Perpetual Bonds in India – What exactly it is?
Perpetual bonds as the name suggests are perpetual in nature, means they do not have any maturity date. Only the issuer has the option of calling it backut the buyer of the bonds cannot sell it to the issuer before the call option is exercised by the issuer. Generally, the call option dates are every 5 years from the bond issuance date.
However perpetual bonds in India are listed on stock markets, so if an investor wants liquidity then they can sell the bonds on the stock exchange.
These bonds are generally issued by large manufacturing companies or by banks to fund their long-term capital requirements. In banks, the perpetual bonds come under as Additional Tier 1 bonds which gives it features of Quasi Equity. Which Means that in case of bank winds up then the Investors in Perpetual bonds will be paid last but before equity investors.
Besides this, the coupon (Interest) payment on these bonds depends on the current year profitability of the issuing bank. If the bank is not in profits or does not satisfy the minimum capital adequacy requirement as laid down by RBI then it has the option of not paying the interest of that particular year.
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However, in February 2017 RBI came up with a circular and allowed banks to pay the Coupon on Perpetual bonds from the Reserves/surpluses or carried forward profits. This goes down well with the investors and increased the demand for Perpetual bonds in India.
To compensate this risk, the yield in these perpetual bonds are generally 200-300 basis points higher than the government securities rate.