SC Extends Stay On Bombay HC Order In AT1 Bonds Case

Admitting the petition, a bench headed by Chief Justice of India Dhananjaya Y. Chandrachud issued notice to the bondholders of Yes Bank Ltd after the private lender and Reserve Bank of India (RBI) challenged the January ruling of the Bombay high court.

The bench, which included justice P.S. Narasimha, said that the six-week interim stay granted by the high court should continue till its further orders, as it agreed to examine a bundle of legal issues surrounding the power of the administrator and the reconstruction of the bank.

The high court on 20 January directed Yes Bank to pay the bondholders but stayed its order till 17 February to enable the filing of an appeal, after which the lender and RBI on 13 February approached the top court. However, with the SC issuing notices to hear the case on 28 March, the stay gets extended till then. AT1 or perpetual bonds are unsecured securities with no maturity date and are used by banks to bolster their capital base and comply with Basel III norms.

During the proceedings on Friday, the court observed that small bondholders must not suffer and directed Yes Bank to give a break-up of different classes of bondholders based on their exposure to the bonds.

The private lender and RBI have also been asked by the court to explain which legal provisions empower them to issue a complete write-off.

Yes Bank and RBI, represented by senior counsel Kapil Sibal and solicitor general Tushar Mehta, respectively, argued that a write-off is essential for the reconstruction and, if not permitted, could lead to Yes Bank becoming unviable again. They argued that State Bank of India (SBI) and seven other banks invested public money into Yes Bank based on the write-off. They also argued that the administrator, appointed by the central bank, had the power to fully write down AT1 bonds. Further, RBI submitted that bonds were high-interest-bearing, high-risk instruments, and the subscribers were “rich people" who understood the risks. It was also argued that the high court erred in acknowledging the correct date of reconstruction of the bank.

Appearing for a group of individual bondholders, senior advocate Mukul Rohatgi contended that writing off the bonds was not correct in law and that RBI had changed its stance on the matter over time. Assisted by advocate Srijan Sinha, Rohatgi added that not all bondholders are “rich people" and cannot wait indefinitely for payments. “They are not Birlas and Tatas who have invested in these bonds. How is 9% risky?" he asked. The lender sold the perpetual AT1 bonds in three tranches in 2013, 2016 and 2017. 

In March 2020, a moratorium was imposed on the bank, superseding the then board of directors, and an administrator was appointed to manage the bank. The AT1 bonds were written off as part of a restructuring plan to rescue Yes Bank. Equity holders, on the other hand, did not face a similar write-down.

RBI directed the Yes Bank administrator to write off these bonds as part of a restructuring scheme to save the lender from collapse.

A set of individual and institutional bondholders filed a petition before the Bombay high court challenging this decision. In January, the high court ruled against the write-off, holding that the decision was not valid as it was taken after the moratorium period of Yes Bank was completed. “It appears that the administrator exceeded his powers and authority in writing off AT1 bonds after the bank was reconstructed on 13 March 2020," the high court said.

Post the Yes Bank fiasco, the capital markets regulator ruled that AT1 bonds should henceforth be sold only in minimum ticket sizes of ₹1 crore and above to institutional investors. Older tranches of AT1 bonds, however, continue to trade at smaller lot sizes of ₹10 lakh in the market.