Have Yes Bank’s AT1 Bondholders Truly Won?

“If it is too good to be true, it probably is not,” goes a popular saying people like to repeat in finance. Even if most people forget this, a clutch of retail investors who were missold exotic financial instruments by relationship managers at Yes Bank Ltd. will never do so.

Over 1,300 individual investors, most of them Yes Bank customers, were sold additional tier-1 bonds in the form of “super fixed deposits”. According to an investigation conducted by the markets regulator in 2021, the investors were told that they would earn superior returns by buying into these perpetual bonds. The investors, however, were not duly informed of the many risks involved in these instruments.

Most likely, they did not truly bother finding out more either. Why would they? After all, India prides itself in never having allowed a universal bank to fail. There was no reason to believe that Yes Bank would ever reach a point where the money they invested would be written off.

Yet, that is what happened. On March 5, 2020, after Yes Bank’s capital position was nearly fully eroded, the Reserve Bank of India stepped in. It superseded the board, placed the bank under a moratorium, appointed former State Bank of India official Prashant Kumar as administrator and temporarily froze deposit withdrawals.

A day later the draft scheme of reconstitution was put out, requesting feedback from all stakeholders. This draft included a clause allowing the write-off of AT1 bonds.

After a week-long discussion, the final scheme was released on March 13, 2020. However, the clause about the AT1 write-off was conspicuously missing from this version. It gave temporary hope to the bondholders who were left holding the bag. These hopes were instantly crashed when Kumar, acting as administrator, wrote off the bonds on March 14, 2020.

A prolonged legal battle started, which culminated in an order last week by Acting Chief Justice of the Bombay High Court, SM Modak. The court held that on March 14, 2020, Kumar had neither the authority nor the approval to write off these bonds. The decision to write off these bonds was set aside, nearly three years after it was taken.

While the Bombay High Court has ordered that the administrator could not write off these bonds on March 14, 2020, it has steered clear of making any commentary on whether writing off these bonds is legally acceptable.

“We would not enter into a debate as to whether the AT-1 bonds could have been converted into the shares and or whether they could have been proportionately written down. The court would not possess the necessary expertise of the same,” Justice Modak said in the order.

Yes Bank, on its part, has said that it has strong legal grounds to appeal this decision and that it will approach the Supreme Court within the six-week timeline given by the high court.

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