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nism-series-va-at1-perpetual-bond-valuation-rule[ MUTUAL FUND DISTRIBUTORS ]

Under revised SEBI circulars, what is the mandatory valuation methodology and deemed maturity framework for Additional Tier 1 (AT-1) perpetual bonds held by mutual funds?

[ A ]Valued on a simple straight-line 30-day money market amortization basis.
[ B ]Valued as zero-coupon equity shares without factoring coupon cash flows.
[ C ]Valued exclusively by unitholders at the time of annual general meetings.
[ D ]Valued on a Yield to Call basis, with deemed residual maturity treated as 100 years from the date of issuance of the bond.[ CORRECT ]
Takeaway

Option D is correct: Valued on a Yield to Call basis, with deemed residual maturity treated as 100 years from the date of issuance of the bond.

Derivation
To address loss-absorption and non-call risks in bank perpetual bonds, SEBI mandated a glide path where the deemed residual maturity of AT-1 bonds is treated as 100 years from the date of issuance. Furthermore, SEBI mandated that the valuation of AT-1 bonds by mutual funds shall be conducted on a Yield to Call basis. Close-ended debt schemes are barred from investing in AT-1 bonds due to this 100-year deemed maturity. This question tests specialized debt valuation norms. A common error is assuming AT-1 bonds are valued using contractual call dates.
Why the others fail
A — Valued on a simple straight-line 30-day money market amortization basis.
Amortization valuation is restricted to very short-term money market instruments, not long-term perpetual AT-1 debt securities.
B — Valued as zero-coupon equity shares without factoring coupon cash flows.
AT-1 bonds are hybrid debt instruments paying periodic coupons and cannot be valued as zero-coupon equities.
C — Valued exclusively by unitholders at the time of annual general meetings.
Valuation of institutional debt is performed daily via independent valuation agencies and AMCs, not unitholder general meetings.