Perpetual bonds and AT1 bonds in India

What a perpetual bond is

An ordinary bond or NCD has a maturity date on which the issuer must repay the principal. A perpetual bond has none. The issuer pays interest while the bond is outstanding and never has to return the money on a fixed date. The only ways back to cash are selling the bond to someone else or a call, where the issuer chooses to redeem the bond on a date its terms allow.

In India, perpetual bonds are mainly issued by banks, and some NBFCs, as part of their regulatory capital. A bank's perpetual bond is called a Perpetual Debt Instrument, or PDI, and counts as Additional Tier 1 (AT1) capital, which is why the market calls these AT1 bonds. The RBI decides what terms such a bond must carry to count as capital. SEBI decides who may buy it and in what size. The table below sets an AT1 bond against an ordinary bond, and the sections after it give each rule with its source.

Bank AT1 bonds under the RBI's capital rules

The RBI's rules for bank capital are in the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025, dated 28 November 2025 and last updated on 7 October 2026. They follow the Basel III framework. Paragraph 20 sets the terms a PDI must meet to count as AT1 capital. Paragraph 19 sets almost identical terms for perpetual non-cumulative preference shares (PNCPS), the other AT1 instrument. Paragraph 26 adds the loss-absorption rules for both.

AT1 sits between a bank's common equity, called CET1, and its Tier 2 capital. A bank must hold Tier 1 capital of at least 7 per cent of its risk-weighted assets. While it is meeting that minimum, PDIs and PNCPS together can count towards AT1 only up to 1.5 per cent of risk-weighted assets.

The table below lists the terms that decide what an AT1 holder actually gets. Two of them matter more than the rest. Interest is at the bank's discretion, and the principal can be cut before the bank fails, not only after.

The Yes Bank AT1 write-down, 2020 to 2026

The Central Government placed Yes Bank under a moratorium on 5 March 2020. The RBI published a draft reconstruction scheme on 6 March 2020, and the Government notified the Yes Bank Ltd. Reconstruction Scheme, 2020 on 13 March 2020. In March 2020, as part of the reconstruction, the bank's Administrator ordered the write-down of the bank's AT1 bonds, which totalled ₹8,415 crore.

The case shows that the AT1 risks described above are real. The bonds were written down during a rescue, and holders then spent more than six years in court before the write-down was finally set aside. For any AT1 bond, the information memorandum sets the terms that decide what holders are owed, so start there.

The table below follows the case through Yes Bank's own stock-exchange filings. This guide relies on those filings and the RBI's press releases. It has not read the court judgments themselves, so it does not describe the courts' reasoning, and it makes no forecast of what happens next.

SEBI's rules: institutional buyers only, ₹1 crore units

SEBI's rules on who may buy these instruments are in Chapter XIII of its Master Circular for non-convertible securities, dated 15 October 2025. The chapter covers PDIs, PNCPS and similar instruments that count as a bank's or NBFC's regulatory capital. It says these instruments let the issuer, in consultation with the RBI, write down principal or interest, skip interest or recall early without a matching right of legal recourse for investors, and that retail individual investors may not fully understand that discretion. On the advice of SEBI's corporate bond market advisory committee, CoBoSAC, the chapter sets these rules:

• Only qualified institutional buyers (QIBs) may take part in an issue of these instruments.
• The face value of each such security is ₹1 crore. When it trades on an exchange or over the counter, the trading lot always equals the face value. This lot rule has applied since 3 July 2024.
• Every issue must go through the electronic book provider (EBP) platform, whatever its size.
• The placement memorandum must set out the conditions for exercising the call, the risk factors, and the PONV clause, which gives the RBI the absolute right to direct a write-down of the entire value if the bank has passed the point of non-viability or needs a public-sector capital injection.
• The rules apply to a perpetual instrument that counts as non-equity regulatory capital, is issued with the RBI's permission, and gives the issuer or the RBI discretion over conversion, write-off, skipping or delaying payments, early recall or changing its terms.

What the SEBI rules mean for an individual investor

An individual who is not a QIB cannot apply in a new AT1 issue. For instruments covered by these rules, each unit has a face value of ₹1 crore and the trading lot equals the face value, so the smallest possible trade is ₹1 crore of face value. SEBI made these rules because of the concern quoted above: these instruments carry discretion that retail investors may not fully understand.

If you already hold an AT1 bond, or meet one on a platform, read its information memorandum for the call conditions, the coupon terms, the trigger level and the PONV clause, and check its current rating with the agency that rates it. The AAA-rated bonds guide explains how to read a rating and check it on the agency's site. A bank's own rating and the rating on its AT1 bonds are separate ratings.

Tier 2 and other subordinated bonds

Banks also issue Tier 2 bonds. They are subordinated, but they are not perpetual. Under paragraph 24 of the RBI directions, a Tier 2 debt instrument must have a minimum maturity of five years, with no step-ups or other incentives to redeem and no put option. It may be called only after at least five years, with the RBI's prior approval, and its coupon cannot be linked to the bank's own credit standing. In a winding up it ranks above Tier 1 instruments and below all depositors and general creditors.

The point-of-non-viability rule in paragraph 26 applies to Tier 2 bonds as well as AT1. At the RBI's option, a Tier 2 bond can also be written off or converted into shares at PONV. The pre-specified CET1 trigger is written for AT1 instruments only. For the last five years before maturity, the amount of a Tier 2 bond that the bank may count as capital falls by a fifth each year. That is a capital rule for the bank and does not change what the holder is owed.

NBFCs also raise perpetual and subordinated debt that counts as their capital, under separate RBI rules for NBFCs that this guide does not cover. SEBI's Chapter XIII rules above also apply to NBFC perpetual instruments. The table below compares a bank AT1 bond with a bank Tier 2 bond.

How these bonds show up on platforms, and why the yield looks high

A bond platform or a broker's bond desk may list a bank perpetual or Tier 2 bond from the secondary market. A perpetual bond has no maturity, so any yield shown for one has to assume a date when the principal comes back, such as a call date. If the bank does not call the bond on that date, the holder does not earn that yield. The RBI rules forbid the bank from signalling in advance that it will call.

When an AT1 bond's yield looks high next to a senior bond or a deposit from the same bank, the gap reflects risks that a senior bondholder or depositor does not carry. Coupons can be cancelled without a default. Principal can be written down at a trigger or at PONV. The bond ranks just above equity. The call may not come. And the bond trades in ₹1 crore units in a thin market. The higher yield is the market's price for those risks. It is not extra return for the same risk. Use the checks below before you put money into one.

• 1. Read the instrument name and the information memorandum: words such as Basel III, AT1, perpetual or Tier 2 tell you it is capital, not a senior bond.
• 2. Check the minimum size. If it is a perpetual capital instrument under SEBI's rules, one unit is ₹1 crore of face value.
• 3. Ask which date the quoted yield assumes. For a perpetual bond it is a date the bank is not obliged to repay on.
• 4. Read the coupon terms, the trigger level and the PONV clause, and the order of write-down against the bank's other instruments.
• 5. Check the rating on the instrument itself, not the bank's headline rating, and read the latest rationale.
• 6. Read the bank's recent exchange filings for its capital ratios and any matter affecting its capital instruments.