The group of banks and private equity investors who had invested money in the troubled bank could suffer stock losses as a result. However, there is no assurance that bondholders will receive their interest or principal right away even if the AT-1 bonds are reinstated. By definition, AT-1 bonds are perpetual, and the bank is not required to exercise the call option. Additionally, the bond’s terms include provisions that permit the issuer to forgo coupon payments if the bank’s capital reserves are in danger.
The petitioners in this case made a number of claims, ranging from the legitimacy of equity shareholders’ superior rights to AT-1 bondholders to the misrepresentation of AT-1 bonds in the marketplace. However, the Court did not address the necessity of the write-off, instead using technical reasons to invalidate it. It has highlighted discrepancies between the preliminary rebuilding order published on March 6, 2020, and the final reconstruction order published on March 13, 2020. The issue of why AT-1 investors were required to accept haircuts prior to equity shareholders is a legitimate one from a legal standpoint because AT-1 bonds do have a higher seniority of claims than equity stockholders. However, it is questionable if intelligent investors would purchase these bonds without being aware of their risky characteristics.
Video Courtesy: Zee Business
AT-1 bonds are exclusively available to corporate and high net worth investors and require a minimum investment of 10 lakh (HNIs). These bonds’ capital write-off and coupon-skipping provisions are explicitly disclosed in the offer documentation, which is why their yields are 200 to 250 basis points higher than those of other bonds. In reality, the Yes Bank write-off helped the bond markets by making investors aware that the risk associated with AT-1 bonds isn’t just there on paper; it may also manifest itself in real life.
Overall, the Yes Bank tragedy serves as a reminder that India has not yet developed a comprehensive game plan for handling sudden failures of major banks or other deposit-taking institutions. The knowledge gained thus far reveals that, depending on the circumstances of each instance, the RBI and the government do need to use some discretion when creating bank rescue plans. For instance, in the case of Yes Bank, the rehabilitation package had to be put together in 2019 during a period of slowing economic growth and concerns over a deposit run. There were also claims that debtors bought bank bonds as payment in exchange. If regulatory orders on bank rescues, entire findings of investigations, and explanations of haircuts are made public, litigation may be avoided in the future.
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