RBI May Seek To Be Heard In Yes Bank Appeal On AT1 Bond Verdict — BQ Exclusive

The RBI will seek to provide the regulator’s perspective, including how the tier-1 bonds can be written down, BQ Prime has learnt.

<div class="paragraphs"><p>Yes Bank House in Mumbai. (Source: Vijay Sartape/BQ Prime)</p></div>
Yes Bank House in Mumbai. (Source: Vijay Sartape/BQ Prime)

The Reserve Bank of India may choose to be a party or at least seek to be heard in court when Yes Bank files its appeal against the Bombay High Court verdict against the write-off of additional tier-1 bonds in March 2020, according to a senior banking industry executive.

The RBI will seek to provide the regulator’s perspective on the issue, including how the tier-1 bonds can be written down in event of stress in a bank, without seeking RBI or government nod under any scheme, the person told BQ Prime on the condition of anonymity as details are not public yet.

An emailed query to the RBI did not elicit a response.

On Friday, the Bombay High Court ruled in favour of holders of additional tier-1 bonds of YES Bank on the issue, but the order shows that it did so on the basis of a technical reading of what powers the administrator had and the timing of the write off.

The court stayed clear of commenting on issues such as mis-selling to retail investors or the bank’s decision to write-off bonds without writing down equity or the bank’s right to effect such a write-down.

Additional tier-1 bonds are perpetual bonds that attract a higher rate of interest since they carry a higher risk, as the bond contract specifies the points of non-viability under which a bank can choose to stop paying interest on these bonds, convert them into equity or write them off.

If RBI joins the case then it would add regulatory heft to the bank’s right to write-off these bonds, and how the contract signed by investors prior to investing already provides the situations in which this can happen, the executive quoted earlier said.

Over the weekend, Yes Bank Managing Director and Chief Executive Officer Prashant Kumar said they have strong grounds to appeal the high court verdict. The court has stayed the order for six weeks to grant Yes Bank time to appeal the issue. Kumar was also the administrator of Yes Bank when the bonds were written down on Mar 14, 2020, a day after the government notified the final scheme of reconstitution of the bank.

It is unclear if the RBI aims to explain to the court why the draft reconstruction scheme it released specifically carried a clause on write-off of these bonds worth almost Rs 8,500 crore, while the final scheme did not specify this clause.

Legal experts suggest that this missing clause in the final scheme of reconstruction could have played a part in why the Bombay High Court judgement went against the private bank.

Yes Bank AT1 Bond Saga — RBI Needs To Tighten Drafting Of Norms