Perpetual Bonds

Why in news?

• SEBI has enhanced the rules on disclosures by credit rating agencies and put in place a framework for rating withdrawals of Perpetual Bonds.

What are Perpetual Bonds?

• A perpetual bond, also known as a “consol bond” is a fixed income security with no maturity date.
• This type of bond is often considered a type of equity, rather than debt.
• One major drawback to these types of bonds is that they are not redeemable. However, the major benefit of them is that they pay a steady stream of interest payments forever.

What are the current rating revocation regulations?

• According to the current rating revocation regulations, the rating of perpetual bonds such as AT-I bonds cannot be revoked unless the securities are redeemed.

What is being changed now?

• In order to facilitate the withdrawal of perpetual debt security ratings, that are listed or are to be listed on the stock exchange, a credit rating agency may withdraw a rating. This can be done in case it rated these securities continuously for at least five years or received an undertaking from either the issuer or other agencies that a rating is available for such bonds.

Why are these changes being made now?

• SEBI has brought these new guidelines after AT1 bonds issued by Yes Bank were written down to zero in March 2020 as part of a restructuring plan, which led to huge losses for several investors.

PRACTICE QUESTION:

With reference to ‘Perpetual Bonds’, consider the following statements:

1. They have no maturity date

2. The interest received as well as capital gains on Perpetual Bonds are not taxable

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer