Bombay High Court in Yes Bank case: Sets Aside RBI's order Off AT1 Bonds Worth Nearly Rs. 8,500 Crore

Bombay High Court in Yes Bank case: Sets Aside RBI's order Off AT1 Bonds Worth Nearly Rs. 8,500 Crore

The Bombay High Court by its division bench comprising of Justices SV Gangapurwala and SM Modak while hearing batch of petitions provided relief to investors and set aside an order from the administrator of Yes Bank and a letter by the Reserve Bank of India (RBI) to write off additional tier 1 (hereinafter referred to as AT1) bonds sold by Yes Bank to ineligible investors.

In its judgement, the Bombay High Court accepted the arguments canvassed on behalf of the Trustee and other bond holders that once the final scheme was notified and Yes Bank stood reconstructed, the Administrator had no powers to take any policy decision. Moreover, when the draft scheme had a provision of write down, the final scheme deleted such a provision, the Administrator had no authority to carry out such exercise after the Bank stood reconstructed. RBI that informed the Court that it has not instructed the Administrator to initiate any such action. The Court has held that any such action of writing down the AT -1 Bonds should have been taken "before" the Bank was reconstructed and not "after".

The case pertains to Yes Bank executives allegedly selling AT-1 bonds to investors under the guise of super FDs (fixed deposits), promising higher returns and the safety of a typical bank FD. A penalty of Rs. 2 crore was imposed by SEBI on Yes Bank's former manager and CEO Rana Kapoor in September last year for mis-selling AT-1 bonds.

Mumbai based law firm – Manilal Kher Ambalal & Co., filed the Writ Petitions before the Hon'ble Bombay High Court on behalf of the Axis Trustee.

Bondholders, including financial institutions like 63 moons technologies ltd and Axis Trustee Services Ltd, Yes Bank AT1 Bond Holders Association and a few retail individual investors, had filed these petitions.

A total of Rs. 8,415 crore was invested in Yes Bank's perpetual AT-1 bonds, which were perpetual bonds without maturity dates, by institutional investors like mutual funds and individuals.

Following the collapse of Yes Bank in early March last year and RBI's hurriedly assembled rescue package for the cash-strapped lender, all investors lost their investment. Many of these investors were retired individuals who had parked a sizeable chunk of their life savings in these bonds at the behest of their relationship managers.

As a result, 63 moons technologies, which has a Rs. 300 crore exposure to the written off AT1 bonds of Yes Bank, had filed a lawsuit against the private lender as well as the Reserve Bank of India.

As per Basel-III norms and international best practices, a write-off of bond holders' claims can only be performed when equity capital has practically lost its entire value.

The AT1 bonds are issued by banks in order to strengthen their core capital base to meet Basel-III standards, however these bonds are unsecured, perpetual in nature and so pay a higher coupon rate and carry high risk and can be written down if the bank's capital dips below threshold limits.

A tightening of rules was announced in October 2020 with regards to new issues of AT-1 bonds issued by banks that were intended to restrict retail investors from being able to purchase them. These new rules aim to protect retail investors from investing in these highly risky instruments.

RBI is empowered to enquire banks that are dangerously on edge to cancel its outstanding AT-1 bonds without consulting its investors, which is what happened in the case of the AT-1 bonds Yes Bank was holding when SBI bought a forty-eight per cent stake in the bank to save it.

Earlier it has been repeatedly reported how Yes Bank executives had sold Yes Bank AT-1 bonds with five-year tenors at an interest rate of 9.5 per cent per annum, claiming that the "instrument is as safe as bank fixed deposit having no linkage to the riskier equity market." Bank executives traded these instruments to investors, declaring these perpetual bonds as 'super FDs' offering safety and relatively high return compared with regular fixed deposits.

In recent development the Securities and Exchange Board of India (SEBI) is probing investments between Nippon India Mutual Fund and Yes Bank between 2016 and 2019 for suspected misuse of investors' money.

Reliance Nippon Life Asset Management was the prime loss bearer in Yes Bank's AT-1 bond. As per news reports, the Anil Ambani-led group had borrowed from Yes Bank to the extent of over Rs. 12,000 crore. In April 2021, Reliance Infrastructure sold its headquarters in Santacruz, Mumbai, to Yes Bank for Rs. 1,200 crore.

Mr. Vikram Trivedi, Managing Partner of Manilal Kher Ambalal & Co. commented, "Final Scheme of the Yes Bank being statutory in character, the Administrator ought not to have acted contrary to the powers vested in him. The hard-earned money of public will stand revived in the books of Yes Bank Limited subject to the outcome of Appeal if any filed by the Bank".