In short: The Supreme Court has upheld a Bombay High Court ruling striking down Yes Bank's March 2020 cancellation of Additional Tier-1 (AT-1) bonds worth ₹8,415 crore. The top court held that the bank's administrator lacked the authority to write off the bonds because the final reconstruction scheme contained no such provision. Yes Bank is examining the ruling to evaluate further legal steps.

What did the Supreme Court decide?

A Supreme Court bench comprising Justices Dipankar Datta and Augustine George Masih dismissed appeals filed by Yes Bank, the Reserve Bank of India (RBI), and the Union government. The ruling affirmed the Bombay High Court's 20 January 2023 judgment, which had quashed the administrator's decision to write off the ₹8,415 crore worth of AT-1 bonds.

The court pointed out that the central dispute was not whether the bonds were capable of being written down, but the illegal procedure adopted to do so. Key findings in the judgment include:

  • Lack of administrator authority: The court observed that the administrator appointed by the central bank could not exercise a power reserved specifically for the RBI.
  • Absence in final reconstruction scheme: The final reconstruction scheme notified for the revival of Yes Bank did not contain a clause authorising the write-down of AT-1 bonds. While an earlier draft scheme had included such a clause, the central government removed it from the final scheme.
  • Breach of rules: The write-down was found to be contrary to the RBI's own master circular on Basel-III capital regulations and the terms agreed under the information memorandum governing the bonds.
  • Annual coupons must be paid: The bench directed that annual coupon payments remain unaffected and must be paid under the terms of the information memorandum.

Severe criticism of regulatory lapses

The Supreme Court made sharp observations regarding the conduct of the authorities leading up to the lender's crisis in March 2020. The bench noted that the RBI acted as a bystander while Yes Bank's Common Equity Tier-1 (CET-1) ratio sank to an astonishing low of 0.6% and business was conducted in a clandestine manner.

The court emphasized that while criminal prosecutions were launched against bank personnel for prior material irregularities, ordinary investors should not be penalised for regulatory and administrative failures. Furthermore, the court faulted the lender for marketing high-risk AT-1 perpetual instruments to individual retail investors when regulatory guidelines required them to be offered exclusively to institutional investors.

What are AT-1 bonds and how does this affect Yes Bank?

Additional Tier-1 bonds are perpetual debt instruments used by banks to build up their capital base. Because they carry no fixed maturity date, issuers pay an annual coupon and typically retain a call option to redeem the debt after five or ten years. The RBI has regulatory powers to cancel these instruments if a lender runs into extreme financial distress.

Following the top court's verdict, Yes Bank stated in a regulatory filing that it is examining the judgment in detail and evaluating all available legal options and future steps. The financial implications for the bank include:

  • Resumption of coupon servicing: Unless the verdict is modified or overturned, Yes Bank will need to resume regular annual coupon payments to bondholders. The treatment of past dues accrued since 2020 remains to be determined.
  • Capital adequacy impact: Full restoration of the ₹8,415 crore bonds onto the balance sheet will impact the lender's CET-1 capital ratio, though the bank stated it holds access to various capital-management levers to support its operations.
  • Market reaction: Following the dismissal of the appeals, shares of Yes Bank dropped 14.5% to ₹18.12 on the National Stock Exchange (NSE).

Frequently asked questions

Why did the court rule that the bond write-off was invalid?

The Supreme Court held that the administrator lacked the authority to cancel the bonds, the RBI's final reconstruction scheme did not include a write-down clause, and the cancellation violated the RBI's own Basel-III master circular.

Do bondholders immediately receive past unpaid coupons?

While the court clarified that annual coupon payments must be honoured under the terms of the bond contracts, the status and timing of accumulated arrears between 2020 and the present were not immediately determined.

What legal options does Yes Bank have now?

Yes Bank stated in a regulatory disclosure that it is reviewing the full judgment and assessing all available legal steps, which may include filing a review petition before the Supreme Court.

Sources

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