Nippon India MF, others move HC against YES Bank bond write-off

Suresh P Iyengar

Nippon India Mutual Fund, Axis Debenture Trustee and certain other mutual funds that have been hit by the Reserve Bank of India writing off ₹8,920-crore worth Additional Tier-1 bonds of YES Bank, has filed a petition in the Bombay High Court.

The petition is likely to come up for hearing on Wednesday.

Nippon India has invested ₹1,800 crore through six of its schemes in the Additional Tier-1 (AT-1) bonds of YES Bank.

In the draft reconstruction plan for YES Bank, the RBI has announced that the instruments qualifying as AT-1 Capital issued by YES Bank under Basel-III framework shall stand written down permanently in full, from the appointed date.

Earlier in a letter written to RBI, Axis Trustee, the debenture trustees for YES Bank’s AT-1 bond, has presented the central bank with an alternative option to cancel or suspend coupon payments and delay the exercise of call option till the time the financials of the bank improves.

The decision to write-down the AT-1 bonds, if given effect to, will be an arbitrary and discriminatory decision. While the Basel-III framework does legally permit write-off of the AT-1 bonds or conversion of such instruments into equity, such power ought not to be exercised in a manner in which preference is given to the common equity holders at the cost of retail as well as other investors who have directly or through mutual fund schemes and regulated financial institutions subscribed to the bonds, said Axis Trustee.

Public sector banks have raised about ₹54,576 crore through AT-I bonds while private sector banks have outstanding of ₹38,685 crore in these bonds.

Of this, mutual funds have an exposure of ₹37,734 crore to AT-I bonds.

Negative sentiment

Axis Trustee Services said the complete write-down of the AT-1 bonds will shake investors’ confidence and result in negative sentiments among domestic and foreign investors.

Further, Axis Trustee said global best practices place equity as subordinate to AT-1 bonds but the RBI should consider the AT-1 bonds at par with equity, if not senior.

Moreover, the AT-1 bonds can be converted into equity without affecting the size of the stake and value of investment of State Bank of India.

AT-1 bondholders have been holding on to the bonds for the past three to four years as long-term investors.

Even if the bonds are converted into equity, the bondholders would be subjected to loss of 70-80 per cent of face value. However, that would be more equitable and acceptable than the proposed write down, it said.