Yes Bank AT1 Bonds-Missing ethics?

BLOG 30/2025 DATED 15TH NOVEMBER 2025

Yes Bank, a flourishing Private Sector Bank, was founded by Rana Kapoor and Ashok Kapoor in 2004. The Bank rapidly became one of the biggest private sector banks challenging the big players in the market. By 2019 the Bank faced a financial crisis due to rising NPAs that rose as high as 18%. When investigated, various irregularities were found including reckless lending, unethical selling, Governance issues etc. RBI swung into action, imposing a 30 days moratorium where withdrawal was restricted to Rs. 50,000/- per depositor. RBI also superseded the Board and appointed an administrator to oversee the operations of the Bank. RBI announced a reconstruction scheme wherein it brought SBI to take stake in Yes Bank. The reconstruction plan also envisaged improvement in its Capital structure and Asset Quality. Apart from SBI some other Banks also participated in the reconstruction process.

In a disclosure made to exchanges, Yes Bank disclosed that it had written off the AT1 Bonds issued by them to the extent of Rs. 8415 crore. Bank justified their decision explaining that the bonds can be written off as Bank has reached a ‘Point of Non Viability’ and writing off these bonds will help Bank to improve its capital adequacy ratios.

What is AT1 Bonds:

Additional Tier 1 Bonds are capital instruments and introduced to Banking system through BASEL committee post 2008 reforms. Salient features of these bonds are as under:

• These are part of the Tier 1 Capital of the Bank.
• Bonds are unsecured in nature.
• It has perpetual maturity, i.e there is no maturity of these bonds.
• Issuer has the Call Option, i.e issuer can redeem the bond after specific interval but there is no obligation to mature.
• Interest is paid at regular interval at agreed rate.
• Interest is normally higher than the normal interest rates prevailing in the market.
• Issuer has the discretion to write off the principal or deny Interest payment if capital position is not comfortable.
• These bonds are normally listed in a stock exchange, hence provide liquidity.

Yes Bank had issued such AT1 bonds to the extent of Rs.8415 crore which was written off, duly approved by RBI as part of the capital restructuring plan of Yes Bank. By doing this, the Bank could save approx. Rs. 800 crore every year as interest outgo. The decision was financially prudent and has the approval of RBI. All legal procedures were also duly followed by the Bank before writing off the Bonds.

However, there is a different side of story as well. The investors of AT1 bonds approached High Court challenging the decision of Yes Bank. Investors argued that Yes bank has marketed these bonds just as another type of Fixed Deposit with higher interest rates. There was no clear attempt by the Bank to explain the terms of the Bonds. Many individual investors, invested their life savings in these bonds. Further, many institutional investors who originally subscribed these bonds sold that in secondary market to individual investors.

Kumar Awasthi, a 79 year old retired from Indian Armed forces, invested in 13 AT1 Bonds issued by Yes Bank amounting to Rs.1.36 crore. When they received communication that the bonds have been written off, they were shell shocked as their entire life savings were wiped off. They blame that the Relationship Manager from Yes Bank marketed the instrument terming as super FD. Mr Awathi’s son informed that the Bank has cheated them and his old and bed ridden father is completely dependent on him and his sister.

SEBI also conducted an investigation in the matter and found that Yes Bank officers were guilty of mis selling these bonds to unsuitable investors such as senior citizens. It passed orders and imposed penalties on Yes Bank top executives.

The matter was taken to the Bombay High court, the court decided in the matter and ruled that the write off of Additional Tier 1 Bonds of Yes Bank is illegal. This gave relief to the investors that also include Reliance Mutual Fund as the biggest investor who has investment of around Rs. 2850 crore in these bonds. The High Court order sets an important legal and regulatory precedent that investor’s accountability must be balanced with fairness and due process.

Reserve Bank of India and others took the matter to Supreme Court against the judgment of Bombay High Court. The Supreme Court is yet to pronounce a judgement in the case.

Questions to ponder:

1. Is it ethical (even if legally correct) to write off the Bonds all together before winding off the company, while on the other hand equity share holders still enjoy the ownership of the Bank ?
2. Should retail investors be permitted to invest in such risky instruments?
3. Are the regulators taking miss-selling seriously?

Please give your responses in comments.