Yes Bank shares nosedive 20% after SC declares Rs 8,415 crore AT-1 bond write-off illegal

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The ruling also went against the position taken by the Reserve Bank of India and the central government, which had challenged the High Court's decision. The bank may now face obligations arising from the disputed bonds, although the precise impact on its balance sheet, including any repayment requirements, will depend on the detailed judgment and its implementation.

The dispute dates back to March 2020, when Yes Bank was placed under a moratorium by the RBI following a sharp deterioration in its financial position, mounting bad loans and concerns over governance.

In a pivotal decision, India's Supreme Court declared that the write-off of Yes Bank's 84 billion rupee AT-1 bonds is unlawful, causing a steep decline in Yes Bank shares. The ruling offers solace to bondholders, who successfully argued that their investments were misrepresented. This landmark decision raises critical questions about regulatory practices and bondholder rights, potentially reshaping market attitudes toward similar financial instruments.

The central bank subsequently introduced a reconstruction scheme, under which State Bank of India and several other lenders invested capital to rescue the struggling bank.

As part of the restructuring, Yes Bank permanently wrote down AT-1 bonds worth Rs 8,415 crore to zero. The amount comprised Rs 3,000 crore raised in December 2016 and another Rs 5,415 crore raised in October 2017.

AT-1 bonds are perpetual debt instruments issued by banks to strengthen their capital base. They typically offer higher interest rates than conventional bonds but carry greater risks, including the possibility of investors losing their entire investment if specified regulatory triggers are activated.

The write-off triggered legal challenges from bondholders, including individual investors and institutions, who argued that the decision was unlawful and had wiped out their investments despite the bank being rescued.

In January 2023, the Bombay High Court set aside the write-off, finding that the bank's administrator lacked the necessary authority to extinguish the bonds under the circumstances of the reconstruction. The final reconstruction scheme had also omitted an explicit provision for writing down AT-1 bonds.

Yes Bank, the RBI and the Centre subsequently moved the Supreme Court against that ruling. The apex court had stayed its implementation pending the outcome of the appeals.

During the proceedings, the government argued that AT-1 bonds were governed by contractual terms and RBI regulations, which allowed them to absorb losses when a bank approached non-viability. Bondholders maintained that the final reconstruction scheme preserved their rights.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.