Rs 8,400 Crore Under Lens: Supreme Court Ruling Jolts Yes Bank Investors, Shares Slide 15%

India's top court dealt a blow to Yes Bank by overturning the permanent write-off of its riskier bonds during a government-backed rescue in 2020, raising the prospect of fresh liabilities for the private lender. Shares of the bank slumped.

The bonds, known as Additional Tier 1 securities, were written off as part of a restructuring overseen by the Reserve Bank of India in March 2020. The move, the first of its kind in India, wiped out about Rs 84 billion of bonds held by investors.

The ruling could have consequences beyond Yes Bank, raising questions about the legal authority to impose losses on bondholders during bank rescues. For now though, it raises the prospect of fresh capital requirements for Yes Bank, in which Japan's Sumitomo Mitsui Banking Corp. owns a 24.9 per cent stake, should the lender be required to compensate bond holders.

"One will definitely be looking out for how funding requirement will be met, whether Sumitomo as a partner will have to bring in or other shareholders though rights issue or any other way," said Deven Choksey, managing director at DRChoksey FinServ.

The decision is a second legal setback for the lender. The Bombay High Court had set aside the write-off in 2023, citing procedural lapses without ruling on the merits of the bonds themselves. Yes Bank subsequently challenged the decision in the top court, which has now ruled that the administrator appointed during the bank's rescue did not have the authority to order it.

"This will set a precedent for future bank rescues, as writing down bonds affects not just investors but other stakeholders as well," said Ashish Pyasi, managing partner at Aendri Legal. "The government and Yes Bank can still seek a review of the Supreme Court's decision."

AT1 securities count toward banks' regulatory capital but can be written off when specified loss-absorption triggers are breached, including when a lender becomes nonviable. They rank below other debt instruments in the event of a bank failure, exposing investors to potentially substantial losses.

Yes Bank shares fell 14.5 per cent on Thursday, the most since July 23, 2020. The stock extended losses on Friday and fell as much as 3.2 per cent.

Former Chief Executive Officer Prashant Kumar said in 2023 the lender hadn't made provisions for potential liabilities arising from the dispute, citing legal advice supporting its position. Yes Bank, in a stock exchange filing Friday, said its key capital ratio could fall by about 2.5 percentage points after the court's ruling, but it has appropriate capital-management levers.

Some mutual funds, including Kotak Mahindra Asset Management Co., have suspended inflows into their debt schemes on expectations that the value of these AT1 bonds will rise.

"The ruling could have mixed implications for the AT1 bond market, bolstering investor confidence in legal protections while creating uncertainty over future write-downs that may raise borrowing costs for banks," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap. "It also underscores the need for clearer regulatory rules."