AT1 and Perpetual Bonds: The 'High-Yield Bank Bond' That Can Go to Zero

In March 2020, holders of Yes Bank’s Additional Tier 1 bonds watched ₹8,415 crore get written down to zero while the bank’s equity shareholders kept their shares. Thousands of them were retail investors who’d been told they were buying something “like a bank FD, but with higher interest.” Debt ranked below equity, in practice. Six years on, the litigation is still working through the Supreme Court. That episode is the only introduction AT1 bonds need, and everything below follows from it.

What an AT1 bond is

Additional Tier 1 bonds are loss-absorbing regulatory capital that banks issue under Basel III rules. Translated out of the fine print:

• They’re perpetual. There’s no maturity date. The bank may repay at call dates, typically five years out, and the market prices them as though it will. It doesn’t have to.
• Coupons are discretionary. The bank can skip them if capital ratios strain or the regulator says so, and skipped coupons are non-cumulative. Gone means gone.
• Principal can be written off. At a trigger, or when the RBI declares non-viability, principal can be written down fully and permanently. As Yes Bank showed, that can happen without equity being zeroed first.

In exchange they pay the highest coupons in the bank capital stack, historically 150–300 bps over the same bank’s ordinary bonds. That premium isn’t free money. It’s the price of the three bullets above.

The Yes Bank case, still unresolved

The write-off happened during the RBI-orchestrated rescue in March 2020. Bondholders sued, and in January 2023 the Bombay High Court set the write-off aside, on the grounds that the administrator lacked the authority. The appeal moved up, and the Supreme Court reserved judgment on 26 February 2026 without ruling since. Whatever the outcome, six years of limbo has already demonstrated something: when an AT1 goes wrong, your recovery timeline runs on court schedules, not coupon dates.

The regulatory aftermath matters for buyers today. SEBI capped mutual funds’ AT1 exposure and required valuation at a 100-year deemed maturity, which pushed funds to shrink their AT1 books. One consequence is that issuers now court HNI and retail money through wealth desks, using the same “super FD” pitch that burned Yes Bank’s bondholders.

If you’re still interested, price them properly

1. Work out the yield-to-call, then assume you’re wrong about it. Market convention prices AT1s to the first call date, because banks that skip calls take reputational damage. The call is still the bank’s option, not yours. Compute the YTC, then ask whether you could live holding a non-maturing instrument at this coupon if the call never arrives. The YTM calculator prices to any assumed date, so run both scenarios.
2. Stick to the strongest issuers. An AT1’s real security is the distance between the bank and trouble. SBI’s AT1s and a struggling private bank’s AT1s are different instruments wearing the same name.
3. Check the spread. Compare the AT1’s yield against the same bank’s senior bonds and against G-secs. If it pays only 80–100 bps over the bank’s ordinary paper, you’re selling a catastrophe option too cheap.
4. Size it for zero. The right position is one whose total loss you’d absorb with annoyance rather than damage. For most retail investors that rounds to a small satellite, or to nothing at all, which is a respectable allocation to an instrument this asymmetric.

The red-flag phrases

If a distributor says any of these, the conversation itself is the risk.

“It’s a bank bond, banks don’t fail in India.” Yes Bank’s AT1 holders would agree that banks rarely fail. Their bonds still went to zero without the bank failing.

“Guaranteed 8–9% from a trusted bank.” AT1 coupons are contractually discretionary, so “guaranteed” is false.

“It’ll definitely be called in year 5.” Probably. And “probably” is carrying an enormous amount of weight in that sentence.

Where AT1s can make sense

There’s a real investor for these: someone who understands bank capital, follows issuer financials quarterly, and buys top-tier names at spreads that pay for the risk. That person reads Pillar 3 disclosures for fun.

If that isn’t you, the honest alternatives are senior bank bonds, AAA corporate paper run through the checklist, or more equity, which at least announces itself as equity.

FAQ

Are AT1 bonds covered by any insurance? No. No DICGC, no guarantee, no security, no trustee-enforced collateral. Regulatory capital exists to absorb losses.

How are they taxed? Coupons at slab. Listed AT1s sold on the exchange follow normal listed-bond capital gains rules. A write-off becomes a capital loss with its own messy claim mechanics, as the Yes Bank litigants can attest.

What’s “yield-to-worst”? The lowest yield across all call scenarios. For AT1s, decide on yield-to-worst rather than the advertised coupon.

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Supreme Court status as of August 2026: arguments concluded and judgment reserved on 26 February 2026 before Justices Dipankar Datta and Augustine George Masih, ruling awaited. If the verdict has landed by the time you read this, the risk lesson holds either way.

Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge, but verify with a professional before acting. See the full disclaimer.