Perpetual Bond (AT1)

A bond that never matures

A perpetual bond answers an unusual question: what if a bond never had to be repaid? It pays interest indefinitely with no fixed maturity date, so investors earn a coupon for as long as they hold it, often with the issuer holding an option to redeem it after some years.

In India, the dominant example is the Additional Tier 1 (AT1) bond issued by banks. Under Basel III norms, banks use AT1 bonds to build core capital. They rank above equity but below other debt, and crucially they are designed to absorb losses if the bank runs into serious trouble.

The Yes Bank warning

The risk in that design stopped being theoretical in 2020. During the RBI-led reconstruction of Yes Bank, roughly ₹8,415 crore of AT1 bonds were written down to zero, wiping out those investors even as the bank was rescued. Many holders had been sold the bonds as safe, FD-like products.

The fallout still reverberates. The legal battle over that write-down reached the Supreme Court, with the government defending the move as necessary to protect depositors and keep the lender alive. The episode reshaped how everyone treats AT1 risk.

Tighter rules and what to know

SEBI has since restricted retail access to AT1 bonds, effectively limiting direct investment to experienced high-net-worth and institutional investors, and tightened how mutual funds value and hold them.

For investors, the lesson is that the higher yields on AT1 bonds, often well above plain bank deposits, are compensation for genuine risk. Coupons can be skipped if the bank's capital falls short, redemption depends entirely on the issuer exercising its call option, and in a crisis the principal can be written down to nothing. There is also reinvestment uncertainty, since you can never assume the bond will actually be called at the first opportunity.

These are not deposit substitutes, and the credit quality of the issuing bank is everything. A well-capitalised lender is a different proposition from a stressed one, so treat AT1 paper as a credit decision on the bank itself, not as a fixed-income product you can buy on yield alone.