What Are AT1 Bonds And Why They Could Land Yes Bank In Trouble? BQ Explains
The Bombay High Court has quashed Yes Bank’s decision to write off Rs 8,300 crore worth of AT1 bonds.
One day before Yes Bank Ltd. declares its quarterly financial results for the third quarter of FY23, the Bombay High Court delivered a verdict that may weigh on the bank’s earnings day.
The high court has quashed Yes Bank’s March 2020 decision to write off a specific category of bonds which it had issued back in 2016 and 2017. Called additional tier 1—or AT1—bonds, these are perpetual debt instruments which are used by banks to expand their equity base.
Put simply, AT1 bonds are high quality capital which can act as a fail-safe in case of a bad financial situation. Such bonds also carry higher yields than comparable debt instruments.
Although they are non-equity instruments, AT1 bonds typically also carry a convertible feature which is triggered in case of a contingent—or materially negative—event. Notably, such bonds are also eligible to be written-off.
Introduced under the 2010 Basel III norms, AT1 bonds qualify as regulatory capital and were rolled out to better protect depositors following the global financial crisis of 2008-09. In many ways, banks can break the glass to tap capital via AT1 bonds in case they face a going concern type of situation.
Yes Bank’s board of directors was superseded by the Reserve Bank of India in March 2020 following a crisis at the bank due to ballooning bad debt and falling depositor confidence. AT1 bonds worth Rs 8,300 crore were written off as part of the reconstruction plan at the bank following the appointment of Prashant Kumar as administrator.
While retail investors can no longer invest in such bonds, SEBI only put that prohibition in place following the crisis at Yes Bank.
Retail bondholders, representing about Rs 300 crore worth of AT1 investments, had filed the petition to quash Yes Bank’s write-off decision, BQ Prime reported earlier on Friday. Yes Bank is set to appeal this decision at the Supreme Court over the next few weeks.
In September 2022, SEBI had also levied a Rs 2 crore fine on Rana Kapoor, the former CEO of Yes Bank, under charges of misselling the bank’s AT1 bonds to retail investors as "super FDs" and downplaying the risks of investing in them.
In 2020, the Madras High Court had upheld the RBI’s decision to write off the bonds under its AT1 bonds circular after a similar petition was filed by 63 Moons Technologies Ltd., which held bonds worth Rs 300 core.
The Bombay High Court has provided six weeks for Yes Bank to appeal the matter in the Supreme Court. If the verdict goes against the bank, it will be liable to repay the bondholders in full and an additional 9% interest from the date of the write-off. While that will certainly impact the bank’s financial position, the verdict could also set the precedent for how the legal system deals with regulatory bank capital that was wrongly sold to retail investors.