Supreme Court Upholds Quashing of AT1 Bond Write-Off
Shares of YES Bank Ltd have experienced a significant downturn, plummeting nearly 26% over the past month. This sharp decline follows a critical decision by the Supreme Court of India, which dismissed appeals filed by YES Bank, the Reserve Bank of India (RBI), and the Union Government. The Supreme Court's ruling upholds a previous judgment by the Bombay High Court that had quashed the bank's March 2020 write-off of ₹8,415 crore worth of Additional Tier 1 (AT1) bonds.
The selling pressure intensified after this judicial setback, with the stock hitting a fresh 52-week low. Investors are now grappling with the potential financial implications of this decision, which could impact the bank's capital ratios and overall profitability.
Understanding AT1 Bonds and Their Role
Additional Tier 1 (AT1) bonds are a type of high-risk debt instrument issued by banks to strengthen their capital base. These perpetual bonds typically offer higher returns to investors but come with a crucial condition: they can be written off or converted into equity under specific circumstances, particularly when a bank faces severe financial distress. In March 2020, as part of a restructuring scheme when YES Bank was declared insolvent, new investors were brought in, and its AT1 bonds were controversially written off.
Bondholders subsequently challenged this write-off, leading to the Bombay High Court ruling in their favour in January 2023. The Supreme Court's recent decision effectively affirms the High Court's stance, overturning the bank's original write-off action.
YES Bank's Response and Market Outlook
In an exchange filing, YES Bank confirmed the Supreme Court's decision, noting it upheld the Bombay High Court's January 2023 judgment and dismissed appeals from the bank, RBI, and the Union of India. The bank stated it is carefully reviewing the judgment to determine its next legal and operational steps.
Despite reporting a positive second-quarter performance, with net interest income (NII) rising 22.7% year-on-year to ₹2,822 crore and net profit increasing 65% year-on-year to ₹1,080 crore, analysts caution against optimism. Ravi Singh, Chief Research Officer at Master Capital Services, highlighted that while Q2 earnings were positive, the Supreme Court's decision could significantly impact the bank's profitability and capital ratios. He advised investors to avoid new positions due to ongoing legal and financial uncertainties.
From a technical perspective, Shitij Gandhi, AVP - Equity Technical Research at SMC Global Securities, identified key support levels for YES Bank's stock at ₹15, followed by ₹14. He warned that any recovery would likely face selling pressure unless the stock decisively breaks above the ₹20-21 range.