Yes Bank crisis: Bombay High Court quashes RBI-appointed administrator’s order writing down over ₹8,000 crore bonds

The Bombay High Court on Friday quashed and set aside a decision of the administrator appointed by the Reserve Bank of India (RBI) for Yes Bank Pvt Ltd. to write down Additional Tier-1 (AT1) bonds of ₹8,300 crore subscribed by shareholders. [Axis Trustee Services Limited v. UOI & Ors.].AT-1 tier bonds are unsecured, perpetual debt instrument. A holder of this bond is a creditor to the company and this investor ranks higher than an equity investor but lower than a secured creditor.They carry a different risk level as they carry rate of around 9-9.5% on the principal amount.By quashing the order of the administrator to write down the bonds, the High Court has effectively ensured that the bond holders gets their dues along with the interest rate as agreed between the parties during the investment..A division bench of acting Chief Justice SV Gangapurwala and Justice SM Modak reasoned that after the bank had been reconstituted in 2020, the administrator could not have exercised his powers after reconstitution of the bank “After the bank was reconstituted, the Administrator could not have taken such a policy decision of writing off the debentures. Nor the RBI had authorized him to do so. It appears that Administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed on March 13, 2020,” the 81-page judgment recorded..The Court also observed that the final reconstruction scheme for the bank did not contain the clause for writing down of AT-1 bonds. “Upon consideration of the objections the Reserve Bank made modification in the draft scheme. It deleted the clause of writing down of AT-1 bonds. The final scheme sanctioned by the Central Government did not contain the clause or provision for writing down AT-1 bonds,” the Court observed. .The petitioner, Axis Trustee Service Limited (ATSL) had petitioned the High Court on behalf of bond holders challenging RBI’s proposed reconstruction scheme.The bond holders included Nippon Mutual Fund, Templeton Mutual Fund, UTI Mutual Fund, India Bulls Housing and Max Financial.Senior Advocate Janak Dwarkadas, appearing for ATSL, argued that AT1 bonds are universally ranked superior to equity.It argued that a complete write-down of such securities could be done only when Yes Bank, the issuer of the bonds, goes into liquidation.Senior Advocate Ravi Kadam for RBI stated that the write-off was lawful and necessary for ensuring protection of more than two lakh depositors/individual account holders..The Court clarified that the matter being fiscal in nature, it would not dwell on whether writing off the AT-1 bonds was necessary but only deal with the decision making process.“We would not enter into a debate as to whether the AT-1 bonds could have been converted into the shares and or whether they could have been proportionately written down. The Court would not possess the necessary expertise of the same” the Court said..[Read Judgment]