WHAT IS A PERPETUAL BOND?
A perpetual bond, also known as a ‘consol bond’ or ‘perp’. It is a fixed income security with no maturity date. This type of bond is often considered a type of equity, rather than debt. Perpetual bond cash flows are, therefore, those of a perpetuity.
The issuers of perpetual bonds are not under any obligation to ever repay the bond purchaser’s principal amount; however, the issuer is obligated to make coupon payments in perpetuity – theoretically, forever.
In practice, the issuer of a perpetual bond usually holds the option to call, or redeem, the bond at any point after a specified time, such as five years from the date of issue. Therefore, some issuers of perpetual bonds eventually redeem their bonds. The issuer still benefits from the fact that perpetuals do not come with a fixed redemption date.
Therefore, the time of redemption is flexible at the issuer’s discretion. They can wait to redeem the bonds at a time when they can most easily afford to do so. The flexibility on repaying the bond’s principal amount may be the main reason that an issuer chooses to go with issuing perpetual bonds.
Given the higher risk appetite required for such instruments, SEBI has restricted the purchase of such bonds to institutions only.
PERPETUAL BONDS VS EQUITY
- Although similar to equity, perpetual bonds do not have attached votes and, therefore, provide no means of control over the issuer.
- Perpetual bonds are still fixed-income securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretionary.
A HISTORY OF PERPETUAL BONDS
The British government is widely credited with creating the first perpetual bond, back in the 18th century. They’re currently not nearly as popular as Treasury bonds and municipal bonds,
WHO CAN ISSUE PERPETUAL BONDS?
Governments, major corporations, and financial institutions often issue perpetual bonds. A Perpetual Bond holder is free to liquidate. The Perpetual Bonds can be sold on the stock exchange.
FEATURES OF PERPETUAL BOND INDIA
- Reliable fixed income stream
- Paying the higher interest as compared to regular bonds
- No need to engage in “re Investing”
- Don’t require to inspect bond maturities
TAXATION OF PERPETUAL BONDS
The perpetual bonds annual coupon will be summed up to the Investor’s total income and taxed according to the Income tax slab one gets in. But if the bond gets sold off in the secondary market and the Investor makes long-term capital gain (after 1 year holding period), then the LTCG (long-term capital gains) tax will be applicable at 10% without indexation.
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informative….Thank you for your insights