Yes Bank AT1 Bonds fiasco
Yes Bank AT1 Bonds fiasco:
Who is responsible?
Brief:
Reserve Bank of India, (RBI) in terms of powers conferred under Banking Regulation Act, 1949, after taking into account (a) the rapidly deteriorating financial position of the Yes Bank Ltd., (the bank) relating to liquidity, capital and other critical parameters (b) the absence of any credible plan for infusion of capital announced a 'draft' "Yes Bank Reconstruction Scheme" on 6th March 2020.
The draft scheme, among other things, mentioned that the instruments qualifying as Additional Tier I Capital, (AT1 Bonds) issued by the bank under Basel III framework, shall stand written down permanently, in full, from the appointed date (defined as the date on which the Central Government notifies the scheme in its Official Gazette), as per its extant regulations on the Basel framework. However, the clause relating to 'permanent write down of the instruments issued as AT1 Bonds', did not find a place in the Reconstruction Scheme in the notification issued by the Central Government on 13th March 2020. The Administrator, appointed by RBI, while publishing the unaudited financials of the bank on 14th March 2020, decided to write down the AT1 Bonds amounting to ₹8415 cr.
Aggrieved by the above decision, AXIS Trustee Services Ltd (acting as trustee for the Basel III bonds) and others filed a case in the Bombay High Court, which quashed the decision of the administrator, as having exceeded his authority. Yes Bank, along with RBI and the Central Government, preferred an appeal with the Supreme Court for the reversal of the order of the Bombay High Court. Now, the Supreme Court has also upheld the ruling of the Bombay High Court that the administrator had no powers to write down the AT1 Bonds.
Who is responsible for this fiasco?
I had a look at the relevant portion of the Master Directions issued by RBI, so as to understand when the AT1 Bonds, carrying loss absorption features, can be written off. It can be exercised, when RBI feels that point of non-viability (PONV) is reached and the trigger event to either convert the bonds into common equity or write down the bonds (permanently) has arisen. In this case, CET1 ratio at 0.6% as per unaudited financials as on 31st December 2019 (much below the minimum regulatory requirement to avoid a trigger) and the decision taken by RBI for injection of capital by public sector (SBI and other PSBs chipped in) satisfied the conditions required for 'PONV trigger event'*. However, the write down decision was taken by the Administrator (instead of by RBI, as stipulated in the Master Directions), knowing well that notification by the Central Government, did not mention the 'AT1 bonds write down' clause that appeared in the 'draft' framed by RBI. The questions are:
(i) Was the Central Government not aware of the consequences, especially when equity from the public sector was sought for, to rescue the bank? (ii) Did RBI, which was engaged in discussions with the trustee of the bonds, not realize that its opinion matters per its own regulations, before write down clause kicks in? (iii) Whether the Administrator would have taken a call on his own, without consulting the regulator or the PSBs, the major investors in the rescue plan?
Difficult to believe, especially when one goes through the SC Judgment. It says the following: RBI submitted an internal note to DFS, based on representation from AXIS Trustee Services Ltd (acting as trustee for the Basel III bonds) that instead of permanent write down, common shares be allotted to the existing AT1 Bonds holders in proportion to their current holdings of these bonds. The suggestion was also suitably incorporated in the revised reconstruction scheme. However the Central Government did not incorporate any clause in the Reconstruction Scheme that would affect the bonds and omitted the portion relating to AT1 bonds in its notification.
(i) It replaces the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank. Replacement issues can be concurrent with but not after the instrument is called;
(ii) The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.
V. Viswanathan
ex CGM eSBT
21st October 2026
*Quote: "The PONV Trigger event is the earlier of: (a) a decision that a conversion (i.e., full conversion to common shares) or write-off (fully and permanently), without which the firm would become non-viable, is necessary, as determined by the Reserve Bank; and (b) the decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable, as determined by the relevant authority. The write-off of any CET1 capital shall not be required before the write-off of any non-equity (AT1 and Tier 2) regulatory capital instrument". Unquote
Comments
Post a Comment