Yes Bank: Bombay HC Sets Aside RBI's Order Writing Off AT1 Bonds Worth Nearly Rs8,500 Crore
Moneylife Digital Team 20 January 2023
In a significant order and relief to investors, the Bombay High Court (HC) on Friday set aside an order from the administrator of Yes Bank and a letter by the Reserve Bank of India (RBI) to write off additional tier-1 (AT-1) bonds sold by Yes Bank to ineligible investors. The order was passed by justice SV Gangapurwala and justice SM Modak in a batch of petitions. Bondholders, including financial institutions like 63 moons technologies ltd and Axis Trustee Services Ltd, Yes Bank AT-1 Bond Holders Association and a few retail individual investors, have filed these petitions. 
In its order, the division bench of acting chief justice Gangapurwala and justice Modak says, "Clause 57 of the information memorandum binding the parties and relevant for our consideration is extracted from the master circular (issued by RBI) based on basel III norms. Clause 57 also suggests that the writing off or conversion to shares would be in accordance with these rules. In view of that, writ petition would be tenable before this court."

"In light of the above discussion, the impugned letter dated 14 March 2020 and the decision to write off AT-1 bonds deserve to be set aside and is hereby quashed and set aside," the bench says.
It may be recalled that institutional investors such as mutual funds, including Reliance Nippon, and individuals had put as much as Rs8,415 crore in Yes Bank's AT-1 bonds, which are perpetual bonds without any maturity date. 
When Yes Bank collapsed in early March last year and RBI wrote off the entire value (Rs8,415 crore) of the AT-1 bonds as a part of the hurriedly-put-together rescue package for the cash-strapped lender, all investors lost their money. Many of these investors were retired individuals who had parked a sizeable chunk of their life savings in these bonds at the behest of their relationship managers.
63 moons technologies, which has an exposure of Rs300 crore to the written-off AT-1 bonds of Yes Bank, had launched a lawsuit against the private sector lender as well as RBI. It contended that a write-off of bond-holders claim—under Basel-III norms as well as international best practices — can take place only when the equity capital has virtually lost all value and must be written off.
AT-1 bonds are issued by banks to shore up their core capital base to meet the Basel-III norms. These bonds are unsecured, perpetual in nature and so pay a higher coupon rate. But they are high risk and can be written down if the bank's capital dips below threshold limits. In October 2020, rules were tightened for new issues of AT-1 bonds issued by banks to restrict retail investors from investing in them. The new rules protect retail investors from investing in these highly risky instruments. 
RBI could also ask a bank that is dangerously on edge to cancel its outstanding AT-1 bonds without consulting its investors, which is what happened in the case of the AT-1 bonds Yes Bank was holding when SBI bought a 48% stake in the bank to save it.
Several news reports have detailed how Yes Bank executives had sold Yes Bank AT-1 bonds with five-year tenors at an interest rate of 9.5% per annum (pa), claiming that the "instrument is as safe as bank fixed deposit having no linkage to the riskier equity market." Bank executives sold these instruments to investors, pitching these perpetual bonds as 'super FDs' offering safety and relatively high return compared with regular fixed deposits.
According to a report from Reuters, the Securities and Exchange Board of India (SEBI) is probing investments between Nippon India Mutual Fund and Yes Bank between 2016 and 2019 for suspected misuse of investors' money.
The sources also told Reuters that the fund house itself, senior officials and its former sponsor could face charges for violating regulatory norms under SEBI's prevention of fraud and unfair trade practices relating to securities market rules and Yes Bank and its former officials could also face charges.
Reliance Nippon Life Asset Management had one of the biggest exposures to Yes Bank's AT-1 bonds. According to news reports, the Anil Ambani-led group had borrowed from Yes Bank to the extent of over Rs12,000 crore. In April 2021, Reliance Infrastructure sold its headquarters in Santacruz, Mumbai, to Yes Bank for Rs1,200 crore. 
