SC may uphold Bombay HC order quashing the write-off of YES Bank AT1 bonds, say experts

AT1 bonds are a type of perpetual bonds that do not have any fixed maturity and offer relatively higher interest rates as these are considered quasi-equity instruments that carry higher risk.

YES Bank has reportedly approached the Supreme Court challenging the Bombay HC order.

The association of bond holders have filed a caveat with the SC following the High Court order. A caveat is filed to ensure that the SC doesn't pass any order on the matter until the concerned party is heard.

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Will the SC set aside HC order?

According to Avinav, the SC will consider whether there are tenable grounds to interfere with the HC judgment.

“Only if the SC disagrees with the reasoning provided by the HC would it set aside the High Court judgment,” Avinav explained.

However, Sinha feels there are strong chances that the SC will uphold the HC judgment.

What happened in the AT1 bond case?

YES Bank was on the verge of collapse owing to alleged fraud, financial irregularities, and non-performing assets (NPAs). A clutch of banks came to its rescue at the direction of the Reserve Bank of India (RBI).

The RBI put Yes Bank under a moratorium in March 2020 and a new management and board were appointed as part of a rescue plan.

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

The move came as a shock to AT1 bond holders, who accused the bank of mis-selling the bonds as FDs, promising both higher returns and safety.

A probe by the Securities and Exchange Board of India (SEBI) found that the bank had mis-sold these bonds to retail investors without informing them of the attendant risks. The Sebi investigation also found that Yes Bank had positioned these bonds as ‘Super FD’ and ‘as safe as FD’ to investors.

Subsequently, Bombay HC quashed the decision to write off these bonds.

Providing its rationale for its decision, the court highlighted the absence of the clause (to write off AT-1 bonds) in Yes Bank’s reconstruction scheme, and said that the administrator overreached his authority.

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