Yes Bank Crisis: RBI Cannot Differentiate Between AT-1 Bondholders And Promoters, Axis Trustee Says

RBI cannot differentiate between stakeholders in the reconstruction process, Yes Bank’s AT-1 bondholders argue.

Account holders queue outside a Yes Bank branch to withdraw money, in Mumbai on Saturday, March 7, 2020. (Photo: PTI)
Account holders queue outside a Yes Bank branch to withdraw money, in Mumbai on Saturday, March 7, 2020. (Photo: PTI)

Axis Trustee Services and Indiabulls Housing Finance Ltd. have moved the Bombay High Court challenging the Reserve Bank of India’s decision to write off their investments in additional tier-1 securities of Yes Bank Ltd. The total value of their AT-1 bonds exceeds Rs 8,400 crore.

A separate petition has also been filed by the L&T Officers and Supervisory Staff Provident Fund Trust on similar grounds. Bondholders have filed a writ petition under Article 226 of the Constitution seeking directions against the RBI and the central government.

This comes after the government notified a reconstruction scheme for Yes Bank last week, which among others, proposed a lock-in period of three years for certain equity shareholders and investments by State Bank of India and three other private sector banks. The scheme, however, was silent on the treatment of AT-1 bonds.

Bondholders had opposed the write-off and proposed a scheme which entailed a partial conversion of their bonds into equity. In a separate stock exchange notification on March 14, however, Yes Bank’s RBI-appointed administrator said AT-1 Bonds would have to be fully and permanently written down as the bank was deemed to have reached a point of non viability. A write-down was necessary before the reconstruction process, the notification said.

Counsel representing Axis Trustee Services argued on Tuesday that the RBI cannot differentiate between promoters and the AT-1 bondholders, who have equally contributed to the bank’s growth. While certain promoters retain equity, bondholders are being made to suffer due to write-off of their investments, he said.

A day prior to the hearing when the writ petitions were filed, the Bombay High Court had passed an interim order stating that any action by the RBI or the central government will be subject to the court’s orders. It will hear the arguments of the parties before granting any further interim relief.

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AT-1 Bondholders’ Arguments

Janak Dwarkadas, senior counsel representing Axis Trustee Services, argued:

  • Infusion of capital by private banks will change the status of Yes Bank from ‘deemed to be non viable’ to a ‘viable bank’, which will indicate a ‘healthy status’ and allow it to make repayments.
  • Therefore, AT-1 bondholders, who had equally contributed to the growth of the bank, must be allowed to participate in the future growth.
  • While certain existing promoters would retain equity in the bank after reconstruction, AT-1 bondholders will be prejudiced if the write-off is allowed. The RBI cannot differentiate between stakeholders in the reconstruction process. Bondholders would benefit through a surge in Yes Bank’s equity shares after reconstruction.
  • Any equity stake to the bondholders will not prejudice the interest of the new banks as it will not substantially reduce their equity stake in the reconstructed bank.
  • Yes Bank’s reconstruction scheme states that it is for the benefit of public at large. It says that all contracts and bonds will remain effective in the same manner that was before the RBI’s announcement. The RBI-appointed administrator, who acts as an agent of Yes Bank, however, fully wrote down the value of AT-1 bonds.
  • Many mutual funds, pension funds and individual investors invested in AT-1 bonds on assurances given by the bank. A write-off would hamper their interest.

And so, investments in AT-1 bonds must not be written off and should remain active till Yes Bank remains in operation. A write-off in their value would be against global best practices and principals of natural justice, Dwarkadas argued.

Senior Counsel Navroz Seervai represented the Reserve Bank of India, while Zal Andhiyarujina represented certain individual AT-1 bondholders. The high court will next hear the matter on Wednesday.

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