Explainer: What Are AT1 Bonds? What Investors Must Know About Bombay HC Order On Yes Bank AT1 Bond Case

The additional Tier 1 bonds, popularly known as AT1 bonds, are back in the news in the wake of the Bombay High Court on Friday quashing Yes Bank’s write-off of AT1 bonds worth around Rs 8,400 crore, providing much-needed relief to investors. As part of its rescue plan for the ailing Bank, the Reserve Bank of India (RBI) in March 2020 wrote off the bank's loss-absorbing instruments.

What Are AT1 Bonds?

AT1 bonds are a type of perpetual debt instrument with no maturity date. The issuer possesses the call option that permits them to redeem these bonds after a certain period.

While it offers higher returns to investors compared with other debt products, AT1 bonds are considered high risk because, in case of an institutional failure, the banks are allowed to stop paying interest and, if needed, write off these bonds.

Importantly, when the issuer crosses the point of non-viability, AT1 bonds are the first part of the debt that will be written off. This happened in Yes Bank, where AT1 bonds worth Rs 8,414 crore were written off entirely by RBI as part of the Bank’s reconstruction effort in March 2020.

As per reports, on Friday, a division bench of acting Chief Justice Sanjay V. Gangapurwala and Justice Shriram M. Modak quashed the write-off while hearing pleas by Axis Trustee Services and retail individual investors challenging the write-down order.

The court order said, “It appears that the administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed on March 13, 2020.” The high court bench observed that “Yes Bank stood reconstituted on March 13, 2020, upon the notification of the final Yes Bank Ltd. Reconstruction Scheme, 2020. After the Bank was reconstituted, the administrator could not have taken such a policy decision of writing off the debentures.”

Additionally, according to media reports, the Bombay High Court did not go into the nature of Yes Bank’s AT1 bonds while ruling that there were procedural lapses in the decision to write down the bonds. Reuters reported that the court offered relief to bondholders with exposure of Rs 84.5 billion.

Here’s What Has Happened So Far:

In September last year, market regulator Securities and Exchange Board of India (Sebi) launched an investigation and slapped a Rs 2 crore fine on Yes Bank founder Rana Kapoor under the provisions of Section 15HA of the SEBI Act for mis-selling the private sector lender's AT-1 bonds.

The Sebi circular said that it issued an adjudication show cause notice to YBL, Rana Kapoor, Vivek Kanwar, who was the head of the private wealth management team, Ashish Nasa, and Jasjit Singh Banga.

As per the Sebi investigation, it found that they "had facilitated the selling of AT-1 Bonds of YBL from institutional investors to individual investors. It was alleged that during the process of selling the AT-1 bonds, individual investors were not informed about all the risks involved in the subscription of AT-1 bonds. Therefore, it was alleged that AT-1 Bonds were fraudulently sold to individual investors."

In its 87-page order, the market regulator said Kapoor was overseeing the entire operation relating to the secondary sale of AT1 bonds, taking regular updates from the team and giving them further instructions to increase the sales, thus creating pressure on the officials to ramp up the sales. Sebi also held the Yes Bank founder responsible "for acts of misrepresentation or suppression of material facts, manipulation, and mis-selling of AT-1 bonds of Yes Bank to investors" while observing that he "pressured officials of the private wealth management (PWM) team to devise a devious scheme to dump the AT-1 bonds on hapless customers of Yes Bank."