Perpetual and AT1 Bonds: Risks Explained for Investors

A platform screen shows a State Bank of India bond paying 9.45%, rated AA+, maturing — you squint — on 31 December 9999. The coupon looks like an FD's richer cousin from the same bank whose deposits you have held for twenty years. It is not an FD. It is an Additional Tier 1 bond: an instrument whose contract gives the bank the right to skip your interest, call your money back early, or write the principal down to zero — and in one famous Indian case, exercised the last of those rights on ₹8,415 crore of retail-sold paper in a single night.

This post explains what AT1 and other perpetual bonds actually are, the four contract clauses that carry all the risk, the capital trigger that governs write-downs, what the Yes Bank saga and its 2026 Supreme Court ruling did and did not change, the mutual fund rules that shape who holds this paper, and the coupon arithmetic that tells you what you are really being paid. Our bonds guide gives the general background; this page goes where that one stops.

What an AT1 bond is, and why banks issue it

Banks must hold capital in layers. Common Equity Tier 1 (CET1) — shares and retained earnings — absorbs losses first. Below it sits Additional Tier 1 capital, and below that Tier 2, then senior bonds, then depositors. AT1 bonds exist to fill the AT1 layer: they count as regulatory capital under the Basel III framework without diluting shareholders, which is why every large Indian bank issues them regularly. What you get for sitting in that layer is a fat coupon. What you give up is the entire concept of a maturity date — AT1 instruments are perpetual, with call options instead of repayment dates — and your place in the queue: below depositors, below senior creditors, below Tier 2, just above equity. Source: RBI Basel III Capital Regulations (Master Circular, updated April 1, 2025); framework summary per Vinod Kothari Consultants' AT1 analysis, July 2026.

The four clauses that carry all the risk

• Perpetual. There is no maturity. Exchange systems literally display 31 December 9999. Your exit is the bank's call option, a sale on the secondary market, or nothing.
• The call, not you. The bank may redeem after five years with supervisory approval — and it will, whenever refinancing is cheaper than the coupon. Fixed-rate AT1 bonds carry a reset clause: at the call date the coupon resets to a government-security benchmark of similar tenor plus the original spread, and the bank chooses between calling and resetting. You face reinvestment risk at every reset, not the bank.
• Discretionary, non-cumulative coupons. The issuer can skip a coupon entirely without defaulting, and skipped coupons do not accrue. In practice Indian banks have paid AT1 coupons through every stress since 2015 — which is precisely why markets price them as quasi-contractual interest, the exact mistake the contract warns about.
• Loss absorption. On a trigger, the principal is either permanently written down or converted into equity, per the bond's terms. This is the clause that turned ₹8,415 crore into zero in March 2020.

The trigger: when your principal is at risk

Indian AT1 bonds absorb losses when the bank's CET1 ratio falls to 6.125% of risk-weighted assets (the contractual pre-specified trigger under RBI's Basel III framework; the international Basel floor is 5.125%, and several jurisdictions sit between). A second, qualitative trigger — the point of non-viability — lets the supervisor determine that the bank cannot survive without extraordinary support, whichever is earlier. RBI's September 2014 notification adds the sequencing rule that matters in resolution: AT1 instruments are to be fully written down or converted before any amalgamation or reconstitution scheme proceeds. Source: RBI Basel III Master Circular and the September 1, 2014 notification on loss absorption in restructuring; trigger level cross-checked against two independent legal commentaries on RBI's framework (Casemine AT1 commentary, October 2026).

Read that again with your depositor hat off: a bank can be rescued — merged, capitalised, open for business on Monday — and the AT1 holders are still the ones who pay for the rescue, ahead of equity, ahead of the story everyone else tells. That is the design. It worked exactly as designed in the case below.

Yes Bank: the case study, and the 2026 ruling

In March 2020, during the SBI-led rescue of Yes Bank, ₹8,415 crore of AT1 bonds was written down to zero. Most of it had been sold to retail investors — some of it, courts later heard, marketed as comparable to a fixed deposit. The Bombay High Court set the write-off aside in January 2023, holding the administrator had exceeded his powers; the Supreme Court stayed that order; and on October 16, 2026, the Supreme Court struck down the write-down, ruling that the administrator lacked the authority to impose those losses the way the scheme had done. Source: the ruling as reported by Moneylife and India Today, October 2026, consistent with our bonds guide's coverage.

