Supreme Court Upholds Bombay High Court Order Quashing Yes Bank Rs 8,415 Crore AT1 Bond Write-Off

In a landmark decision, the Supreme Court of India has upheld the Bombay High Court's January 2023 ruling that quashed the write-off of Yes Bank's Additional Tier-1 (AT1) bonds worth Rs 8,415 crore. A bench comprising Justices Dipankar Datta and Augustine George Masih dismissed the appeals filed by Yes Bank, the Reserve Bank of India (RBI), and the Central Government, effectively reinstating the claims of bondholders who had their investments extinguished during the bank's March 2020 rescue.

The dispute originated during the March 2020 rescue of Yes Bank. Amid mounting bad debt and an acute liquidity crisis, the RBI superseded the bank's board and appointed an administrator under a government-notified reconstruction scheme. As part of the restructuring process, the administrator wrote down Rs 8,415 crore of perpetual AT1 bonds to zero. While bondholders faced a complete wipeout, existing equity shareholders faced only a three-year lock-in on 75% of their shareholdings.

Bondholders, including institutional players such as mutual funds (including Nippon India Mutual Fund, formerly Reliance Nippon) alongside thousands of retail investors represented by Axis Trustee Services, challenged the decision before the Bombay High Court. In January 2023, the High Court set aside the write-off on the grounds that the administrator exceeded his authority, as the Union Government's final gazetted reconstruction scheme contained no specific provision directing an AT1 write-down.

The Supreme Court examined key legal questions regarding whether the administrator could write down the bonds absent an explicit clause in the gazetted scheme and whether the action aligned with the RBI Master Circular and the information memorandum. Concluding that the administrator's action was unauthorized under the terms of the final scheme, the apex bench declined to interfere with the High Court's order.

Market Reaction and Stock Impact

Following the announcement of the verdict, Yes Bank shares witnessed aggressive selling pressure on Indian bourses:

• Yes Bank shares tumbled as much as 10% to touch the lower circuit at Rs 19.09 apiece on the NSE.
• The private lender’s stock dropped sharply from intraday levels around Rs 21.25.
• The broader market diverged sharply from the bank's performance, with benchmark indices such as the BSE Sensex trading firmly in positive territory during the session.

Implications for Yes Bank and Bond Investors

The apex court's ruling brings an end to a multi-year legal battle and forces Yes Bank and banking regulators to determine settlement mechanisms.

Key Takeaways for Market Participants:

• Capital Adequacy & CET1 Buffers: Reinstating or settling claims of Rs 8,415 crore presents a significant balance sheet event for Yes Bank, potentially impacting its Common Equity Tier-1 (CET1) capital ratios depending on whether the debt is settled via cash, debt-to-equity conversions, or restructuring mechanisms.
• Precedent for Indian Debt Markets: The verdict establishes a vital legal safeguard for domestic fixed-income investors, ruling that statutory intervention in banking turnarounds cannot arbitrarily bypass the governing contractual terms and finalized schemes.
• Relief for Aggrieved Investors: Retail and institutional investors, who alleged that the complex perpetual bonds were aggressively mis-sold as fixed-deposit substitutes, finally secure legal validation for the recovery of their principal capital.

Tags: Yes Bank Reserve Bank of India Supreme Court of India BSE Sensex Banking Sector Fixed Income