Decision to write down AT1 bonds legally valid, Yes Bank admin tells SC

Administrator argues 2020 write-off was valid under Basel III; court's ruling could force ₹8,400 crore repayment to bondholders

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The administrator of Yes Bank on Tuesday defended before the Supreme Court the bank's 2020 decision to write down the lender’s additional tier-1 (AT1) bonds, saying that the move was legally valid and essential for the bank’s survival.

 

He argued that the write-down was authorised under the Basel III master circular, clause 57 of the information memorandum, and Section 36AC of the Banking Regulation Act, which empowered him to take management decisions until a new board was constituted.

 

He further told the court that two triggers, namely the Common Equity Tier 1 (CET 1) capital ratio falling below the prescribed threshold and the bank reaching the point of non-viability, had justified the move. 

 

The purpose of the write-down, he said, was to restore the bank’s CET 1 ratio, protect its financial stability, and enable State Bank of India’s ₹10,000-crore capital infusion under the reconstruction plan. According to him, the process of “reconstitution” was only complete once capital was infused and a new board assumed charge.

 

The petitioners, however, challenged the administrator’s authority, contending that he had exceeded his powers once the reconstruction scheme took effect. They argued that the final scheme did not explicitly permit the bond write-off and that the decision, implemented after March 13, 2020, lacked legal sanction. The court will continue hearing arguments on Thursday.

 

The apex court is hearing appeals filed by Yes Bank and the Reserve Bank of India against a 2023 Bombay High Court judgment that struck down the write-off of AT1 bonds worth about ₹8,400 crore. The High Court had ruled in favour of bondholders, who claimed they were unfairly made to absorb losses before equity shareholders.

 

The write-down formed part of an RBI-led rescue plan that recapitalised the crisis-hit lender amid mounting bad loans and corporate governance failures.

 

If the apex court upholds the High Court’s ruling, Yes Bank could be required to repay bondholders in full, with 9 per cent annual interest, significantly impacting its financials and future bank resolutions.

 

AT1 bonds, introduced under Basel III norms after the 2008 global financial crisis, are perpetual debt instruments that help banks augment their equity base and absorb losses during distress. Retail participation in such bonds was banned by Sebi following the Yes Bank episode.

 

The controversy erupted in March 2020 when the RBI superseded Yes Bank’s board, appointed Prashant Kumar as administrator, and approved the ₹8,400-crore write-off as part of the reconstruction plan. Retail investors, who together held around ₹300 crore in AT1 bonds, challenged the decision in the Bombay High Court.

 

In 2022, Sebi imposed a ₹2-crore penalty on former CEO Rana Kapoor for allegedly mis-selling AT1 bonds to retail investors as “super FDs.” In contrast, the Madras High Court, in a separate plea filed by 63 Moons Technologies, had upheld the RBI’s authority to permit such write-downs.