Shares of Yes Bank slumped over 14% on Thursday and were further down more than 2% in intraday trading on Friday.
What are AT-1 Bonds?
For the uninitiated, AT-1 bonds are a type of interest-bearing debt instrument, which banks issue to strengthen their capital base. They are perpetual in nature as they don’t have a fixed maturity date, unlike a traditional bond. But, more importantly, they are riskier than traditional bonds.
The construct is such that at times when the entity is in financial distress, these AT-1 bonds could be converted into equity to reduce debt, or may be completely written off. Given that risk, these bonds typically offer a higher interest rate.
Why were Yes Bank’s AT-1 bonds written off?
Back in 2020, Yes Bank faced a severe liquidity crisis. RBI placed it under a moratorium and a rescue plan was put into place, through a consortium of banks, led by India’s largest lender State Bank of India. During that bailout of the bank, its Rs 8,415 crore worth AT-1 bonds were written down.
The AT-1 bond holders challenged that decision in the Bombay High Court, which ruled in their favour. The verdict was challenged in the Supreme Court by Yes Bank, RBI and the union government. However, the top court too on Thursday delivered a judgement setting aside the bond write-off.
What did the Supreme Court say in its judgement?
“We have good reasons to infer that the Central Government had taken a conscious decision to exclude the clause permitting writing down of the AT-1 bonds from the Reconstruction Scheme, based on consideration of the objections lodged,” the Supreme Court said.
In fact, it opined that the Administrator “acted under an erroneous impression or mistaken belief” that he retained the authority to write down the AT-1 bonds.
“This, in our opinion, was an impermissible act and ultra vires the Master Circular read with the Reconstruction Scheme.”
Dismissing the appeals, the top court said it saw no reason to “interfere with the impugned judgement”
What is Yes Bank’s response to the verdict?
Yes Bank said it would examine the judgement in detail and would evaluate all available legal options and suitable steps going forward.
“The bank has access to appropriate capital-management levers, and it preserves the flexibility to undertake additional capital actions, as considered appropriate to pursue its growth objectives,” Yes Bank said on Friday.
The bank said that with respect to capital adequacy, the pro forma impact of reinstatement of AT-1 Bonds principal amount on CET1 (this is the core regulatory capital) ratio, including profits as on June 30, 2026 was expected to be 250 bps. It added that the Tier 1 capital ratio, on a pro forma basis, was likely to remain unchanged at 14.0%.
What do experts say on the Supreme Court Judgement?
Shriram Subramanian, founder and MD of InGovern Research Services, said it was a totally surprising order to intrude into an instrument structure.
“The bonds pay out higher interest rate and are subordinate bonds without any guarantees,” he noted.
On the other hand, Akshat Khetan, founder, AU Corporate Advisory and Legal Services, termed it a “landmark judgement” because of the larger principles of regulatory accountability, investor protection and legal certainty in banking resolutions.
“The Supreme Court has essentially reinforced that even in a financial crisis, regulatory powers cannot be exercised beyond the framework of an approved reconstruction scheme. The fact that AT-1 bonds are inherently high-risk instruments does not mean their write-off can be undertaken without following the prescribed legal process,” said Khetan.
A liability thought to have been extinguished had now resurfaced, and that would create implications for the bank’s capital structure, profitability and future investment decisions, according to him.
The ruling, however, does not mean that AT-1 bonds generally cannot be written off, Subramanian of InGovern stated.
“Supreme Court contends that the write-off in this particular case was not on proper legal grounds,” he pointed.
Khetan too expressed similar views, stating he would distinguish between the validity of AT-1 bonds as loss-absorbing instruments and the legality of this particular write-off.
“The judgment does not make AT-1 bonds risk-free or prohibit their write-down in accordance with law. It establishes that contractual provisions, statutory authority and the approved resolution framework must be respected,” stressed Khetan.
Post this verdict, he now feels there will be greater scrutiny of regulatory intervention, stronger accountability in the distribution of complex financial products to retail investors, and increased emphasis on legal due diligence in bank rescues and acquisitions