In a landmark decision, the Supreme Court of India has reversed the permanent write-off of Additional Tier 1 (AT1) bonds worth approximately ₹8,400 crore ($884 million) by Yes Bank during its government-backed rescue in March 2020. This ruling has significant implications, potentially exposing the private sector lender to fresh financial liabilities and prompting a sharp decline in its shares.
Implications for Yes Bank and its Capital
The Supreme Court's judgment could lead to substantial compensation claims from bond investors, thereby creating additional capital requirements for Yes Bank. Market analysts are closely watching how the bank will address these potential financial obligations. Questions arise regarding whether existing shareholders, including Japan’s Sumitomo Mitsui Banking Corporation, which holds a 24.9% stake, might need to contribute further capital.
“One will definitely be looking out for how funding requirement will be met, whether Sumitomo as a partner will have to bring in or other shareholders though rights issue or any other way,” said Deven Choksey, managing director at DRChoksey FinServ, to Bloomberg.
Yes Bank's shares reacted sharply to the news, falling 14.5% on Thursday, marking their steepest decline since July 2020 and closing at their lowest level since April 2005. Former CEO Prashant Kumar had previously stated in 2023 that the bank had not made provisions for such potential liabilities, relying on legal advice supporting its original position.
Wider Impact on India’s AT1 Bond Market
The ruling carries broader implications for India’s banking sector and the regulatory framework governing bank rescues. AT1 bonds are designed to absorb losses when a bank becomes non-viable, forming a crucial part of its regulatory capital. They rank below other debt securities, making investors susceptible to significant losses during a bank failure.
While the decision may bolster investor confidence in legal protections for bondholders, it also introduces uncertainty over future write-offs and could potentially increase borrowing costs for banks issuing such instruments.
Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, noted that the ruling “could have mixed implications for the AT1 bond market, bolstering investor confidence in legal protections while creating uncertainty over future write downs that may raise borrowing costs for banks.” He also emphasized the need for clearer regulatory guidelines.
Legal Precedent and Future Steps
This development marks another legal challenge for Yes Bank. In 2023, the Bombay High Court had initially set aside the bond write-off due to procedural lapses, a decision Yes Bank subsequently challenged in the Supreme Court. Ashish Pyasi, managing partner at Aendri Legal, highlighted that this ruling could establish a significant precedent for future bank rescues, given its implications for investors and other stakeholders.
It remains possible that the government and Yes Bank could seek a review of the Supreme Court’s decision, adding another layer of complexity to this evolving financial and legal saga.