Yes Bank AT-1 bond case: SC stays Bombay HC ruling on bond write-off

The Supreme Court on Friday stayed the Bombay High Court order which had set aside the writing down of Yes Bank's AT-1 bonds of more than Rs 8,300 crore in January. The apex court also issued a notice to bondholders.

The Bombay High Court quashed a decision taken by the Yes Bank Administrator on March 14, 2020, to write off Additional Tier 1 (AT-1) bonds noting the Administrator did not have the authority to take such a decision.

As a part of its observations, SC termed the write-off as "extreme" and asked Yes Bank and RBI to explain which legal provisions empower them to issue a complete write-off.

The apex court noted that small bondholders must not suffer, therefore, has directed the petitioners to give a break-up of different classes of bondholders, based on the quantum of their exposure to the bonds.

The central bank argued that a write-off is essential for construction and if not permitted, could lead to Yes Bank, again becoming unviable. It argued that SBI and 7 other banks have invested public money into Yes Bank, based on the write-off.

Further, the apex bank submitted that bonds were high-interest-bearing, high-risk instruments, and the subscribers were “rich people” who understood the risks.

The lender submitted that the investors constitute the "creamy layer". It submitted that the administrator enjoyed sufficient powers to issue a write-off. The SC will now hear the case on March 28.

Yes Bank, whose board of directors was reconstituted and fresh capital was infused in 2020, had issued AT-1 bonds in the nature of debentures in December 2013, December 2016, and October 2017. These bonds were written down as part of reviving the bank in 2020.

According to Sebi, 1,346 individual investors had invested approximately Rs 679 crore in the AT1 bonds, of which 1,311 were existing customers of Yes Bank and invested approximately Rs 663 crore.

Further, 277 customers had existing fixed deposits with Yes Bak and the bank prematurely closed their existing FDs and reinvested an amount to the extent of Rs 80 crore in these AT-1 bonds.

Subscribers of the AT1 bonds include Nippon Mutual Funds, Barclays, Kotak Mutual Funds, Franklin Templeton, 63 Moons, Indiabulls Housing Finance, and Reliance Industries. Beyond them, retail investors had also subscribed to these bonds.

Back in 2020, Yes Bank cited the RBI’s Basel III capital regulations, which says that if the relevant authorities decide to reconstitute a bank or amalgamate it with any other lender under Section 45 of the Banking Regulation Act, 1949, the bank will be deemed as non-viable or approaching non-viability. In such a case, the trigger for conversion or write-down of the AT-1 instruments will be activated, it said.

It pointed out that such bonds would need to be fully written down permanently before any reconstruction of the bank is undertaken. Hence, the perpetual subordinated Basel-III compliant additional tier-1 bonds issued for an amount of Rs 3,000 crore as on December 23, 2016, and the perpetual subordinated Basel-III compliant AT-1 bonds issued by the lender for Rs 5,415 crore on October 18, 2017, have been fully written down and stand extinguished.

Bondholders had challenged the write-off in the Bombay High Court. In January 2023, Bombay HC scrapped the move by an RBI-appointed administrator to write off AT1 bonds as "illegal". HC held that once Yes Bank was reconstituted, the administrator could not have taken the decision to write off bonds.