In September last year, SEBI imposed a penalty of Rs2 crore on Yes Bank's former managing director (MD) and chief executive officer (CEO) Rana Kapoor in the AT-1 bonds mis-selling case. The case pertains to Yes Bank executives allegedly selling AT-1 bonds to investors under the guise of super FDs (fixed deposits), promising higher returns and the safety of a typical bank FD. (Read: Yes Bank AT1 Bonds: SEBI Imposes Rs2 Crore Penalty on Rana Kapoor)
2 years ago
Writing off investments made in Tier 1 Bonds only speaks of Regulator's and Bank's failure to ensure efficient functioning of the banks and such a write off is equal to non payment of deposits technically. The bank's failure to manage the credit portfolio by throwing all safety norms to wind ignoring the regulatory prescriptions and banks own Governance standards if any to safeguard depositors money and other liabilities cannot be brushed aside by making the Tier 1 bond holders the scapegoats and forego their investments . This does not seem to be a prudent approach and can have adverse effects on bond market which needs otherwise to be lifted up to strengthen the capital market . The policy makers cannot create bad precedence and wrong approach to cover up the failures in Governance seen in banks and their financial deterioration.
2 years ago
If ultimately it is decided to reverse the order, it may give relief to the bond holders but what about the retail investors or even institutional who invested in Yes Bank post Its rezig on the clear understanding that Yes Bank does not have this liability on its books. How will they be compensated. Will they also not go to Court. I think it will open a Pandora’s box.
Replied to malhotrarnm123 comment 2 years ago
The investors post At1 default are jumping into the trroubled Yesbank waters with their eyes open can they be cheated .
Replied to arungoyal.delhi comment 1 year ago
Well said. Comment writer probably employee of yes bank..
2 years ago
AT 1 Bonds issued by Yes Bank Ltd., to protect its net worth as per Basel III norms . The Bonds were issued a number of times to keep the Bank lending to recover its bad loans. It failed miserably in the attempt. The Bonds were placed with its customers to keep their loans from going bad. In other words to NPA. All jargons were used to lure the FD holders of the Bank by selling the Bonds as Super Fixed Deposit. The Bonds carried 9.5 per cent interest per annum. The Bank had issued a number AT 1 Bonds but only two issues were written down by RBI vide letter dated 14th March,2020. Covid-19 announcement followed. The Bond holders whose money was reduced to `0' value were left with nothing to rely on. The Bond holders were not even informed individually by the Bank. The investors in the Bond had to depend from here say who informed about the Bond. About Rs 8500 Crore was written down. There were individuals who were lured by the Bank to invest in these Bonds.
There were applications to stay the RBI order but Courts could not grant the much needed relief to the Bond holders whose investment had been written off.
What had happened and how it happened only the investors knew but the few individual investors who were lured by the Bank in the secondary market could do little make the country understand. Authority quoted the principles of Basel - III norms , an international policy which was applied. The individual investors who were lured by the Bank acting through the Relationship Managers to invest even though such investors were not allowed to invest in the primary market.
SEBI in October, 2020 barred the issue of AT 1 Bonds to individuals categorically. SEBI issued a circular in this regard as the Bonds were traded in BSE.
The strange thing noticed in AT 1 Bonds issue of December, 2016 was Manager to the issue was YES Securities Ltd., a whole owned subsidiary of Yes Bank Ltd., Banker to the Issue was also Yes Bank. SEBI regulations were used to ensure success of the issue.
High Court at Bombay passed its Order against various applications . It definitely brings cheers to the investors , specially individual investors who were made to invest when the various regulations, notifications, circulars were issued by RBI,SEBI and several other laws to keep a check on investment in the interest of the investors specially individual investors. Covid-19 covered up the loss to the investors even though of the existence of the multiplicity of the laws, regulations and rules.
But the road is only half travelled. The other half is left. It could take some more time to see the light of the day.
The next round will possibly be the capital.
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