Supreme Court overturns Yes Bank’s ₹8,400 crore bond write-off, raising liability risks: Report

The Supreme Court has overturned the permanent write-off of Yes Bank’s Additional Tier 1 (AT1) bonds during the lender’s government-backed rescue in 2020, raising the possibility of fresh financial liabilities for the private sector bank. The bank’s shares fell sharply following the ruling.

According to Bloomberg News, the write-off in March 2020 wiped out bonds worth about ₹8,400 crore ($884 million) held by investors. The move was part of a restructuring overseen by the Reserve Bank of India (RBI) and was the first of its kind in India.

The judgment could have wider implications for the banking sector, particularly regarding the legal authority of regulators to impose losses on bondholders during a bank rescue.

Yes Bank faces potential capital requirements

The ruling could leave Yes Bank facing compensation claims from investors, potentially creating additional capital requirements for the lender. Japan’s Sumitomo Mitsui Banking Corporation owns a 24.9% stake in Yes Bank.

Market participants will be watching how the bank addresses any resulting financial obligations and whether its existing shareholders may need to contribute additional capital.

“One will definitely be looking out for how funding requirement will be met, whether Sumitomo as a partner will have to bring in or other shareholders though rights issue or any other way,” Deven Choksey, managing director at DRChoksey FinServ, told Bloomberg.

The development marks another legal setback for Yes Bank. In 2023, the Bombay High Court had set aside the bond write-off, citing procedural lapses without deciding on the substantive merits of the securities. Yes Bank subsequently challenged that decision in the Supreme Court.

Ashish Pyasi, managing partner at Aendri Legal, said the ruling could establish an important precedent for future bank rescues, given the implications of bond write-offs for investors and other stakeholders. He added that the government and Yes Bank could still seek a review of the Supreme Court’s decision.

Yes Bank responds

YES Bank on Thursday said it was reviewing the Supreme Court judgment upholding the quashing of its ₹8,415 crore Additional Tier-1 (AT1) bond write-off and would make further disclosures as required.

In a regulatory filing, the bank said it was obtaining and examining the final order to assess its implications. It added that it had regularly informed stock exchanges about material developments in the legal proceedings and denied any failure to disclose material information under SEBI’s listing regulations.

According to Finance Ministry records cited during the Supreme Court proceedings, AT1 bonds worth ₹1,02,466 crore and Tier-2 bonds worth ₹1,92,702 crore were outstanding as of December 31, 2022. These bonds were largely issued by public-sector banks, led by the State Bank of India (SBI).

YES Bank wrote off ₹8,415 crore worth of AT1 bonds in March 2020 as part of its reconstruction measures following a period of financial stress.

Implications for AT1 bond investors

AT1 bonds form part of a bank’s regulatory capital and are designed to absorb losses when specified triggers are breached, including when a lender becomes non-viable. These instruments rank below other debt securities in a bank failure, exposing investors to significant losses.

The ruling could have mixed implications for India’s AT1 bond market. While it may strengthen investor confidence in legal protections, it could also create uncertainty over future write-offs and potentially increase banks’ borrowing costs.

“The ruling could have mixed implications for the AT1 bond market, bolstering investor confidence in legal protections while creating uncertainty over future write downs that may raise borrowing costs for banks,” Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, told Bloomberg. He also highlighted the need for clearer regulatory rules.

Yes Bank’s shares fell 14.5% on Thursday, marking their steepest decline since July 23, 2020. The stock closed at ₹18.12, its lowest level since April 7, 2005.

Former chief executive officer Prashant Kumar had said in 2023 that the bank had not made provisions for potential liabilities arising from the dispute, citing legal advice supporting its position. The bank did not immediately respond to a request for comment, Bloomberg reported.