Bombay High Court sets aside write-off of Yes Bank AT1 bonds

In a significant development in the Yes Bank saga, the Bombay High Court has set aside the order of the Yes Bank administrator writing off the bank's AT1 bonds worth Rs 8,300 crore in early 2020.

It appears from the judgement that the court has taken a view that the administrator passed the order to write these bonds off after the final resolution plan was notified by the RBI (which did not expressly contain a provision to this effect), but the administrator at that time did not have the authority to do so.

Back in March 2020, when Yes Bank landed in a financial mess due to its ballooning bad debts, investors across 30 mutual fund schemes, which held Yes Bank bonds, had lost Rs 2,800 crore.

The episode hit the headlines for the sheer magnitude of losses. But equally unfortunately, it once again brought to fore the issue of mis-selling of financial products. Several retail and HNI investors were sold these bonds equating them to fixed deposits which yielded better returns. The subsequent write-off came as a rude shock for obvious reasons.

It had also sparked a debate on whether the administrator was rightful in writing these bonds off completely in the first place. To be sure, these are a much riskier variety of bonds. They offer a higher rate of interest but it comes at a cost. Banks can skip paying interest if they are running into losses. They also have a weaker claim on the bank's assets, and therefore stand last in the queue of bond holders to get their money back. But then, many found it strange that the holders of these bonds lost the entire worth of their investment while the equity investors did not.

The write-off had earned a bad name for AT1 bonds. The more knowledgeable investors, including the fund managers, knew about the inherent risks but never before had they seen it manifest in such a spectacular manner. In order to avoid an encore in times to come, markets regulator SEBI tightened the regulations governing the valuation of these bonds and placed restrictions on how much mutual funds could invest in them.

A combination of the tighter regulations and the wounds inflicted by the Yes Bank fiasco has led mutual funds to shun AT1 bonds in recent times.

While the High Court order brings life back into an unfortunate incident many had moved on from, and potentially opens up possibilities of an alternate outcome, there's no reason for investors to start celebrating.

Do note that in the judgement, the court has expressly refrained from taking a view on whether this decision to write-off AT1 bonds was financially sound or not, but they have merely objected to the administrator's authority to do so at that time.

The proverbial picture abhi baaki hai.