OPINION | Vault Matters: The real but barely mentioned risk in Yes Bank

Out of the woods? Not quite with the judicial outcome of the AT-1 bondholders pending 

For the banking sector and the journalist community, especially those tracking financial services, Yes Bank has been an Akshaya Patra since 2018. It never fails to disappoint the banking fraternity’s interest, and it’s constantly giving fodder to us journalists.

But should we watch out for something that happened in Switzerland and could trigger an anti-climax back home for Yes Bank in its ongoing AT-1 bonds case in the Supreme Court?

The bank may have come out of its reconstruction and even found a new home, but doubts around what is to happen on the AT-1 bonds front are far from subsiding. The bank and the Reserve Bank of India believe that their decision to fully write down the value of AT-1 bonds is correct and justified. Until a month back, everyone thought so.

The recent Swiss court decision, though, is likely to reopen a different point of view, if the Indian apex court is willing to see through the logic in an objective manner.

When UBS took over Credit Suisse in 2023 in a stressful situation, the value of AT-1 bonds was struck down to zero, while equity change hands for about $3.2 billion. Three thousand AT-1 bond holders of Credit Suisse were quick to appeal to the court. The Swiss court in its decision on October 1, without getting into the aspect of compensation, ruled in favour of the bondholders stating that their rights were unlawfully infringed.

Firstly, FAC or Swiss Federal Administrative Court, overturned that FINMA’s argument that its decree was a political act of state security, immune from judicial review. FINMA Swiss Financial Market Supervisory Authority, is Switzerland’s equivalent of RBI.

FAC said since the decree was an administrative decision affecting private property rights, it is subject to judicial oversight.

If any, breach of this aspect is what makes the case very contentious. AT-1 bonds worth Rs 8,400 crore worth, colloquially referred to quasi-equity instruments, were written down as worthless as part of Yes Bank’s rescue package in March 2020.

Three years later, the Bombay High Court ruled in favour of the bondholders stating that the waterfall mechanism for AT-1 bonds was not fairly upheld. Yes Bank and RBI were quick to approach the Supreme Court and the Supreme Court also immediately stayed the lower court verdict. Two years have passed, the bank has a new promoter, and yet there is no finality on the AT-1 matter.

Unlike many instances in the past, where judicial reasoning overseas could not be be extended to India, FAC’s decision is something that the Supreme Court could look at.

Equity of Yes Bank changed hands for a face value of Rs 10 a share while value of AT-1 bonds was fully written down. Agreed that AT-1 by nature is a tricky instrument. It is somewhere between a debt and equity. It is not entirely debt because it has the advantages of upside which an equity instrument enjoys, but it is not entirely equity because it carries a fixed coupon payable at regular intervals. However, in case of insolvency, it is ranked a notch above equity and a notch below a secured debt.

What this means is that if equity holders are entitled to a payoff, so is an AT-1 bond holder. What has happened in case of Yes Bank, though, is that the entitlement of equity holders was preserved, whereas AT-1 holders were forced to relinquish their dues. As is the case with Credit Suisse and UBS, where the FAC took a stand that the transaction is not out of insolvency, but to protect liquidity of Credit Suisse, the rescue plan for Yes Bank led by State Bank of India too is not a package extended out of an insolvency situation.

One may then question, what about the case of Lakshmi Vilas Bank. LVB is a complete outlier and not to be confused with Yes Bank, because LVB’s equity was struck to zero and so was its AT-1 and tier-2 bonds. More importantly, there is no entity now by the name of Lakshmi Vilas Bank, whereas Yes Bank has survived as a legal outfit and claims not to be in stress any longer.

About 15 hearings have gone past, and there has even been a change in the composition of the bench hearing the AT-1 case, but there is no outcome yet. It is only fair that principles of waterfall mechanism as applied by the Bombay High Court is appreciated by the Supreme Court in its final judgement, especially seen in conjunction to the Swiss Court verdict. Having said that, Yes Bank has recently found a new promoter. The bank’s asset quality is not yet pristine on the retail front. SMBC may be preparing to cement the gaps through capital deployment wherever required. If it also has to shoulder a hole of Rs 8400 crores, which now seems to be a contingent liability, will the new promoter be happy to foot this bill?

For the Supreme Court, it’s likely that from a commercial standpoint and a capital viability perspective in the banking space, a verdict entirely based on legal merit may set the clock backwards not just for Yes Bank, but for the entire banking sector. But if it doesn’t , it sends out a strong message of expediency; clearly a Catch-22 situation for the apex court. It also triggers one to think whether such uncertainties are prompting SMBC to take a more calibrated and careful investment approach in Yes Bank. After all the picture will fully unveil in 2026!