YES Bank crisis: Axis Trustee moves HC against AT-1 bond cancellation

Axis Trustee representing bondholders of YES Bank’s additional tier-1 (AT-1) capital bonds worth Rs 8,400 crore on Monday filed a writ petition in the Bombay High Court seeking remedy against the Reserve Bank’s (RBI’s) decision to cancel the bonds as part of reconstruction plan.
 
The central government, represented by the department of financial services and YES Bank, and the RBI have been included in the petition. The petition was reviewed by Business Standard and it was the first to report on March 7 that AT-1 bondholders may seek legal remedy against RBI’s move.
 
The main contention of Axis Trustee is that when YES Bank is treated as a going concern, AT-1 bonds issued by the bank cannot stand extinguished and ought to remain as active instruments. The petition also puts forth that AT-1 bonds cannot be treated inferior or subordinate to equity and that this is contradiction to global best practices where AT-1 bonds are treated superior to equity.
 
According to Axis Trustee, this point was mentioned in the information memorandum of YES Bank, while issuing these instruments. “A complete write-down of AT-1 bonds while retaining the value for equity holders is against the principles of justice and prevalent best practices,” the petition stated. The petition also states that information memorandum issued by YES Bank at the time of raising AT-1 bonds mentioned that value of these bonds could be reduced to zero, only at the time of liquidation, which isn’t the case yet with YES Bank.
 

The petition adds that under Basel-III norms and international best practices, AT-1 bonds can be written off only when the value of equity of YES Bank is completely eroded. “Even today, the shares of YES Bank are being traded at face value of Rs 2 and that the draft scheme pronounced by the RBI does not contemplate the write-off of equity,” it says.
 
The petition represented by Manilal Kher Ambalal & Co states that AT-1 bonds of YES Bank have been subscribed by retail and institutional investors, including mutual funds, and hence writing off such an instrument will shake the confidence of these investors. “Such a permanent write-off of regulatory capital instrument will make it even more difficult for banks to satisfy capital adequacy requirement by issuing perpetual debt instruments as part of its regulatory capital,” it said.
The petition will be heard on March 11.
 
According to sources, the interest of Axis Trustee is to preserve some value to these bonds. “Our objective is to ensure that we be allowed to convert our bonds to equity shares, which is permissible under the regulations,” said a highly placed source invested in YES Bank’s AT-1 bonds.
 
In a March 8 letter to the RBI capturing the grievances of At-1 bondholders, Axis Trustee seeks for an equitable treatment of AT-1 bonds and equity shares.

The story so far
 

• March 5: RBI places YES Bank under moratorium till April 3
• March 6: Central bank issues draft rescue scheme 
• Alters authorised capital of reconstructed YES Bank to Rs 5,000 crore, number of equity shares to 240 billion with a face value of Rs 2 each
• Invites SBI to invest 49% in reconstructed bank at Rs 10 apiece
• 26% of stake to be locked in for three years
• March 7: SBI says it will invest up to Rs 11,760 crore as per draft scheme