The Supreme Court has dealt a blow to the bank, the central government and the Reserve Bank of India (RBI) in the case of Yes Bank’s ₹8,415 crore AT-1 bond write-off. The court upheld the Bombay High Court’s January 2023 decision. The High Court rejected the bank’s decision to cancel these bonds during the financial crisis. After the Supreme Court’s decision, Yes Bank’s shares have fallen by 20%.

After hearing the case, a bench headed by Justice Dipankar Dutta said there was no reason to interfere with the High Court’s decision. The court also lifted the stay imposed earlier in the case and dismissed the appeals of the central government, RBI and Yes Bank. After this, Yes Bank said that it is reviewing the Supreme Court’s decision and its implications. The Bombay Stock Exchange (BSE) also sought an explanation from the bank on the sharp fall in the shares. The bank said it was in the process of getting a full copy of the decision. The bank will share more information after studying the decision in detail and understanding its implications.

What is the whole issue of the ₹8,415 crore bond?

AT-1 bonds worth ₹ 8,415 crore were written-off during the restructuring of financial crisis-hit Yes Bank in March 2020. If you understand in simple language, the bank removed the money of the people who invested in these bonds from their accounts. Institutional investors, mutual funds and general investors invested money in these bonds.

After this the bondholders approached the Bombay High Court. He challenged the bank’s decision and demanded the return of his investment. In January 2023, the High Court ruled in favor of the investors. The High Court held that the write-off of the bonds was not part of the final restructuring plan of the bank. According to the court, after the reorganization of the bank on March 13, 2020, the administrator went beyond his powers by writing off the bonds.

What argument did the central government and RBI give?

The central government, RBI and Yes Bank challenged the High Court’s decision in the Supreme Court. The central government said the bond write-off was legal and the move was necessary to protect the interests of the bank’s over 2 lakh depositors and account holders. The RBI argued that the bonds were written off in accordance with their terms and regulatory conditions. This step was taken before government capital and money from other investors came into the bank, so as to protect the interest of the depositors. Yes Bank said the 2016 information documents and RBI regulations provided for permanent write-off of AT-1 bonds. According to the bank, this was necessary before getting capital from State Bank of India (SBI) and other investors.

What is an AT-1 bond?

AT-1 i.e. Additional Tier-1 bonds are a way for banks to raise capital. Through this, banks borrow money from investors and can use that capital to strengthen their financial position. However, this is not as secure as a normal fixed deposit. If the bank reaches a severe financial crisis, the bond amount can be completely canceled as per the terms and conditions. In such a situation investors are at risk of losing their entire money. In the case of Yes Bank, the bondholders challenged this annulment. The Supreme Court has now upheld the High Court’s decision and dismissed the appeals of the bank, central government and RBI.

What could be the impact on the banking sector?

In this case, the government and the RBI warned the court that the implementation of the High Court’s decision could have a serious impact on the banking system and the future processes of restructuring distressed banks. As of December 31, 2022, banks had outstanding AT-1 bonds worth ₹1,02,466 crore and Tier-2 bonds worth ₹1,92,702 crore, according to finance ministry records. Government banks had a major share in this. The Supreme Court’s decision is important for investors in such bonds and the process followed during a banking crisis. Now the High Court’s decision in this matter remains unchanged and the side of the bondholders has got legal support.