Who Wins, Who Loses: Decoding The Supreme Court's Yes Bank AT1 Verdict

The Supreme Court on Thursday upheld the Bombay High Court's order quashing the write-off of Yes Bank's Additional Tier-1 bonds worth Rs 8,415 crore, carried out during the lender's rescue in March 2020. A Bench of Justices Dipankar Datta and Augustine George Masih dismissed appeals challenging the high court's January 20, 2023 judgment. “We see no reason to interfere with the impugned judgment,” the apex court said while pronouncing its verdict.

The appeals had been filed by Yes Bank, the Reserve Bank of India and the Centre. The court had reserved its order on May 20 after hearing all sides.

Following the verdict being announced, Yes Bank shares plunged on the exchanges, falling as low as as 20% to Rs 16.96 apiece.

Here's a look at what the apex court decision means for bondholders, the government, Yes Bank and the wider AT1 bond market.

Winners: AT1 Bondholders

The clearest gainers are the bondholders, represented in the case by Axis Trustee Services. For retail and institutional investors, including mutual funds that had marked these bonds down to zero, the decision offers a long-awaited path to reclaim their funds.

The exact mechanics — whether the Rs 8,415 crore of bonds are restored or repaid, and with what interest — will depend on the operative portions of the judgment.

Setback: Yes Bank, The RBI And The Centre

All three appellants have lost their challenge. For the RBI and the government, the ruling rejects their position that the write-down was valid under the RBI master circular and bond contracts, independent of the reconstruction scheme.

For Yes Bank, the impact may be more limited than the headline number suggests. The bank had said any financial liability arising from the verdict would be recognised in the relevant future reporting period, and that it did not expect a material financial impact.

After the 2023 High Court ruling, then-CEO Prashant Kumar had said restoring the bonds would not affect total capital adequacy; in an extreme scenario, CET1 capital may come down while AT1 capital goes up. The bigger questions for shareholders are the hit to core equity capital and any cash outgo, rather than overall capital ratios.

Open Question: India's Rs 1 Lakh Crore AT1 Market

During the hearing, the Centre warned that nearly Rs 1 lakh crore of AT1 bonds are outstanding across Indian banks, and that an adverse ruling could weaken investor confidence in these instruments and complicate future bank rescues. Bondholders countered that the case turned only on whether law and due process were followed in this instance.

Which view prevails in the market remains to be seen. The verdict could reassure AT1 investors that write-downs must have clear legal backing, while pushing regulators to make future reconstruction schemes more explicit about how AT1 bonds are to be treated. Investors may also re-examine write-down clauses in existing issues.

ALSO READ: Centre Warns SC Ruling In Yes Bank Case Could Impact Rs 1 Lakh Crore AT1 Bond Market

How We Got Here

AT1 bonds are high-risk instruments that banks issue to shore up their core capital. They are unsecured and perpetual, with no fixed maturity. In exchange for higher interest, investors accept that the bonds can absorb losses — through a write-down or conversion into equity — if a bank's capital falls below specified thresholds or it approaches failure.

In March 2020, Yes Bank faced a severe crisis, with rising bad loans and falling depositor confidence. The RBI superseded its board and imposed a moratorium, and the government approved a reconstruction scheme backed by capital infusion from an SBI-led consortium. As part of the rescue, the bank's administrator wrote down AT1 bonds worth Rs 8,415 crore to zero. Of the three tranches Yes Bank had issued, in 2013, 2016 and 2017, the 2016 and 2017 tranches were written down, wiping out the investments of institutional and retail bondholders. The bonds also drew regulatory action over how they were sold, with SEBI imposing a Rs 25 crore penalty on Yes Bank in April 2021 for alleged mis-selling of AT1 bonds in the secondary market.

Bondholders challenged the write-off, arguing that the final reconstruction scheme deliberately left out any provision for writing down AT1 bonds, even though the draft scheme had contemplated it. They contended this preserved their rights, and that the administrator had no authority to act unilaterally once the scheme came into force.

The Bombay High Court agreed, finding that the administrator appeared to have exceeded his powers by writing off the bonds after the bank was reconstructed on March 13, 2020. It quashed the March 14, 2020 decision, while clarifying that its judgment would not prevent the respondents from taking further action permissible under law.

Before the Supreme Court, the central question was whether the administrator had the legal authority to extinguish the AT1 bonds after Yes Bank's reconstruction, notwithstanding the omission of the write-off provision from the final scheme. The Centre argued that AT1 bonds are governed by the RBI master circular and bond contracts, and that the “non-viability” trigger could arise even before reconstruction was complete. It also argued that writing down the bonds before the SBI-led capital infusion could have jeopardised the rescue.

With this verdict, the apex court has left the high court's view intact.

ALSO READ: What Are AT1 Bonds At Centre Of Yes Bank's Plea Before Supreme Court

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