Supreme Court to wrap up Yes Bank AT-1 bond case hearings in January

NEW DELHI: The Supreme Court on Thursday said it will conclude hearings in the third week of January on appeals filed by the Reserve Bank of India (RBI), Yes Bank and others challenging the Bombay high court’s 2023 order setting aside the March 2020 revocation. ₹Additional tier 1 (AT-1) bonds worth 8,415 crore.

A bench of justices Dipankar Datta and Augustine George Masih adjourned the case, saying the court would continue the proceedings from January 15 to finalize the arguments, after which the verdict would remain reserved.

The high court is considering an appeal of the high court’s January 2023 decision that invalidated the write-off and ruled in favor of bondholders who claimed they were unfairly forced to absorb losses before equity shareholders. This depreciation formed a central part of the RBI-led restructuring plan that recapitalized Yes Bank at the height of its crisis in March 2020, marked by rising bad loans, governance failures and severe liquidity stress.

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In December 2016, the bank ₹3,000 crore in AT-1 bonds offering 9.5% coupon; later increased in October 2017 ₹5,415 crore through AT-1 bonds, offering 9% coupon.

If the Supreme Court upholds the high court order, Yes Bank may have to pay 9% annual interest to bondholders; This decision could materially impact the lender’s financial condition and set a precedent for future bank resolution mechanisms.

At Thursday’s hearing, senior lawyer Aryama Sundaram, appearing for Axis Trustee on behalf of corporate AT-1 bondholders, argued that investors who bought high-yield instruments did so with full awareness of the risk and could no longer challenge the outcome after a triggering event.

AT-1 bonds offer returns of exactly 9-9.5% because they are designed to absorb losses in distress, Sundaram said, noting that the Information Memorandum, RBI Guidelines and bond terms clearly warn of the possibility of permanent losses.

Sundaram said the writ petition before the Bombay High Court targets only the administrator’s March 14, 2020 decision and not the RBI-approved reconstruction plan or regulatory circulars, and argued that rollback would unfairly shift losses to small depositors and the rescue consortium led by the State Bank of India.

In earlier hearings, the Yes Bank executive had argued that the deletion was legally valid and necessary to prevent collapse, citing its powers under the Basel-III Master Circular, Article 57 of the Information Memorandum and Section 36ACA of the Banking Regulation Act.

The manager had said that the statutory trigger conditions were met, including the equity tier-1 (CET-1) capital threshold being exceeded and the bank reaching the point of unviability. He also told the high court that this depreciation was necessary to rebuild the bank’s CET-1 capital, maintain its financial stability and facilitate the financial stability of the State Bank of India. ₹It invested ₹10,000 crore under the revival plan and argued that the bank’s restructuring was not complete until fresh capital was injected and a new board formally took over.

Launched globally after the 2008 financial crisis, AT-1 bonds are perpetual instruments with trigger points linked to the bank’s capital and earnings. If these thresholds are exceeded, interest payments may be stopped. These are among the riskiest bank capital instruments and rank last in the payback hierarchy.

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The debate intensified after the Securities and Exchange Board of India imposed a sanction in 2022. ₹Former Yes Bank CEO Rana Kapoor has been fined Rs 2 crore for allegedly mis-selling AT-1 bonds as “super FDs” to retail investors. Around ₹300 crore of the bonds were in the hands of retail buyers.

History of the crisis

Yes The bank’s near-collapse follows rapid financial deterioration between 2018 and early 2020, driven by aggressive corporate lending that fueled bad loans and eroded depositors’ confidence.

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The RBI imposed a moratorium limiting withdrawals on March 5, 2020. ₹50,000 and replaces the board. A rescue package backed by SBI, ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank injected significant capital and the write-off of AT-1 bonds on March 14, 2020 became central to the revival plan.

The decision triggered a wave of litigation led by Axis Trustee Services and 63 Moons Technologies, and the Bombay high court ordered the ultra vires deletion on January 20, 2023.

In contrast, the Madras High Court upheld the RBI’s power to allow impairment in a separate petition filed by 63 Moons Technologies. RBI and Yes Bank appealed and the Supreme Court set aside the decision in March 2023, ensuring that the deletion remains in force until the final decision.