Yes Bank AT1 bond controversy
Bank-led misselling case
- 2 min read
- 3 chapters
Related on Lably
Through Supreme Court of India and Securities and Exchange Board of India
Background
Yes Bank, a private Indian bank, faced rising non-performing assets and governance issues in the late 2010s, eroding depositor confidence. In March 2020, the RBI superseded its board, appointed an administrator (Prashant Kumar, former CFO of State Bank of India), and introduced a reconstruction scheme backed by capital infusion from other banks, including the State Bank of India.
AT1 bonds, which are perpetual and designed to absorb losses under Basel III, can be written down or converted into equity when capital ratios fall below thresholds. However, critics argued the Yes Bank action inverted the loss hierarchy by impacting AT1 holders before equity.
On 14 March 2020, the administrator wrote down the full value of Yes Bank’s AT1 bonds a day after announcing the scheme. While equity was not immediately written down, equity holdings were locked in for three years.
In 2021–2022, Securities and Exchange Board of India penalized Yes Bank and former CEO Rana Kapoor for mis-selling, citing inadequate risk disclosure and targeting unsuitable clients, including senior citizens.
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Legal proceedings
Bondholders, represented by entities such as Axis Trustee Services, challenged the write-down in the Bombay High Court. In January 2023, the court quashed the administrator's decision, ruling that the final reconstruction scheme notified by the government on 13 March 2020 did not explicitly authorize the write-off, and that the administrator had exceeded his powers post-reconstruction.
Yes Bank, the RBI, and other parties appealed to the Supreme Court, which stayed the High Court order in March 2023 and has since heard arguments on issues including statutory authority, contractual terms of the bonds, and the broader implications for bank resolution frameworks. Hearings continued into 2025, with the court indicating it would conclude arguments in early 2026. A Swiss court ruling on Credit Suisse AT1 bonds in 2025 was cited in some commentary but has limited direct precedential value in India.
Reception
The controversy highlighted tensions between regulatory discretion in crisis resolution and investor rights. Supporters of the write-down argued it was essential to protect depositors and the financial system by enforcing loss-absorbing features without taxpayer burden. Critics pointed to procedural lapses, potential mis-selling, and questions over whether AT1 instruments should absorb losses before equity.