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Explainer: The row over Yes Bank’s AT-1 write-off

Bond-holders had challenged this in court alleging mis-selling. Shashank Didmishe takes a look at the complex world of AI-1 bonds and the high court decision

Explainer: The row over Yes Bank’s AT-1 write-off
Yes Bank (File)

The Bombay High Court recently rejected the Yes Bank administrator’s 2020 decision to write-off additional tier-1 (AT-1) bonds of up to `8,415 crore as part of the bank’s bailout. Bond-holders had challenged this in court alleging mis-selling. Shashank Didmishe takes a look at the complex world of AI-1 bonds and the high court decision

What are AT-1 bonds?

Banks typically raise funds through AT-1 bonds to maintain their capital base and form part of tier-1 capital, along with common equity tier (CET). These bonds are unsecured and perpetual in nature, with a call option. Banks can repurchase the bonds from holders. As per Reserve Bank of India (RBI) guidelines, banks must maintain minimum tier-1 capital of 7% of risk-weighted assets. Of this, AT-1 capital can’t exceed 1.5% of total assets.

They are generally issued on a private placement basis, which means these are not offered in a ‘public offering’ and are generally held to be issued to a group of not more than 50 people. Given these are subordinate to all other forms of debt, in case of default by the issuer, these assume the lowest priority for repayment.

What is the Yes Bank AT-1 row?

Yes Bank had issued the AT-1 bonds in three tranches in 2013, 2016 and 2017, totaling to `8,415 crore. The bank underwent a massive reconstitution exercise in 2020 after it faced financial stress, and the board of directors was superseded and RBI appointed Prashant Kumar as the bank’s administrator.

The administrator wrote down two tranches of the AT-1 bonds. Some investors then moved the Bombay High Court against this. The HC was hearing petitions filed by several individual investors against the Centre, RBI, Yes Bank, and Prashant Kumar, now the bank’s MD & CEO.

The investors had sought directions against National Securities Depositories (NSDL) and Central Depository Services (CDSL) to reverse the effect of the write-off. The petitioners contend that the clause for write-off was not included in the final scheme of reconstitution of Yes Bank.

The HC verdict

The Bombay HC, on January 20, quashed the write-off decision. It held that the administrator of Yes Bank took the decision after the reconstitution process of the lender was completed on March 13, 2020.

Additionally, it also held that neither RBI had directed the bank’s administrator to take such a step, nor the reconstitution scheme provided for such a write-off.  

Write-off norms

The AT-1 bonds issued by banks can be extinguished under the ‘principal loss absorption’ method, by either converting bonds into shares or using the write-down mechanism, as per RBI’s capital regulations of 2013.

This is applicable in cases where the government or RBI decides to reconstitute a bank or amalgamate a bank with any another. Such a bank will be declared non-viable or approaching non-viability, and the rules allows AT-1 conversion or write-down.

What is the Yes Bank management saying, and the shadow on Lakshmi Vilas Bank

Yes Bank is in the process to appeal before the Supreme Court against the High Court order. The bank has six weeks to appeal before the apex court. The lender has the option not to pay interest in a given year and also has the sole right to exercise the call option to buy back the bonds, Prashant Kumar has said. The two private equity investors, Carlyle Group and Advent International, who are in the process of acquiring 9.99% each, are supporting the bank in light of this development, he said to a news channel. The bank believes that there is a strong legal opinion in the its favour, due to which there is no requirement to make provisions or plan for contingency. From an accounting perspective, the common equity tier (CET) would come down but overall tier-I capital will be the same. The bank’s total capital adequacy ratio stood at 18.2% as of December 31, with CET capital at 13% and tier-II capital at 5.1%. The other option, some experts say, could be conversion into equity.

Lakshmi Vilas Bank in 2020 had written-down tier-2 bonds of up to `320 crore in 2020, ahead of its merger with DBS Bank India. The decision to write off the bonds by the bank is also reportedly challenged by some bondholders before various high courts.

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First published on: 25-01-2023 at 04:22 IST