bonds issued by banks to meet their long-term capital requirements. Interestingly, such bonds typically do have a call option after five years and hence if the central bank allows a temporary write down, the fund houses may still be able to stem the potential losses if the valuation of the bank improves after restructuring.

Meanwhile, the total assets under management (AUM) of the industry registered a marginal dip in February with the assets falling to ₹27.23 lakh crore from ₹27.86 lakh crore in January.

Going ahead, industry players expect the ongoing volatility to affect mutual fund flows to a certain extent.

“We expect continued buoyancy in SIP flows in March too, though a few institutional investors may reassess their investment strategy, given the deep correction in markets,” said Mr. Venkatesh.