Be precise about what the ruling changed and what it did not. It reopened the specific write-down in a specific reconstruction scheme — bondholders may recover, and Yes Bank's own disclosures say it expects no material liability. It did not hold that AT1 bonds cannot be written down; the loss-absorption mechanism in every AT1 contract survives intact, and a properly-sequenced write-down in a future resolution would still zero your principal lawfully. The global precedent points the same way: when Credit Suisse failed in March 2023, roughly CHF 17 billion of AT1 paper went to zero while shareholders received consideration — under Swiss terms, but under the same logic that AT1 absorbs losses so someone else does not have to. The Bank for International Settlements' research arm has since argued AT1 instruments have functioned as gone-concern capital activated only near failure, not the going-concern buffer they were designed to be. Source: BIS FSI brief, September 2023, as summarised in the July 2026 Vinod Kothari analysis.

The rules that decide who actually holds this paper

After 2020, SEBI built fences. Its circular of March 10, 2021 (SEBI/HO/IMD/DF4/CIR/P/2021/032, effective April 1, 2021) imposes prudential limits on debt instruments with these special features: a mutual fund scheme may hold no more than 10% of its debt portfolio in them, no more than 5% of its debt portfolio from a single issuer, and a fund house may own no more than 10% of a single issuer's such instruments across all its schemes. It also ordered that perpetual bonds be valued as 100-year instruments (repricing them brutally whenever yields move), barred close-ended debt schemes from holding perpetuals at all, and required schemes holding them to have segregated-portfolio provisions so a write-down can be ring-fenced for affected investors. Source: SEBI circular of March 10, 2021, verified full text.

For individuals, the practical gate is lot size: AT1 bonds are allotted and traded in minimum lots of ₹1 crore, which is why your exposure arrives mostly through debt mutual funds or the occasional platform-mediated secondary lot rather than a direct purchase. Source: lot-size mechanics per bond-platform disclosures (Wint Wealth AT1 listings, fetched 3 November 2026).

What you are paid to take this risk

Live coupons on listed Indian AT1 paper as of early November 2026, from one platform's listings: SBI series between 8.75% and 9.56%, ICICI Bank at 9.90%, Bank of Baroda between 8.70% and 8.99%, Punjab National Bank at 8.75%, Union Bank around 8.69-8.70% — all rated AA+ by CRISIL, all perpetual. Against the 10-year G-Sec at about 7.33% (as on 2 November 2026), that is a pick-up of roughly 1.4 to 2.6 percentage points for a claim that is subordinated, perpetual, coupon-skippable and trigger-exposed. Whether that is adequate compensation is the whole investment case, and after 2020 the market's answer has been usually yes, for institutions, in size.

The worked arithmetic of a bad year: you hold ₹1 crore of an 8.75% AT1. Year one pays ₹8.75 lakh. Year two the bank, under stress, skips the coupon — you receive nothing, and because coupons are non-cumulative, that ₹8.75 lakh never comes back. Year three CET1 slips to 6.0% — below the trigger — and your ₹1 crore is written down to zero while the bank recapitalises and continues. The coupon you banked in year one was 8.75% compensation for a 100% loss. Institutions model that probability explicitly; retail buyers who saw an FD with a bigger number did not.

Who should not own AT1, at all

• Your emergency fund and any money with a date. There is no maturity to match a goal to.
• Anyone who cannot lose the ticket. A write-down is not a rating downgrade you wait out; it is a permanent conversion of your bond into zero.
• YTM shoppers. If 9.9% sorted to the top of a screen and you stopped reading there, the product is doing its marketing job and you are doing its casualty projections.
• Retirees told it is an FD. If someone compared it to a fixed deposit, that comparison was the red flag; the deposit-insurance framework, the contractual priority and the write-down clause all say otherwise.

Tax, briefly: coupons are taxed at your slab rate with 10% TDS once an issuer's annual interest crosses ₹10,000 (the securities-TDS provision, now Section 393 of the Income-tax Act, 2025); listed bonds held over 12 months earn 12.5% long-term treatment on gains. The tax code treats it like any bond. The contract does not.

Five questions before any perpetual goes into your portfolio

1. Read the termsheet's loss-absorption clause — write-down or conversion, and at what trigger?
2. When does the first reset or call date fall, and what spread over the G-Sec benchmark does the reset carry?
3. What is the issuer's CET1 ratio today, and how far is it from 6.125%?
4. If the coupon were skipped for two years, would your plan notice?
5. Is this exposure sized as venture-style risk — money you can lose — or have you mistaken a perpetual subordinated instrument for a deposit?

The Supreme Court's October 2026 ruling corrected a procedure. It did not repeal the arithmetic: AT1 paper is an institutional product wearing a retail price tag, and the coupon is the price of the clause you did not read. Read the clause — or hold the AAA senior paper, the G-Secs and the deposits that do the boring job instead.

This is educational content, not investment advice. Consult a SEBI-registered advisor for decisions specific to your situation.