SC upholds Bombay HC order quashing Yes Bank AT1 bond write-down

New Delhi: The Supreme Court on Thursday upheld a Bombay High Court ruling that had invalidated the write-down of Yes Bank's Additional Tier-1 (AT1) bonds, delivering a major boost to investors affected by the lender's 2020 rescue exercise.

A Bench comprising Justices Dipankar Datta and Augustine George Masih dismissed appeals filed by Yes Bank, the Reserve Bank of India (RBI) and the government, effectively affirming the High Court's January 2023 decision that had struck down the extinguishment of AT1 bonds amounting to Rs 8,415 crore.

The verdict brings to a close a prolonged legal battle over the treatment of AT1 bondholders during the crisis-hit bank's reconstruction and comes nearly five months after the apex court reserved its judgment following detailed submissions from regulators, the government, the lender and investor groups.

The dispute traces its origins to March 2020 when Yes Bank faced mounting stress from deteriorating asset quality and a sharp erosion in depositor confidence.

In response, the RBI superseded the bank's board and placed the lender under a moratorium, paving the way for a government-approved reconstruction scheme supported by fresh capital from a consortium led by State Bank of India.

As part of the rescue package, the bank's administrator ordered a complete write-down of AT1 bonds worth Rs 8,415 crore.

Notably, AT1 instruments are designed to absorb losses during periods of financial distress and can be written down when specified contractual and regulatory triggers are met.

A key issue before the Supreme Court was whether the decision to extinguish the bonds derived its authority from the reconstruction scheme itself or from the RBI's regulatory framework and the contractual provisions governing the securities.

During hearings, the court closely examined the legal framework governing banking restructurings, including when a bank can be considered fully reconstructed under Section 45 of the Banking Regulation Act.

Moreover, the Bench also deliberated on whether a non-viability trigger for writing down AT1 bonds could operate independently or was required to be linked to a completed reconstruction process.

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