Yes Bank admin cannot write down AT1 bonds: Axis Trustee in Supreme Court

The Supreme Court began hearing arguments on whether Yes Bank's 2020 write-off of ₹8,400 crore AT1 bonds was legally valid, a ruling that could reshape future bank resolutions

The 2020 decision of the administrator of Yes Bank to write down the lender’s additional tier-1 (AT1) bonds could not be done legally, the Axis Trustee Services on behalf of institutional AT-1 bondholders told the Supreme Court on Thursday.

 

The counsel for Axis argued that only the Reserve Bank of India (RBI) had the power to write down the bonds and not the administrator who acts as the board of the bank.

 

The lawyer also argued that Solicitor General Tushar Mehta, who appears for RBI, State Bank of India(SBI) and the Centre, “sings the same tune for all three only now”.

 

He said it was only after the matter came to court that RBI, SBI and the Centre were on the same page.

 

“I’m going to show my lord that by all the records, the three spoke or sang different tunes all along. It’s only when it came to court... (it is) old wine in a new bottle. We can’t look at the affidavits. We have to look at the actual records to see what happened today. The Reserve Bank will say what it does. State Bank will say what it does, we have to look at the records as what were the records at the relevant time,” he argued.

 

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.

 

On Wednesday, the administrator of Yes Bank had defended before the Supreme Court the bank’s 2020 decision to write down the lender’s AT1 bonds, saying that the move was legally valid and essential for the bank’s survival.

 

He had 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 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 claimed, 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.

 

A bench of justices Dipankar Datta and Augustine George Masih on Thursday adjourned the hearing, saying the court will resume proceedings from January 15 to complete arguments.

 

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 had 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.