Supreme Court Rules Yes Bank AT1 Bond Write-Off Illegal, Shares Fall 13 Percent

India's Supreme Court ruled on Thursday that the write-off of Yes Bank's additional tier 1 bonds worth 8,415 crore rupees was illegal. The court upheld a Bombay High Court judgment that had quashed the write-off and ruled for the bondholders.

Investors sold the bank's shares hard after the verdict. The stock fell 10 percent to 19.08 rupees, its low for the day, and later slumped nearly 13 percent to 18.46 rupees on the National Stock Exchange, Reuters reported. The wider Indian market rose about 1.5 percent that day.

What the court decided

A bench of Justices Dipankar Datta and Augustine George Masih dismissed the appeals against the Bombay High Court's January 20, 2023 judgment, saying it saw no reason to interfere.

The court decided the case on its merits, taking up two questions: whether the administrator could write down the bonds when the final reconstruction scheme had no specific provision for it, and whether the write-down matched the Reserve Bank of India's master circular and the terms in the bonds' information memoranda. It answered no to both. Annual coupon payments on the bonds stay unaffected and must be paid under the information memorandum. The full written judgment was still awaited, and Yes Bank had not answered press queries.

How the dispute began

The Reserve Bank of India put Yes Bank under a moratorium on March 5, 2020, after its finances deteriorated, then drew up a reconstruction scheme under the Banking Regulation Act, 1949, and brought in new investors.

A draft of that scheme had a provision to write down the AT1 bonds. The final scheme, notified on March 13, 2020, dropped it. A day later, the administrator told the stock exchanges that the outstanding AT1 bonds had been written down in full.

Axis Trustee Services, acting for debenture holders, challenged the decision with individual bondholders and other investors. The Bombay High Court quashed the write-off on January 20, 2023. It held that Yes Bank stood reconstituted on March 13, when the final scheme took force, so the administrator could not cancel the bonds a day later, and that neither the final scheme nor the RBI had authorised him to do so. Yes Bank and the RBI then appealed to the Supreme Court, which reserved judgment on May 20.

What each side argued

Solicitor General Tushar Mehta, for the Centre, the RBI and Yes Bank, argued that the write-off was needed to rebuild the bank's capital and complete its rescue. AT1 bonds are built to absorb losses in a crisis, he said, and about 1.81 trillion rupees of them are outstanding across Indian banks, so weakening that feature could damage the wider banking system. The bondholders' lawyers argued the administrator acted on his own, beyond the power the scheme gave him, and without the process the rules required.

What AT1 bonds are

Additional tier 1 bonds are perpetual debt that banks issue to strengthen their capital. They have no fixed repayment date, pay interest, and carry more risk than ordinary bonds. Under set conditions they can be written down or turned into shares so a troubled bank can absorb losses.

That design is why the ruling matters outside Yes Bank. How far a rescue authority can go when the final scheme is silent is now settled at the top court, and bankers and lawyers were waiting for the full written judgment to judge what it means for future bank rescues.