You can see that confidence in India’s AT1 bond space is being put under a microscope. The Centre has made its case to the court: this was a no-brainer to keep the lender in the game and shield depositors. They’ve put it to the court that if they don’t have the green light to do these write-offs when a bank runs afoul of capital rules, you’re left with an existential problem for lenders.
The money at stake
Take the Yes Bank case for instance. The top court has put off its order on the Rs 8,415 crore write-down that was part of the 2020 rescue. Back then, the administrator simply zeroed out the AT1 bonds, wiping out what institutions and private investors had put in.
What the Centre and RBI told the court
Solicitor General Tushar Mehta, for the Centre, even put a Cabinet Resolution from March 2020 before the judges after the court asked for the minutes of the meeting. He was there to show the legal footing for the move.
Then there’s the design of the product itself. The Centre and the RBI and SBI will tell you the rules are plain: when a bank is non-viable, the bondholders take the hit. That’s how you keep the system steady. And with a face value of Rs 10 lakh per bond, the government says it was never meant for the masses to be involved in any great numbers.
Bondholders push back
But the bondholders have their side of the story. Their counsel says the final plan didn’t call for any write-down, and by leaving it out of the notification, rights were intact. They’re also asking if the administrator had the right to unilaterally act once the scheme was in place, or if due process was a formality.
They don’t want the court to use this one case to set a rule for the entire market. “Our job is to see if the law was followed here,” is the gist of it.
The court’s focus and open questions
The court has been hard on both of them in recent hearings. A few days back, the judges zeroed in on the legality of it all. The Centre’s line is that you look to the RBI and the contract, not the reconstruction scheme, and that a bank can be deemed non-viable before the dust has even settled.
Here are the central questions the Bench examined:
– When is a bank legally reconstructed for Section 45 purposes?
– Was the write-down under the scheme, RBI circular, or contract?
– Can the non-viability trigger arise independently?
Retail exposure and market structure
On the ground, the numbers are telling. SEBI says 1,346 retail names have about Rs 679 crore in these bonds, most of them old Yes Bank hands. Some 277 even called in fixed deposits to put the money in. The government’s rejoinder is that the high ticket size was a way to limit just how much of a retail play this would be.
Of course, the big boys are in there too – Nippon, Barclays, Reliance, you name it.
What happens next
So where does that leave us? The court has reserved its order. The Centre is of the view that this will define the mood for a market with close to Rs 1 lakh crore in AT1s. If the write-down stands, the risk in these bonds will be priced in as it is. If not, you can bet banks will be paying more to raise capital and we’ll be looking at a new way of handling a rescue.
Why this case matters for investors
It all goes back to the 2020 mess when Yes Bank was in freefall and the RBI and SBI had to step in. Now the court has to say if that was done by the book, and in doing so, decide how India will handle the next time a bank is in trouble.
