Bombay HC sets aside Yes Bank AT-1 bonds write off

The division bench of Acting Chief Justice SV Gangapurwala and Justice SM Modak, in its detailed order, have upheld the plea filed by Axis Trustee Services and other petitioners, challenging the move of administrator appointed by the Reserve Bank of India (RBI).

However, the court has allowed the oral plea made by the counsel of an administrator to stay the operation on the order for six weeks.

‘Administrator Exceeded his Powers and Authority’
“The Yes Bank stood reconstituted on March 13, 2020, upon the notification of the final Yes Bank. Reconstruction Scheme, 2020. After the bank was reconstituted, the Administrator could not have taken such a policy decision of writing off the debentures,” the court said in its 81-page order. “It appears that the Administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed.”

AT-1, or perpetual, bonds are quasi-equity investments that do not have fixed maturity tenures, and are considered higher risk than tenured investments.

In March 2020, Axis Trustee, on behalf of bond investors, had approached the court with the argument that the proposal to entirely write down the value of over ₹8,000 crore in AT-1 bonds is not only iniquitous but goes against global best practices and principles of natural justice. Appearing for Axis Trustee, senior advocate Janak Dwarkadas and Vikram Trivedi, managing partner of law firm Manilal Kher Ambalal & Co, argued that AT-1 bonds are universally ranked superior to equity and a complete write-down of such securities is only possible when Yes Bank, the issuer of the bonds, goes into liquidation.

Future Imperfect
While the bank and the regulator may appeal against the ruling, bailing out troubled banks in the future could be difficult with equity investors hesitant to step in. The AT-1 bonds were supposed to absorb the losses in case of bankruptcy of a bank, which is why they bear higher interest rates. If this ruling sets a precedent where AT-1 bond holders are paid off even when a bank gets into trouble, fresh equity investments in failed banks would be hard to come by, said bankers.

The RBI cobbled up equity investments in Yes Bank from other local banks such as

, Axis, ICICI and . This was possible because the liability of AT1 was written down. If the liability remained, it might have been difficult to bring in investors as their investments would have gone to pay the bondholders instead of capitalising the bank. Sources said that it could potentially be a big hit for Yes Bank, which just exited the 2020 reconstruction scheme. Yes Bank did not respond to an email query.

“It’s a good beginning. The stand of the Trustee (for bond holders) has been vindicated,” said Sanjay Sinha, former MD & CEO of Axis Trustee. “Now, one has to wait for RBI’s views on this.”