New Delhi: The Supreme Court on Thursday upheld a ruling setting aside Yes Bank’s decision to write off Additional Tier-1 (AT1) bonds worth Rs 8,415 crore during the lender’s rescue in March 2020, giving relief to institutional and retail investors whose investments had been reduced to zero.
A Bench comprising Justices Dipankar Datta and Augustine George Masih dismissed appeals filed by Yes Bank, the Reserve Bank of India (RBI) and the Centre against the Bombay High Court’s January 2023 judgment. The High Court had quashed the write-off, holding that the bank’s final reconstruction scheme did not authorise the administrator to take that step.
The verdict concludes a major legal dispute over the treatment of AT1 bonds during a banking rescue. It also raises questions about how regulatory powers, reconstruction schemes and contractual provisions governing these high-risk instruments should be interpreted when a bank faces a financial crisis.
Following the judgment, Yes Bank shares came under heavy selling pressure. The stock fell sharply during Thursday’s trading session as investors assessed the potential implications of the ruling for the lender. Reuters reported that the Supreme Court had declared the write-off illegal, while market reports recorded a steep decline in the share price.
What did the Supreme Court rule?
The Supreme Court refused to interfere with the Bombay High Court’s decision to quash the write-off of Yes Bank’s AT1 bonds.
The dispute centred on whether the administrator appointed during the bank’s reconstruction had the legal authority to write down the bonds after the final reconstruction scheme came into force.
The bondholders argued that the final scheme did not contain a provision allowing the bonds to be written off or converted. They also contended that provisions considered during the drafting process had not been included in the final version, meaning the administrator could not subsequently introduce such a measure on his own.
The Centre, the RBI and Yes Bank challenged the High Court’s ruling, maintaining that the write-down was permitted under the regulatory framework and the contractual terms of the bonds.
The Supreme Court’s decision to dismiss their appeals leaves the High Court’s ruling intact. The outcome is a significant development for investors who had challenged the cancellation of their holdings.
However, the verdict should not be interpreted as eliminating the loss-absorbing features of AT1 bonds generally. These instruments remain subject to their contractual terms and the applicable regulatory framework. The dispute concerned the legality of the specific write-off carried out during Yes Bank’s reconstruction.
How the Yes Bank crisis unfolded in 2020
The case dates back to March 2020, when Yes Bank was facing a severe financial crisis amid concerns about rising bad loans, its capital position and depositor confidence.
The RBI superseded the bank’s board and imposed a moratorium as authorities moved to stabilise the lender. The government subsequently approved a reconstruction scheme supported by a capital infusion from a consortium led by the State Bank of India.
As part of the rescue, the bank’s administrator decided to write down AT1 bonds worth Rs 8,415 crore to zero.
The move meant that investors holding these bonds lost the value of their investments. The write-off became controversial because shareholders were not subjected to an equivalent cancellation of their holdings, although a portion of their shares was placed under a lock-in as part of the rescue arrangements.
Bondholders challenged the decision, arguing that it was not authorised by the final reconstruction scheme. Their legal challenge led to the Bombay High Court’s January 2023 judgment, which set aside the write-off.
Yes Bank, the RBI and the Centre then approached the Supreme Court, extending the dispute over the legal basis of the action.
What are AT1 bonds?
Additional Tier-1 bonds are financial instruments that banks issue to raise capital. They form part of a bank’s regulatory capital and are designed to absorb losses when the institution comes under financial stress.
Unlike conventional bonds, AT1 instruments carry significant risks. Depending on their terms and the applicable regulatory requirements, they may be written down or converted into equity when specified capital or non-viability triggers are activated.
Their risk profile is one reason they can offer investors relatively attractive returns compared with some conventional debt instruments. However, the possibility of losing some or all of the investment makes them unsuitable for investors who assume that all bonds offer predictable repayment of principal.
The Yes Bank case brought this risk into sharp focus. Investors had seen their holdings wiped out during the bank’s rescue, but the courts were asked to determine whether the action had been taken within the limits of the legal and regulatory framework.
The Supreme Court’s ruling concerns the authority and process used in this particular case, rather than removing the loss-absorption mechanism that is a defining feature of AT1 instruments.
