Supreme Court reserves verdict again on Yes Bank’s ₹8,415-crore AT1 bond write-off

The Supreme Court on Wednesday reserved its judgment in the long-running dispute over the ₹8,415-crore write-off of Yes Bank’s additional tier-1 (AT1) bonds after concluding hearings and taking on record Cabinet documents linked to the lender’s 2020 reconstruction scheme.

A bench of Justice Dipankar Datta and Justice Augustine George Masih concluded hearings after hearing submissions from the Union government, Reserve Bank of India (RBI), Yes Bank, bondholders represented by Axis Trustee Services, and other investors challenging the write-off.

The case is being watched closely for precedent on future bank resolution mechanisms involving AT1 bonds. Introduced worldwide after the 2008 financial crisis, these bonds are perpetual instruments designed to strengthen banks’ capital buffers and absorb losses during periods of financial stress.

Notably, this is the second time a judgment has been reserved in the matter. The court had previously concluded hearings and reserved its judgment in February. However, on 19 May, it recalled the reserved judgment and reopened the matter for fresh hearings after raising certain queries regarding the write-off decision and the role of the RBI and finance ministry.

Yes Bank had raised ₹3,000 crore through AT1 bonds carrying a 9.5% coupon in December 2016, followed by another ₹5,415 crore issuance carrying a 9% coupon in October 2017. The write-down formed a key component of the bank’s reconstruction during a period marked by mounting bad loans, governance concerns and severe liquidity stress.

During Wednesday’s hearing, the bench sought Cabinet records connected with the reconstruction process, including Cabinet resolutions, meeting minutes and related documents, and directed Solicitor General Tushar Mehta, appearing for the Centre, finance ministry, RBI and Yes Bank, to place them on record.

The bench also sought details regarding the rules governing the Cabinet meeting, quorum requirements, and names of members present when the decision linked to the reconstruction process was taken.

‘Yes Bank would have collapsed’

Mehta defended the write-off, arguing it was necessary to preserve Yes Bank and prevent broader financial instability. He argued that if the write-off had not occurred and the reconstruction scheme, including State Bank of India’s capital infusion, had failed, Yes Bank would have collapsed.

He also said around ₹1.81 trillion worth of AT1 bonds remained outstanding across Indian banks, and that these instruments were introduced under Basel III norms specifically to absorb losses during periods of financial stress. He warned that any interpretation diluting the loss-absorption feature of AT1 bonds could have “serious, cascading and irreparable” consequences for the banking system, as regulators and banks rely on them during crises.

‘Follow the law’

In response, senior advocates Neeraj Kishan Kaul and Aryama Sundaram, appearing for Axis Trustee Services and bondholders, argued that the Yes Bank administrator acted unilaterally and exceeded his authority by writing off the ₹8,415-crore of AT1 bonds on his own. Kaul argued that the administrator effectively acted “as monarchs” while taking the decision.

“Follow the law, follow the due process of law and do what you have to do. You cannot act as monarchs. It’s you who’s acting as monarchs and seeking to do something which the administrator has done,” Kaul submitted.

The bondholders argued that even under the RBI’s Master Circular, the administrator was required to follow prescribed procedures and could not take the decision without due process.

Genesis

Yes Bank’s crisis unfolded between 2018 and early 2020 amid rising bad loans, governance concerns and severe liquidity pressures, prompting RBI to impose a moratorium and initiate a rescue plan led by SBI and other lenders.

As part of the reconstruction exercise, ₹8,415 crore worth of AT1 bonds were written off on 14 March 2020, triggering legal challenges from bondholders.

The dispute before the Supreme Court arose from the Bombay High Court’s January 2023 ruling, which struck down the March 2020 write-off, holding the move invalid and ruling in favour of the bondholders.