Summary: Perpetual bonds are fixed-income instruments that do not have a fixed maturity date. In India, they are most commonly associated with bank-issued AT1 bonds, which help strengthen regulatory capital and carry a different risk-return profile from regular debt instruments.
- Perpetual bonds are bonds without a fixed maturity date.
- You receive periodic interest payments, potentially for an indefinite period.
- Issuers may retain the option to call or redeem the bond after a specified period.
- In India, perpetual bonds are commonly linked to Additional Tier 1 (AT1) bonds issued by banks.
- These instruments generally carry:
- higher yields
- higher risk
- strong interest-rate sensitivity
Quick Overview
Most people do not start their fixed-income journey with a perpetual bond. You build familiarity through fixed deposits, government securities, or maybe even debt mutual funds. Those instruments behave in a way that feels stable because the outcome is defined.
Perpetual bonds do not provide you that comfort.
In India, they became more widely discussed when stress events in the banking sector brought AT1 bonds into public attention. This was seen during the 2020 Yes Bank crisis, where AT1 bonds worth ₹8,415 crore were written down to zero overnight. The legal battle has been ongoing ever since, with courts still debating whether the write-down was valid. This highlights just how real these risks can be for you as an investor. That period created confusion around how something called a “bond” could behave in a way that did not fully protect principal in all conditions.
The gap in understanding wasn’t really about finance complexity. It was about category assumptions.
You expect bonds to behave uniformly. AT1 bonds don’t belong to that uniform group.
They sit inside bank capital structures, which means their behavior is tied to regulatory conditions, not just market expectations. That difference shows up most sharply when a bank is under stress.
What Is a Perpetual Bond?
A perpetual bond is a fixed-income instrument with no fixed maturity date. In practical terms, there is no predetermined year by which the issuer must return your principal.
Instead, the issuer pays regular coupon interest and may repay the principal. However, it only does so if it chooses to redeem the bond, typically through a call option. Per RBI regulations, these call options can only be exercised after a minimum period of 5 years from the date of issuance, and require prior approval from the RBI.
This structure changes how you evaluate returns and holding periods. You can hold the bond for years and continue earning interest, or sell it on the secondary market before maturity. The return, then, is not just about coupon payments but also about the bond’s price over time.
This structure often leaves perpetual bonds in a hybrid space. Under normal conditions, they function as debt but can acquire equity-like characteristics in stress situations. This is especially if they form part of a bank’s regulatory capital.
A further important factor is their position in the order of repayment. A number of these bonds are subordinated, meaning they are paid after senior debt and regular subordinated debt, sitting just above equity in the event of a liquidation. That positioning directly affects risk and pricing.
A few terms help make sense of them:
Coupon rate: The fixed interest paid on the bond’s face value.
Call option: The right of the issuer to buy back the bond after some period.
Yield: The actual return based on market price, not just the coupon.
These instruments are primarily structured for regulatory capital requirements rather than conventional investment design
How Perpetual Bonds Work
Here is how perpetual bonds work:
A bank or financial institution issues the bond to raise long-term capital. You may invest in them, effectively lending money to the issuer. To protect retail investors like you from these complex structures, SEBI restricts them to Qualified Institutional Buyers, setting the minimum allotment and trading lot size at ₹1 crore.
After issuance, coupon payments begin and continue periodically. These payments are expected but not always guaranteed under all conditions.
There is no fixed maturity date. So the bond does not automatically “end.” It continues until the issuer redeems it, if it chooses to do so.
That redemption usually depends on the call option, which becomes available only after a specified period. Even then, it is entirely optional.
In the secondary market, these bonds trade like other fixed-income securities. But their prices are more sensitive to interest rate changes and to the perceived strength of the issuer, because there is no maturity anchor to pull the price back to face value.
Why Perpetual Bonds Matter in India’s Banking System
To you as an investor, AT1 bonds might look like high-yield fixed-income instruments. From the bank’s side, the intent is completely different.
Perpetual bonds in India are mainly used by banks to strengthen their core capital. These instruments, especially AT1 bonds under Basel III norms, help banks improve Tier 1 capital, absorb potential losses, and maintain balance sheet stability.
Regulators such as the RBI and SEBI play an important role in governing the issuance and treatment of these bonds. RBI guidelines define key features like loss absorption and capital classification, while SEBI ensures proper disclosure and investor protection standards.
These instruments become especially relevant during periods of banking stress or when banks need to raise additional capital to meet regulatory requirements. In 2025, the RBI also revised the rules governing overseas perpetual debt instruments for AT1 capital treatment, highlighting their evolving importance in the financial system.
At the same time, investor awareness around AT1 bonds remains high due to their higher risk profile and complex structure compared to traditional bonds.
How AT1 Bonds Absorb Losses
This is where AT1 bonds diverge most clearly from conventional debt. AT1 bonds are explicitly designed to absorb losses if a bank comes under stress.
That means the structure includes scenarios that do not exist in standard bonds. Depending on triggers, coupon payments may be skipped, principal may be written down, and equity conversion may occur. Specifically, the RBI mandates that if a bank’s Common Equity Tier 1 (CET1) ratio falls below 6.125%, a pre-specified trigger point is breached. At this point, the bond principal can be temporarily or permanently written down, or converted into equity.
Furthermore, unlike traditional corporate debt where missed payments constitute a default, AT1 bond coupons are completely non-cumulative. If a bank reports a net loss or fails to meet minimum regulatory capital adequacy ratios, the coupon for that year is permanently skipped and will never be paid back.
These are not unusual outcomes in extreme conditions; they are part of the design framework.
