Supreme Court Sets Aside Yes Bank AT1 Write-Off: What the Ruling Means for Bondholders
The Supreme Court has set aside the permanent write-off of Yes Bank's Additional Tier 1 (AT1) bonds, carried out as part of the private lender's government-backed rescue in March 2020. The ruling raises the possibility of fresh liabilities for the bank and triggered a sharp fall in its share price.
The bonds, held by investors and worth about Rs 8,400 crore, were written off during a restructuring overseen by the Reserve Bank of India (RBI). It was the first instance of such a write-off in India. The write-off meant bondholders lost their entire investment.
The court held that the administrator appointed during the rescue did not have the authority to order the write-off. The decision is the second legal setback for the lender. In 2023, the Bombay High Court had set aside the write-off, citing procedural lapses, without ruling on the merits of the bonds themselves. Yes Bank then challenged that order in the Supreme Court.
Market reaction
Yes Bank shares fell 14.5 per cent on Thursday, the steepest single-day decline since July 23, 2020. The stock extended its losses on Friday, falling as much as 3.2 per cent.
In a stock exchange filing on Friday, Yes Bank said its key capital ratio could fall by about 2.5 percentage points following the ruling, but added that it has appropriate capital-management levers available. Japan's Sumitomo Mitsui Banking Corporation owns a 24.9 per cent stake in the lender.
Analysts are watching how any additional funding requirement would be met. "One will definitely be looking out for how funding requirement will be met, whether Sumitomo as a partner will have to bring in or other shareholders through rights issue or any other way," said Deven Choksey, managing director at DRChoksey FinServ.
What are AT1 bonds?
AT1 securities count towards a bank's regulatory capital, but can be written off when specified loss-absorption triggers are breached, including when a lender becomes nonviable. They rank below other debt instruments in the event of a bank failure, exposing investors to potentially substantial losses. In exchange, they typically offer higher returns than ordinary bonds.
The ruling could have consequences beyond Yes Bank, raising questions about the legal authority to impose losses on bondholders during bank rescues. A review of the judgment may still be sought.
"This will set a precedent for future bank rescues, as writing down bonds affects not just investors but other stakeholders as well," said Ashish Pyasi, managing partner at Aendri Legal. "The government and Yes Bank can still seek a review of the Supreme Court's decision."
Impact on the AT1 market
Some mutual funds, including Kotak Mahindra Asset Management Company, have suspended inflows into their debt schemes in anticipation that the value of these AT1 bonds will rise. Former Yes Bank chief executive officer Prashant Kumar had said in 2023 that the lender had not made provisions for potential liabilities arising from the dispute, citing legal advice supporting its position.
Market participants say the judgment cuts both ways for the AT1 segment. "The ruling could have mixed implications for the AT1 bond market, bolstering investor confidence in legal protections while creating uncertainty over future write-downs that may raise borrowing costs for banks," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap. "It also underscores the need for clearer regulatory rules."