Why the reconstruction scheme became central
A key question during the litigation was when Yes Bank could legally be considered reconstructed under Section 45 of the Banking Regulation Act.
The parties disputed whether the reconstruction took effect when the scheme was notified or only after the steps specified in it had been completed. This distinction mattered because the timing could affect the administrator’s authority to take further decisions.
The bondholders argued that the final scheme did not provide for the write-off. They maintained that once the scheme came into force, the administrator could not independently introduce a measure that had not been included in its terms.
The Centre argued that AT1 bonds were governed by RBI regulations and their contractual conditions, rather than exclusively by the reconstruction scheme. It maintained that the RBI’s master circular provided the framework for the trigger, action and consequences of a write-down.
The government also argued that writing down the bonds before the SBI-led capital infusion could have jeopardised the rescue.
The dispute therefore involved more than the general principle that AT1 bonds can absorb losses. It concerned whether the specific decision was authorised under the rules and scheme applicable to Yes Bank’s reconstruction.
Why bondholders challenged the write-off
Investors argued that the final reconstruction scheme deliberately omitted provisions that would have allowed the AT1 bonds to be written down or converted.
They said the omission preserved their rights and meant the administrator could not rely on provisions that were not part of the final scheme to cancel their holdings.
The challenge attracted attention because the affected investors included both institutional and retail participants. The Rs 8,415 crore write-off represented a substantial amount of capital that investors had placed in the bank’s bonds.
The Bombay High Court accepted the challenge in January 2023, ruling that the final reconstruction scheme did not authorise the write-off. The Supreme Court has now upheld that decision by dismissing the appeals filed by the bank, the RBI and the Centre.
For the affected investors, the ruling removes the legal basis on which the write-off had been upheld by the bank and the authorities. The practical consequences, including how the decision will be implemented and what recovery may be available to individual holders, depend on the applicable directions and subsequent steps.
Government had warned of wider implications
During the proceedings, the Centre warned that a large volume of AT1 bonds remained outstanding across Indian banks. It argued that a ruling against the write-off could affect investor confidence in these instruments and make future bank rescues more complicated.
The concern was that uncertainty over the legal treatment of AT1 bonds could influence how banks raise regulatory capital and how investors assess the risks associated with such instruments.
Bondholders countered that the dispute was limited to whether the law and due process had been followed in Yes Bank’s specific case. Their position was that the existence of loss-absorbing features in AT1 bonds did not automatically establish that every write-down was valid regardless of the applicable scheme and legal authority.
The Supreme Court’s decision brings the dispute to a new stage, but its wider implications for bank capital instruments will depend on how the ruling is applied and how regulators and financial institutions respond.
What the verdict means for Yes Bank
The judgment creates a legal and financial issue for Yes Bank because the bank had previously treated the AT1 bonds as written off under its 2020 rescue.
Before the Supreme Court’s verdict, the lender had said that any financial liability arising from the final outcome would be recognised in the relevant future reporting period. It had also stated that it did not anticipate a material financial impact, maintaining that the write-down complied with contractual terms and regulatory guidelines.
The bank’s eventual accounting treatment and any financial consequences will depend on the implementation of the ruling and the relevant legal and regulatory requirements.
The sharp fall in Yes Bank shares after the verdict reflected market concerns about the implications of the decision. However, the share-price reaction alone does not establish the ultimate financial cost to the bank or the amount that individual bondholders may recover.
A significant ruling for bank capital markets
The Supreme Court’s decision is a major development in the long-running dispute over Yes Bank’s 2020 rescue.
For bondholders, it upholds the judgment that challenged the cancellation of Rs 8,415 crore in AT1 investments. For Yes Bank and the authorities, it leaves the write-off set aside and raises questions about the legal basis for the action taken during the reconstruction.
The case also highlights the importance of clear reconstruction schemes and a precise understanding of the authority available to administrators during a banking crisis.
AT1 bonds remain high-risk instruments designed to absorb losses, but their treatment must still comply with the applicable legal and regulatory framework.
The practical impact of the verdict will depend on how the ruling is implemented, how the bank addresses any resulting liabilities and what steps are taken for the affected investors. For now, the Supreme Court’s decision marks a significant legal victory for the bondholders who challenged the write-off and a setback for the bank and authorities that defended it.