Whalesbook
The Supreme Court is set to rule on the controversial write-down of Yes Bank's Additional Tier-1 (AT1) bonds. This decision carries significant weight, potentially reshaping India's entire AT1 bond market. Authorities have informed the court that the outcome could affect approximately $12 billion (Rs 1 lakh crore) of AT1 bonds currently in circulation across the banking sector.
Legal Arguments Clash
The central issue is whether the $10 billion (Rs 8,415 crore) write-down of Yes Bank's AT1 bonds was carried out under the bank's reconstruction scheme or dictated by the Reserve Bank of India's (RBI) master circular and the bond agreements. The government's counsel argued that AT1 bonds are strictly governed by RBI regulations and their contract terms, not by the reconstruction scheme itself. The RBI's master circular, he stated, provides a detailed framework for write-downs, with a bank's "non-viability" – meaning it's on the brink of collapse – being the key trigger.
Timing and Process Disputed
Government lawyers explained that the reconstruction of Yes Bank, which began in March 2020 during a severe financial crisis, was a step-by-step process. They contended that the "non-viability" trigger for a write-down could occur even before reconstruction is fully completed. The government also warned that writing down AT1 bonds before the capital infusion led by the State Bank of India could have worsened Yes Bank's already fragile financial condition, potentially jeopardizing the entire rescue effort. This illustrates the delicate balance authorities must manage during bank rescues.
Bondholders' Challenge
Lawyers representing the bondholders argued that the final reconstruction scheme for Yes Bank did not explicitly require or allow for the write-down or conversion of AT1 bonds. They noted that earlier drafts of the scheme reportedly included such provisions but were removed from the final version, suggesting an intent to protect bondholders. Petitioners also claimed that even if the RBI master circular and bond terms were applied, a strict due process and adherence to safeguards were necessary before any write-down. They questioned the administrator's authority to cancel bonds unilaterally after the scheme was in place.
Systemic Concerns vs. Specifics
Bondholders pushed back against the government's warnings of systemic risk, arguing that this case should be judged on its specific facts: whether the law and due process were followed correctly in the Yes Bank situation. The Supreme Court bench has focused on three key questions: when a bank's legal reconstruction truly begins, who has the authority to order a write-down, and whether the "non-viability" trigger can stand alone or must be linked to a completed reconstruction under the Banking Regulation Act.