Writing-off of the YES Bank AT-1 (Additional Tier-1) bonds, wherein many retail investors had also put their money, is drawing huge criticism from legal experts in the securities market.
YES Bank has written off ₹8500 crore worth of AT-1 bonds as per the restructuring package approved by the Reserve Bank of India (RBI). But what are the legal issues behind such a brutal write-off? Top legal experts that BusinessLine spoke to say the move will face major hurdles and YES Bank will have to compensate investors.
RBI oversight
Fund-raising through bonds has to be approved by the RBI, which only allows so when it has a clear picture of the banks financial positions. In the case of YES Bank, its divergence in non-performing assets (NPAs) remained hidden, and came as a major shock to the investors when the real figures were out.
The RBI’s moves, while in accordance with Basel-III guidelines, will have serious implications, legal experts said. According to a senior lawyer appearing in Securities and Appellate Tribunal (SAT), the RBI will find it tough to answer how, in 2018, it found zero divergence in YES Bank NPAs, given that the regulator is obliged to handle such situations. Further, the RBI found divergence of only ₹3277 crore in 2019.
“Things cannot have just been deteriorated to so much in 3-4 months of 2020, when it came to be known in March that YES Bank divergence was more than ₹6,000 crore. How did the RBI not know this? It has all the data,” the senior lawyer said.
“Now, it has also approved writing-off of the bonds. This is vicious and such a scheme cannot be buried without judicial accountability for a regulator like the RBI. The Axis debenture trustee has already moved Bombay High Court, and all these questions will come up,” the lawyer added.
Larger implications
“By writing off YES Bank’s AT-1 bonds, the RBI has opened itself up to legal intervention, shut the route of AT-1 bonds for weaker banks and raised costs for other banks,” said another lawyer, who was involved in a case filed by a large financial institution against the RBI.
Juts a day after putting YES Bank under moratorium, the RBI released an SBI-led draft restructuring package for the private sector bank. Among other things, it approved writing-down of over ₹8,600 crore outstanding to AT-1 bondholders. It cited global practices adopted in the Basel framework for the move. Axis Trustee Services Ltd, a debenture trustee of YES Bank, and Indiabulls Finance on Monday filed a petition in the Bombay High Court against the move.
AT-1 bonds are quasi-equity instruments, which are meant to be or deemed equity but are structured as bonds. The promise of equity provides funds for the company to grow, without having to give dividend in return. But the capital was deemed to be secured with some interest on it.
Financial market experts said that the benefits of AT-1 bond write-off pales against the cost which will be incurred. Banks, especially PSUs, don’t have access to equity capital. LIC and the government have been for long the only source of equity capital for them.
Banks have raised about ₹90 000 crore in AT-1 bonds and ₹1,50,000 crore in Tier-2 bonds. These bonds had bridged the gap in capital deficit for banks. With the write-off in the YES Bank case, investors will move away from Basel-III bonds, especially those of weaker banks. They will also demand higher rates (maybe by 2-4 per cent) for Basel-III bonds. Loss incurred by the banks by way of increased borrowing cost is far more than the write-off on YES Bank bonds, experts say.