Perpetual bonds in India are fixed-income instruments that do not have a maturity date. Often issued as Additional Tier 1 (AT1) bonds, they pay regular interest but may not guarantee repayment of principal.

These instruments sit between debt and equity in terms of risk. While they offer higher coupon rates than standard bonds, they also carry unique risks, including loss absorption and interest deferral. Understanding how they work is essential before adding them to a fixed-income portfolio.

Why Banks Issue Perpetual Bonds

In India, the Basel III framework drives the perpetual bonds market by defining banks’ capital requirements.

1. Making Capital Adequacy Stronger

AT1 bonds help banks meet RBI capital adequacy norms under the Basel III framework. These instruments include loss-absorption features that allow banks to strengthen core capital without diluting equity. Because principal repayment is not mandatory and coupon payments can be skipped under stress, AT1 bonds are treated as quasi-equity for regulatory purposes

2. Provision for Call

Perpetual bonds do not have a fixed maturity date. However, most of them include a call option. This gives the issuer the right, but not the obligation, to redeem the bond and repay the principal after a set period, usually five or ten years.

The call option gives the issuer flexibility. If market interest rates fall below the bond’s coupon rate, the issuer may choose to redeem the bond and refinance at a lower cost.

Investors often expect the bond to be called on the first call date. However, this decision depends on interest rates, regulatory conditions, and the issuer’s capital needs. A delay does not automatically signal financial trouble but should be assessed carefully.

Unconventional Perpetual Bonds Risks

While this structure helps issuers, it increases the level of risk you face as an investor. The potential for higher returns and investing in Indian bonds carries perpetual bond risks that are very different from those of a standard corporate bond investment. You should understand that this debt ranks below senior bonds in the repayment hierarchy.

1. Risk of Not Paying Back the Principal

With a regular bond, you receive your principal at maturity. With a perpetual bond, you cannot be sure you will get your money back unless the issuer exercises the call option. If the issuer does not call the bond, you can recover your money only by selling it in the secondary market, where liquidity may be limited.

2. Deferring Interest Payments (Coupon Skip)

If the issuer misses interest payments on a standard bond, it counts as a default. With AT1 perpetual bonds, the issuer may skip interest payments without default. You cannot recover skipped coupons later because they do not accumulate.

3. Write-Down Risk (Loss Absorption)

A key risk of AT1 perpetual bonds is principal write-down. If the issuer’s CET1 capital ratio falls below a set threshold, the bond terms allow part or all of the invested amount to be reduced.

Yield and Price Sensitivity

Perpetual bonds usually offer higher coupon rates than senior bonds issued by the same issuer. This higher yield compensates investors for the additional risks, including subordination, coupon deferral, and potential principal loss.

However, because perpetual bonds do not have a fixed maturity date, they are highly sensitive to changes in interest rates. When market interest rates rise, the price of existing perpetual bonds can fall sharply. This is due to their long-duration nature. As a result, investors who sell before a call date may face significant price volatility, even if the issuer remains financially stable.

Is Perpetual Bond Investment Right for Your Portfolio?

You should not buy perpetual bonds unless you understand the risks. This is especially true for people who don't want to take a lot of risks or who need to keep their money safe.

1. Who Should Consider this Investment

You may consider this product if you are a high-net-worth investor with a high risk tolerance and a strong understanding of loss-absorption mechanisms:

• You need a steady flow of high fixed income from your investment.
• You should not expect to get the principal back and treat this investment as long-term capital.
• The chance to closely check the issued capital ratios and financial health, which regulators require by law.

2. Update on the rules:

SEBI has restricted direct investment in AT1 bonds for retail investors to enhance investor protection. You can invest only if you qualify as an experienced high-net-worth or institutional investor.

Conclusion

Perpetual bonds in India offer higher coupon income but come with structural risks not found in traditional corporate bonds. Because they lack a fixed maturity and include loss-absorption features, they should be treated as high-risk fixed-income instruments. These bonds may suit experienced investors who understand bank capital structures and can tolerate potential volatility and principal risk. Careful evaluation and limited allocation remain essential when considering them within a diversified portfolio.

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FAQs

What are perpetual bonds?

Perpetual bonds are a type of financial security, mostly AT1 bonds. They don't have a specific maturity date and pay interest as long as the issuer doesn't redeem them.

How do they differ from regular bonds?

Unlike regular bonds, perpetual bonds don't promise to pay back the principal by a specified date. If the issuer is having problems with money, they may skip interest payments or reduce the principal instead.

Are they risky?

Yes, perpetual bonds are riskier than regular corporate debt since they are paid last, and the issuing bank may delay interest payments or write down the principal if its capital falls below what the law says it should be.

Should you invest?

Only wealthy, experienced investors who are willing to accept a lot of risk and don't need to cash out right away should buy perpetual bonds. They should also know exactly what hazards these bonds pose.

What returns do they offer?

Most of the time, perpetual bonds pay greater interest than regular bonds, which is typically 8% or more. This is because they are risky and don't guarantee that the principal will come back.