Yes Bank has asked the Supreme Court to review an order that upheld a Bombay High Court decision. The high court had struck down the bank’s administrator for writing off Additional Tier 1 bonds worth Rs 8,415 crore in March 2020.
The bank’s plea targets an October 15 order, in which the top court dismissed appeals against the high court’s January 20, 2023 judgement. That judgement had quashed the write-off.
What AT-1 bonds are
Additional Tier 1 bonds are perpetual instruments that banks issue to strengthen their capital base. They carry higher interest rates than ordinary bonds because they are riskier. If a bank runs into trouble, the Reserve Bank of India can direct it to cancel them.
The Supreme Court’s concerns
The apex court described the handling of bonds worth more than Rs 8,514 crore as questionable. It said the RBI, the Yes Bank administrator and Yes Bank had together handled the matter in a way that was hard to justify.
The court said investors should never have been exposed to such unnecessary risk, and that this could easily have been avoided. It stressed that AT-1 bonds act as a safety cushion that keeps a bank from collapsing. That purpose could have been served if the RBI and Yes Bank had followed the terms of the Master Circular.
The court called the RBI a mere bystander as the bank’s CET1 ratio fell to an alarmingly low 0.6 per cent. It also noted that irregularities at the bank had surfaced much earlier, and that criminal proceedings had been started against people connected with it. Even so, it said it would be unfair for investors to bear the cost of administrative lapses.
The court also held that the administrator had no authority to write off the bonds, since the reconstruction scheme contained no specific provision allowing it.
The high court’s reasoning
On January 20, 2023, the Bombay High Court quashed the administrator’s decision of March 14, 2020 to write off the bonds. It ruled that the administrator lacked the power to take such a step.
The judgement said the final reconstruction scheme issued by the RBI did not cover writing down AT-1 bonds. The final scheme sanctioned by the Centre also contained no clause for it.
The court noted that when the RBI prepared the draft scheme, it invited suggestions and objections. Petitioners had objected to writing down the bonds and had even proposed converting them into shares.
The high court kept its order in abeyance and stayed it for six weeks, giving the RBI and Yes Bank time to appeal to the Supreme Court. The petitions had also sought directions to National Securities Depositories Limited and Central Depository Services. They asked these firms to reverse any accounting entries, write-offs or cancellations made under the disputed decision.
Background to the write-off
The bank’s financial position had declined sharply. On March 5, 2020, the Centre placed the lender under a moratorium under section 45 of the Banking Regulation Act, 1949, running until April 3, 2020.
On March 14, 2020, the administrator wrote down the AT-1 bonds. The decision was communicated to the Bombay Stock Exchange and the National Stock Exchange.
Several writ petitions challenged the move before the high court. While allowing those challenges, the court set aside the administrator’s action.