What is Perpetual Bonds?

Perpetual bonds, often called “perps,” are a unique class of bonds that have no maturity date. This means the issuer is not obligated to repay the principal amount but continues to pay interest indefinitely. Perpetual bonds are a popular financial instrument in the Indian share market, particularly among corporate and government entities looking to raise capital.

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Table of Contents

1. Introduction to Perpetual Bonds
2. Key Features of Perpetual Bonds
3. Advantages and Disadvantages
4. How Perpetual Bonds Differ from Traditional Bonds
5. Historical Overview in the Indian Context
6. Popular Perpetual Bonds in India
7. How to Invest in Perpetual Bonds
8. Tax Implications
9. Risks Associated with Perpetual Bonds
10. Future of Perpetual Bonds in India
11. Conclusion

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Introduction to Perpetual Bonds

Perpetual bonds derive their name from their defining feature—no fixed maturity date. Unlike traditional bonds that have specific tenure, these bonds offer an indefinite payment of interest to investors. Issued mainly by financial institutions and corporations, they combine characteristics of equity and debt instruments, providing stability and attractive returns.

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Key Features of Perpetual Bonds

Feature	Description
No Maturity Date	Issuer is not required to repay the principal.
Fixed Interest	Offers steady interest payments indefinitely.
Callable Option	Issuers often have the option to call back bonds.
Hybrid Nature	Combines elements of equity and debt.
Higher Risk Premium	Due to their indefinite nature, they offer higher yields.

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Advantages and Disadvantages

Advantages

1. Steady Income: Attractive for income-focused investors.
2. High Yields: Higher interest rates compared to standard bonds.
3. Diversification: Adds a unique element to an investment portfolio.

Disadvantages

1. Credit Risk: Dependence on issuer’s financial health.
2. Liquidity Concerns: Limited market trading reduces liquidity.
3. Interest Rate Risk: Rising rates may lower the bond’s market value.

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How Perpetual Bonds Differ from Traditional Bonds

Aspect	Perpetual Bonds	Traditional Bonds
Maturity	No maturity	Fixed maturity period
Principal Repayment	Not repaid	Repaid at maturity
Interest Rate	Higher	Lower
Market Liquidity	Relatively low	High
Risk Level	Higher	Moderate

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Historical Overview in the Indian Context

In India, perpetual bonds gained prominence with the Reserve Bank of India (RBI) allowing their issuance to support banks in meeting Basel III norms. Over the past decade, these instruments have become a staple for raising long-term capital.

Historical Data

• 2010: Introduction of Basel III-compliant perpetual bonds.
• 2014-2018: Surge in issuance by public sector banks.
• 2020: Concerns arose due to defaults by Yes Bank.
• 2021: RBI introduced stricter norms for perpetual bonds.

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Popular Perpetual Bonds in India

1. State Bank of India Perpetual Bonds
2. HDFC Perpetual Bonds
3. ICICI Bank Perpetual Bonds
4. Yes Bank (Post-Restructuring)

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How to Invest in Perpetual Bonds

Step-by-Step Guide

1. Identify Issuers: Research credible institutions offering perpetual bonds.
2. Brokerage Account: Open an account with a licensed bond broker.
3. Assess Risk: Understand the credit rating and financial stability of the issuer.
4. Diversify: Avoid overexposure to a single issuer or sector.
5. Monitor Performance: Regularly track interest payments and market conditions.

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Tax Implications

• Interest Income: Taxable under the head “Income from Other Sources.”
• Capital Gains: Gains from secondary market sales are subject to capital gains tax.

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Risks Associated with Perpetual Bonds

1. Credit Risk: Failure of the issuer to make interest payments.
2. Market Volatility: Price fluctuations due to economic conditions.
3. Interest Rate Sensitivity: Adversely affected by rising interest rates.

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Future of Perpetual Bonds in India

The future looks promising, especially with ongoing financial reforms and the growing need for long-term funding. However, stricter regulations and market awareness will play a critical role in shaping their trajectory.

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Conclusion

Perpetual bonds are a compelling investment option for those seeking steady income with a high-risk appetite. Their unique features, combined with higher yields, make them a popular choice in the Indian share market. However, potential investors should carefully evaluate associated risks and market conditions before diving in.