Today, On 22nd January, The Supreme Court referred pleas by the RBI and others concerning the write-off of Yes Bank’s Additional Tier-1 (AT-1) bonds to a different bench. AT-1 bonds are perpetual, high-risk instruments issued by banks to bolster their capital base, offering higher interest rates. The Reserve Bank of India has the authority to cancel these bonds in cases where the issuing bank faces financial distress.
New Delhi: The Supreme Court on Wednesday referred the pleas from the Reserve Bank of India (RBI) and others to another bench, challenging a Bombay High Court ruling that annulled the Yes Bank administrator’s decision to write off additional tier 1 (AT-1) bonds worth Rs.8,415 crore as part of a bailout.
AT-1 bonds are perpetual instruments issued by banks to support their capital base and are considered riskier than traditional bonds, offering higher interest rates. The RBI has the authority to direct a bank to cancel these bonds if it faces financial difficulties.
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The bench, consisting of Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice K.V. Viswanathan, stated it would not hear the four pleas contesting the high court’s ruling. Without providing a specific reason, the Chief Justice announced that these pleas would be taken up by a bench led by Justice A.S. Oka after a week.
Previously, a bench headed by then Chief Justice D.Y. Chandrachud had issued notices to Axis Trustee Services Ltd regarding four petitions filed by the RBI and others against the high court’s judgment on March 3, 2023. The Supreme Court had also extended the stay on the implementation of the high court’s order, which quashed the Yes Bank administrator’s decision to write off the AT-1 bonds as part of a bailout in March 2020.
The high court had ruled on January 20, 2023, that the Yes Bank administrator lacked the authority to make such a decision. However, the Supreme Court assured AT-1 bond investors that it would strive to find a solution to their financial woes after senior advocate Mukul Rohatgi, representing Axis Trustee Services Ltd, emphasized that their investments had become worthless through no fault of their own.
Rohatgi argued,
“It was the top officials of the bank who brought down the bank… Our money has become zero. We are not Tata-Birla; we are institutional investors. Some people invested their hard-earned money. What wrong did we commit? Why should we suffer?”
Solicitor General Tushar Mehta, representing the RBI, and senior advocate Kapil Sibal, on behalf of Yes Bank, stated that public sector banks had agreed to the bailout and infused capital into Yes Bank after the decision was made to write off the AT-1 bonds.
Yes Bank explained that these non-convertible, perpetual bonds, which yield a high interest rate of 9.5%, could be written off to save the bank.
The Supreme Court indicated it might exercise its extraordinary powers under Article 142 of the Constitution to find a resolution for the bondholders. The high court, while quashing the Yes Bank administrator’s decision, noted that its ruling would be suspended to allow the RBI and Yes Bank to appeal to the Supreme Court.
The high court further stated that the Final Reconstruction Scheme of Yes Bank, issued by the RBI, did not include provisions for writing down the AT-1 bonds.
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The court stated,
“The final scheme sanctioned by the Central government did not contain the clause or provision for writing down AT-1 bonds,”
It also mentioned that when the RBI drafted the scheme for the bank’s reconstitution, it had invited suggestions and objections, and it appeared that petitioners had objected to the write-down of the AT-1 bonds and even suggested their conversion into shares.
The high court had stayed its order for six weeks, and the petitions before it sought directions against the National Securities Depositories Limited and Central Depository Services to reverse any accounting entries or write-offs resulting from the contested decision to write off the bonds.
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