Yes Bank’s Additional Tier-1 (AT1) bonds have returned from the dead, but their investors are still waiting to see their money. Nearly a week ago, the Supreme Court upheld a Bombay High Court ruling that invalidated the bank’s Rs 8,415-crore write-off of these bonds during its 2020 rescue.
AT1 bonds are not supposed to be indestructible like James Bond. Their purpose is precisely to take a hit when a bank is in trouble. But the Yes Bank saga shows that even a bond designed to disappear can return as a legal liability when the rules governing its destruction are not followed.
Also Read: Supreme Court rules against Yes Bank's write-off of Rs 8,415 crore AT1 bonds
Yes Bank is preparing to seek a review, while the RBI is weighing its own legal options. The bank is also unlikely to resume coupon payments immediately, leaving investors caught between a favourable court verdict and an unresolved payment dispute.
For regulators worldwide, the case has reopened an uncomfortable issue of how far can banks go in making investors absorb losses when things fall apart.
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What exactly are AT1 bonds?
AT1 bonds are debt instruments that banks issue to strengthen their capital without diluting existing shareholders. They form part of a bank’s regulatory Tier-1 capital, which is meant to absorb losses while the institution continues operating. Unlike ordinary bonds, they are generally perpetual, meaning they have no fixed maturity date, although issuers may be allowed to redeem them after a specified period subject to regulatory approval.
Investors receive periodic interest payments, known as coupons, usually at rates higher than those on conventional bonds. That premium compensates for extraordinary risks. Banks can cancel coupons under the applicable terms, while the instruments can be written down or converted into equity when capital falls below specified thresholds or other contractual triggers are activated.
Also Read: Yes Bank unlikely to pay AT1 bond coupons despite bond holders demand, sources say
A conventional bondholder generally expects repayment according to a contractual schedule. An AT1 investor could lose the entire principal without receiving a conventional bankruptcy-style warning or waiting for the bank to be liquidated.
AT1 bonds sit above common equity in the capital structure in some respects, but are designed to take losses before senior creditors.
Why the controversy never goes away
AT1 bonds emerged from the post-2008 global financial crisis, when regulators wanted banks to build stronger capital buffers and reduce the likelihood that taxpayers would have to rescue them. The Basel III framework introduced tougher capital requirements and recognised instruments capable of absorbing losses when banks came under stress.
The problem lies in the product's hybrid nature. It is called a bond, pays interest and can be sold to investors seeking regular income. But its economic behaviour in a crisis can resemble equity, with the possibility of a total loss. The complexity of contractual triggers makes it difficult for investors to assess precisely when that loss might occur.
Yes Bank sold AT1 bonds to individual investors despite their high-risk characteristics. In its judgment, the Supreme Court criticised the bank for actively offering such instruments to retail investors in violation of the RBI's rules, which restricted their sale to institutional investors.
The episode exposes a basic conflict. While banks want access to capital that can absorb losses without a taxpayer-funded rescue, investors want the income associated with a bond. When the two expectations collide, the fine print suddenly matters far more than the advertised coupon.
Credit Suisse showed how brutal AT1 can be
The most prominent international illustration came in March 2023, when Swiss authorities arranged UBS's takeover of troubled Credit Suisse. Around 16 billion Swiss francs of Credit Suisse AT1 bonds were written down to zero as part of the deal, while shareholders received UBS shares, and that caused an uproar.
Under the conventional hierarchy of claims, shareholders are generally expected to absorb losses before bondholders. The Swiss authorities defended the AT1 write-off on the basis of the instruments' contractual terms and the emergency measures used to facilitate the takeover.
Investors challenged the decision in court. The controversy also rattled the wider AT1 market, prompting questions about whether the securities' contractual loss-absorption provisions could override assumptions investors had drawn from the traditional creditor hierarchy.
The lesson from the Credit Suisse case was not that AT1 bonds cannot be written down but that the precise terms and the legal authority behind a write-down can become decisive when a bank fails. For investors, a high coupon offers little comfort if the principal can disappear overnight.
Yes Bank: When the fine print ran into the law
Yes Bank's crisis began long before the current court battle. In March 2020, the RBI stepped in to rescue the lender, bringing in State Bank of India and other investors as part of a reconstruction scheme. The bank's Rs 8,415 crore of AT1 bonds, issued in two tranches of Rs 3,000 crore in 2016 and Rs 5,415 crore in 2017, were written off. Investors challenged the move, arguing that the approved reconstruction scheme did not authorise the administrator to extinguish their holdings.
The Bombay High Court agreed in January 2023. The RBI, Yes Bank and the Union government appealed, but the Supreme Court dismissed their appeals on October 15. It upheld the finding that the administrator lacked the authority to write off instruments that were not covered by the final reconstruction scheme. The court also criticised the bank's sale of these high-risk products to individual investors.
The Yes Bank case differs from a straightforward AT1 loss. The instrument was designed to absorb losses, but the dispute concerns whether the bank had the legal authority to impose that loss under the specific rescue arrangement. The judgment does not invalidate the entire concept of AT1 bonds. It draws attention to the limits of regulatory discretion when a resolution scheme has been formally approved.
The money is back on paper but what about the cash?
The Supreme Court verdict does not mean Yes Bank has to immediately transfer Rs 8,415 crore to investors. But restoring the written-off bonds on its books would still come at a cost. The bank estimates that the move would reduce its common equity Tier-1 (CET1) capital ratio, a key measure of its ability to absorb losses, by 2.4 percentage points to around 11.4%, based on its September 2026 position. In practical terms, Yes Bank would have a thinner cushion against future losses, leaving it with less room to absorb another financial shock without raising fresh capital. Its overall Tier-1 capital ratio would remain around 13.7%. The immediate impact would be on the bank's reported capital position rather than its cash balance, since reinstating the bonds on its books is different from actually repaying investors.
Coupons are another unresolved issue. Investors say the annual payment due on October 18 remains unpaid and have asked Axis Trustee Services to intervene. Yes Bank is reportedly preparing a review petition and is unlikely to pay the coupons immediately. The bank's accumulated losses remain a constraint, with its latest annual report showing a debit balance of Rs 5,279 crore in its profit and loss account. The extent of any arrears will depend on the bond terms and the legal treatment of past payments.
The potential burden extends beyond the principal. Depending on how the bonds are reinstated and whether unpaid coupons become payable, analysts have warned of a significant hit to the bank's book value and its capacity to absorb future losses. The dispute could also complicate capital planning just as the lender seeks to rebuild its business.
A bond that tests the system
Credit Suisse and Yes Bank incidents illustrate opposite sides of the same problem. In Switzerland, the authorities used contractual provisions and emergency powers to wipe out AT1 bonds during a rescue. In India, the Supreme Court has ruled that the write-off in Yes Bank's case was not legally authorised under the approved reconstruction scheme. Both episodes have triggered questions about investor protection and the boundaries of regulatory intervention.
For regulators, the challenge is to ensure that AT1 bonds absorb losses when they are supposed to, without making their treatment unpredictable. For investors, the lesson is that a high coupon is not free income. It is payment for taking risks that ordinary bonds rarely carry.