India's Easing of Perpetual Bond Norms Expected to Revive Market
India's move to ease norms for how mutual funds value perpetual bonds is expected to prompt banks to resume issuing the notes and revive the market. This follows a period of slowdown in issuance after the Securities and Exchange Board of India (SEBI) tightened valuation norms in March 2021.
The new norms allow mutual funds to use the call option maturity to price the notes, providing greater clarity and stability for investors. This is expected to boost initial demand and improve market sentiment, leading to increased issuance by banks.
Several major banks, including State Bank of India, Canara Bank, Bank of Baroda, and Punjab National Bank, are expected to raise around Rs 15,000 crore (about $1.8 billion) through perpetual bonds by September end. This will significantly increase the volume of perpetual bonds issued compared to the previous fiscal year, where funding through the notes dropped to Rs 17,500 crore from Rs 34,400 crore the year before.
While the long-term impact on yields is expected to be neutral as the market adjusts to supply dynamics, the move is seen as positive for both issuers and investors. Banks will have access to a wider pool of capital, while investors will benefit from the additional return offered by perpetual bonds compared to regular unsecured bonds.
The change in valuation norms is seen as a positive step that recognizes market practice and legitimizes it. This should lead to lesser volatility in the net asset value (NAV) of funds holding such bonds, further enhancing investor confidence.
Overall, the easing of norms for perpetual bonds is expected to have a positive impact on the market, leading to increased issuance, improved liquidity, and greater investor participation. This will benefit both banks and investors, contributing to the overall growth and development of the Indian financial market.