The challenge of compensating Yes Bank's AT-1 bondholders six years after Rs 8,415 crore worth of bonds were written down could prove more complicated than the legal question itself, according to Abizer Diwanji, founder of NeoStrat Advisors.
Diwanji has proposed that compensation be structured through equity, with large shareholders who sold their holdings contributing towards the initial losses and the government potentially providing a fresh grant to Yes Bank to fund additional share issuance.
Reacting to the Supreme Court verdict on the bank's 2020 AT-1 bond write-down, Diwanji described the outcome as “excellent” and “very well reasoned”, but criticised the six-year delay. He argued that the practical difficulties of reversing the write-down should not invalidate the underlying legal position, even as they complicate the process of providing relief to investors.
Who Should Pay AT-1 Bondholders?
Diwanji suggested that the government, which drove the financial restructuring plan, would need to facilitate a settlement in equity.
Under his proposed mechanism, large shareholders who sold their holdings could contribute towards the initial losses, while the remaining amount could be supported through a fresh government grant to Yes Bank. The bank could then issue additional shares to affected AT-1 bondholders.
This is Diwanji's proposed resolution, not a compensation mechanism directed by the Supreme Court. Its implementation would depend on the applicable legal framework, regulatory approvals, the terms of the original bond instruments and the feasibility of issuing shares to affected investors.
Administrator's Powers Under Scrutiny
Diwanji also said the administrator's actions exceeding the scope of his authority, coupled with inadequate oversight, should serve as a warning for future bank-resolution exercises. He argued that the need for a write-down should have been clearly envisaged and addressed before the restructuring process.
The issue raises questions about the powers available to administrators during a bank's reconstruction, the safeguards governing the exercise of those powers and the extent of regulatory oversight when instruments held by investors are written down.
Are AT-1 Bondholders Senior to Common Equity?
Another fundamental question concerns the ranking of Additional Tier 1 (AT-1) bonds relative to common equity. Diwanji noted that India's regulatory framework has not explicitly established the same seniority treatment for AT-1 instruments that he cited in the case of Switzerland.
AT-1 instruments are designed to absorb losses when specified regulatory or contractual triggers are activated. Their precise position in a bank's capital structure, however, depends on the applicable regulatory framework and the terms of the instruments. The question of whether bondholders can claim compensation ahead of, or alongside, common shareholders therefore requires examination of the relevant rules and contractual provisions.
Write-Down Versus Write-Off: Why the Distinction Matters
Diwanji also highlighted the distinction between a write-down and a write-off. He argued that a write-down does not necessarily mean an instrument has been permanently extinguished, potentially leaving scope for a claim to recompense if the governing terms permit it.
That distinction is not automatic. Whether written-down AT-1 bonds retain any enforceable rights to reinstatement or compensation depends on the bond documentation, the applicable regulatory provisions and the legal effect of the action taken in 2020.
A write-down can be permanent under the terms of an instrument, and it should not be assumed that a claim for compensation survives merely because the action is described as a write-down rather than a write-off.
What the Case Means for India's AT-1 Market
Diwanji said the episode has exposed the complexity of AT-1 instruments, which are generally perpetual securities with contractual features that govern loss absorption and potential redemption. He suggested that India could consider a more transparent market structure for perpetual bonds, including listing requirements and a minimum public float to improve tradability.
He also proposed a minimum investor base of around 500 subscribers for each tranche and said the responsibilities of underwriters and bond subscribers warranted greater scrutiny.
The central challenge remains how to provide any legally permissible relief to investors six years after the original write-down, and how to allocate the cost without undermining the purpose of AT-1 instruments as loss-absorbing capital.
READ | Yes Bank Shares Extend Fall After Supreme Court Sets Aside Rs 8,415 Crore AT-1 Bond Write-Down
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