SC voids Yes Bank’s $883 mn AT-1 bond write-off

Why in the News

Yes Bank’s 2020 rescue wiped out its additional tier-1 (AT1) bondholders but only locked in its shareholders for a few years, reversing the usual rule that owners lose before lenders. The Supreme Court of India has now set aside that write-off of about ₹84 billion ($883.70 million), a blow to the lender and to the regulators who defended it.

What are AT1 bonds, and why were Yes Bank’s written off?

1. What it is: An AT1 bond is a bond with no maturity date that counts toward a bank’s Tier 1 capital, the core cushion that absorbs losses. Like a shock absorber, it pays higher interest but can be written off or turned into equity under stress.
2. Why banks issue them: Under the global Basel III capital norms, they let a bank raise loss absorbing capital without issuing new shares. Investors are paid more for carrying that extra risk.
3. Collapse and rescue: Yes Bank was declared insolvent six years ago. Under the Yes Bank Reconstruction Scheme, 2020, issued under the Banking Regulation Act, 1949, investors led by the State Bank of India (SBI) put money into the bank.
4. Unequal burden: The AT1 bonds were written off in full. Equity holders, who normally absorb losses first, faced only a three year lock-in on 75% of their shares.
5. The takeaway: The rescue reversed the usual order of loss, so bondholders paid for the bank’s failure ahead of its owners.

How did the dispute reach the Supreme Court?

1. High Court ruling: Yes Bank’s AT1 bondholders challenged the write-off, and the Bombay High Court ruled in their favour in 2023.
2. Appeal by lender and regulators: Yes Bank, the Reserve Bank of India (RBI) and the Union government appealed that ruling to the Supreme Court.
3. Supreme Court outcome: The Supreme Court has now set aside the write-off, so the bondholders’ win in the High Court stands.
4. New ownership: Japan’s Sumitomo Mitsui Banking Corporation (SMBC) now holds a 24% stake in Yes Bank, so the bank facing the bondholders’ claim has a new major shareholder.

Why does the ruling matter beyond Yes Bank?

1. Creditor hierarchy: Insolvency practice ranks lenders above shareholders. A rescue that erases bondholders but spares equity turns that order upside down.
2. Limits on regulators: The ruling narrows how freely the RBI and the Union government can impose losses in a future rescue.
3. Cost of bank capital: Banks sell AT1 bonds only if investors trust that write-offs follow fixed rules, so a write-off later voided affects how such bonds are priced.

Challenges

1. Judgement based triggers: A regulator decides by judgement when AT1 bonds may be written off, so investors challenge the decision in court.
2. Mis-selling to small savers: AT1 bonds were sold to retail investors as safe products. Eg. Securities and Exchange Board of India penalised Yes Bank (2021).
3. Global precedent: Other regulators face the same dispute. Eg. Switzerland’s 2023 write-off of Credit Suisse AT1 bonds.
4. Slow resolution: A dispute lasting six years leaves the bank’s capital position and investors’ claims unsettled.

Way Forward

1. Codify the loss order: The RBI should state that equity absorbs losses before AT1 bonds in any reconstruction scheme.
2. Objective trigger: Define the point of non-viability (when a bank cannot survive without rescue) in published, measurable terms.
3. Institutional buyers only: Keep AT1 bonds limited to institutional investors who can price the write-off risk.

Conclusion

The Supreme Court has undone a rescue measure that made a bank’s lenders bear losses ahead of its owners. How Yes Bank settles the revived bonds, and whether the RBI rewrites its rules for bank rescues, is what to watch.

Matching Previous Year Question

“[2024] Consider the following statements: Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders. Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I (c) Statement-I is correct, but Statement-II is incorrect* (d) Statement-I is incorrect, but Statement-II is correct ANSWER:”