From a system perspective, this ensures that losses are absorbed within capital layers rather than moving outward.
From your perspective as an investor, it introduces a layer of uncertainty that traditional bonds do not carry.
And that uncertainty is one of the reasons yields are structurally higher.
Types of Perpetual Bonds in India
Additional Tier 1 (AT1) Bonds
AT1 bonds are the most widely used form in India’s banking system. They are issued by banks to meet Basel III capital requirements and sit within the Tier 1 capital structure.
Key characteristics include:
- Relatively higher coupon rates
- Subordinated repayment position
- Conditional, non-cumulative coupon payments
- Potential permanent or temporary write-down risk
- Strong sensitivity to bank financial health
They are less about investment structure and more about regulatory capital engineering.
Perpetual Debt Instruments (PDIs)
PDIs function in a similar space but are structured differently depending on issuer type. While banks issue them as AT1 capital, non-banking financial companies (NBFCs) and select corporates also issue PDIs to raise long-term capital. They are used for long-term capital raising and also sit below senior debt in repayment priority.
While not identical to bank AT1 bonds (as corporate PDIs usually do not feature RBI-mandated loss-absorption write-down triggers), they share the same broad logic of supporting capital buffers.
Benefits of Perpetual Bonds
Benefits for Investors
One of the first things you notice is the coupon. Perpetual bonds usually offer higher yields than many traditional fixed-income instruments. That higher yield reflects the additional risks built into the structure.
Since there is no fixed maturity date, you can continue receiving coupon payments for as long as the bond remains outstanding. This creates the potential for long term income.
Instruments such as AT1 bonds also give you exposure to the banking sector through fixed-income investments. Your returns depend not only on the interest rates but also on the financial strength of the issuing bank.
That being said, the higher yields also come with trade-offs. These include subordination in repayment, the possibility of skipped coupon payments, and sensitivity to the issuer’s financial condition. The additional return is compensation for taking on these risks.
Benefits for Issuers
Banks and financial institutions use perpetual bonds primarily to strengthen their capital position.
Under Basel III norms, AT1 bonds contribute to Tier 1 capital and help banks meet capital adequacy requirements.
For example, in 2024, Canara Bank’s ₹1,000 crore perpetual bond issue saw strong demand and was priced at a coupon of around 8.27%, with a call option after 10 years. The bond can continue indefinitely unless the bank chooses to redeem it.
Perpetual bonds also allow banks to raise capital without issuing new equity. This helps them strengthen their balance sheets without immediate dilution of existing stakeholders.
They also provide structural flexibility. Since there is no fixed repayment date, banks can decide whether to redeem or refinance based on market conditions and capital requirements.
Risks Investors Should Understand
Perpetual bonds carry multiple structural risks that directly affect returns and behavior.
Interest Rate Risk: Without a maturity date, bond prices can move sharply when interest changes. Because they have no maturity anchor, they have a very high “duration,” making them far more volatile than standard debt instruments when macro interest rates fluctuate
Credit risk: The value of your investment depends on the financial strength of the issuer. If the issuer’s credit profile weakens, the bond price may fall
Coupon skip risk: Coupon payments may be skipped or deferred permanently during periods of regulatory or financial stress without triggering a default
Write-down risk: In extreme situations or upon breaching the 6.125% CET1 trigger, AT1 bonds can be written down to zero or converted into equity
Liquidity risk: You may not always be able to sell the bond quickly. During periods of market stress, finding a buyer can be difficult, and secondary market liquidity can dry up completely
Complexity risk: Structural features can be difficult to assess if you do not read the bond documentation
Perpetual Bonds vs Traditional Bonds
The biggest difference between these bonds comes down to their structure. Traditional bonds have certainty built into a fixed time frame. Perpetual bonds have flexibility built in and can be useful in scenarios like bank capital, where regulatory requirements are just as important as repayment terms.
| Feature | Perpetual Bonds | Traditional Bonds |
| Maturity date | No fixed maturity | Fixed maturity |
| Coupon payments | Potentially ongoing (non-cumulative) | Fixed tenure (cumulative/guaranteed) |
| Risk level | Higher | Usually lower |
| Interest-rate sensitivity | Higher | Moderate |
| Capital structure | Often subordinated (just above equity) | Usually senior debt |
| Coupon skip possibility | Possible (at issuer discretion / regulatory trigger) | Rare (constitutes default) |
| Yield | Usually higher | Usually lower |
How Perpetual Bonds Fit in Investor Portfolios
Perpetual bonds sit toward the higher-risk end of the fixed income spectrum.
The main reason is structural. There is no fixed maturity date, so your exit timing and price stability depend more on the market conditions than on a predetermined repayment schedule.
These bonds can provide you with long-term income and exposure to banking sector debt. They can also help you diversify beyond traditional fixed-income instruments such as fixed deposits, government securities, and standard corporate bonds.
For that reason, perpetual bonds are primarily suited for institutional investors, high-net-worth individuals (HNIs), and sophisticated corporate treasuries who understand credit frameworks. Due to the high risk and ₹10 lakh ticket size, they are rarely appropriate for retail portfolios.
Conclusion
Perpetual bonds differ from traditional debt instruments because they remove the one thing most debt instruments rely on: a fixed endpoint.
In India, AT1 bonds represent the most common form, tied directly to banking capital structures under Basel III norms.
They offer higher yields, but that yield reflects structural conditions like subordination, coupon flexibility, and loss absorption features.
Once you stop expecting a maturity date and start reading them as capital instruments, their behaviour becomes easier to interpret in a real market context.
You may explore fixed-income instruments on Jiraaf to learn more about investing options that suit your needs.
