What RBI Has Done To Yes Banks' AT1 Bondholders Is Legally Correct
By A Special Correspondent
First publised on 2020-03-12 12:14:19
About the Author
The RBI has formulated a plan and got the Additional Tier-1 (AT1) bondholders of the Yes Bank to agree to it. Under the plan, 80 percent of their holding will be written off and they will get shares of Yes Bank for the rest. This is much better than the earlier rumours that the entire AT1 bonds would be written off. The RBI decision to treat AT1 at a lower rung then equity, although criticized, is justified as these bonds were issued with the specific mandate of being bailed in at the time of stress and carried a substantially higher rate of interest to compensate for the risk. Even the Basel III norms specify that AT1 should be written down before equity.
AT1 bonds are part of the 9.5% risk-weighted Tier-1 capital ratio Indian banks must maintain. Since these bonds are unsecured and perpetual, they help banks maintain additional capital requirements. It would seem unfair to AT1 holders that despite helping the banks for their capital requirements they stand to lose 80 percent of their money, the very fact that they were paid a higher rate of interest and knew beforehand that their holdings would be bailed in if there was stress no tears should ideally be shed for the write-off. Further, there is a secondary market for these bonds. Investors could have liquidated their holdings when the first signs of trouble were detected at Yes Bank. They could have got a much better price then. If investors held on to the instrument, they must be prepared for the consequences.
AT1 bonds are normally purchased by informed investors. They know that the bonds are perpetual. They also know that despite carrying a higher rate of interest, the banks retain the option of foregoing interest payment in any year if they wish to. The face value of the bonds can also be reduced if the capital ratio norms are breached. The RBI can even ask a stressed bank to cancel its outstanding AT1 bonds without any reference to the investors, which is what has happened in the case of Yes Bank. All this, except the last, forms the part of the offer terms. Hence, the AT1 investors losing their money in Yes Bank cannot complain much. This is something that should not have happened but legally, this is the way it happens if a bank goes under. Since many institutions and mutual funds hold these bonds, there is a likelihood of a legal battle over the issue but one feels that the RBI is on strong ground.
