MC Explains | The Yes Bank AT1 bond and why Bombay High Court refused a write-off

AT1 bonds are a type of perpetual securities that banks use to shore up their core capital to meet Basel-III norms.

These bonds offer higher risk and reward. Interest rates offered at around 9-9.5 percent are higher than those for other debt instruments. But risk falls on the investors as AT1 bonds absorb losses in the event of an organisational failure. The issuer can write down such bonds in the event of non-viability.

What happened in Yes Bank’s case? 

Yes Bank had collapsed following alleged fraud, financial irregularities and resultant non-performing assets (NPAs). A clutch of banks came to its rescue at the direction of the Reserve Bank of India.

Subsequently, Yes Bank’s AT1 bonds were written down by the RBI-appointed administrator as part of the reconstruction scheme approved by the central bank and the government.

The move came as a shock to the AT1 bond holders, who said Yes Bank executives misrepresented the risks the bonds carried and sold them as ‘Super FDs’ to fixed-deposit holders on the promise of higher returns and safety.

Yes Bank executives offered 9-9.5 percent return on these bonds and made them transfer substantially high amounts (in some cases Rs 1 crore to Rs 1.5 crore) to these instruments.

Retail investors allege that this was done without explaining the high risk associated with these bonds, especially the provision that says these bonds would be extinguished and capital lost if the bank failed.

Why did the court say?

The court has cited two main reasons. The court highlighted the absence of the clause in the final scheme of Yes Bank reconstruction and said that the administrator overreached his authority.

It said while Yes Bank draft reconstruction scheme contained the clause for AT1 bonds write down, the final scheme sanctioned by the government did not.

“It appears that upon consideration of the objections, the Reserve Bank made modification in the draft scheme, as permissible under section 45(6)(b) of the Act of 1949. It deleted the clause of writing down of AT-1 bonds,” the court said.

The final scheme did not authorise the Yes Bank administrator to write off the AT-1 bonds and in doing so, he exceeded his authority the court said.

“It appears that the administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed on March 13, 2020,” the court said.

The court allowed a six-week stay on the order on the request of the bank.

What next? 

On January 21, Yes Bank said it will challenge the order in the Supreme Court, which means investors still have a long legal battle ahead.