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)