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With biggies on board, Yes is now a safer bank for depositors but a long legal fight awaits AT1 bondholders –

Yes Bank’s RBI-appointed administrator Prashant Kumar and the rescuers have made a strong case to the bank’s depositors that their money is safe with the bank. At a presser called on Tuesday, a day before the moratorium will be lifted, the team has done just what it was supposed to do — build confidence among the customers. At the presser, the most important presence was that of State Bank of India Chairman Rajnish Kumar, who is the biggest guarantor of Yes Bank’s future. SBI alone has forked out Rs 6,000 crore into the fund pool and is the biggest trust factor in the exercise. At the presser, Ranish Kumar said his bank will not sell “a single share” of Yes Bank in the next three years.

Following the financial failure, Yes Bank was rescued by a hurried deal planned and executed by the government and the Reserve Bank of India (RBI). Besides SBI, seven other private banks too joined the exercise, lending money and their brand for the Yes Bank rescue. During the presser on Monday, Prashant Kumar outlined why he didn’t expect a run on the bank when the moratorium is lifted tomorrow. “Only one-third customers withdrew during moratorium period where there was a withdrawal restriction of up to Rs 50,000,” Kumar said. “All our ATMs and branches have enough money and I want to reiterate that there is absolutely no problem with liquidity,” said Kumar.

Perhaps, beyond the repeat assurances by the administrator what would have given confidence to Yes customers are the words of RBI Governor Shaktikanta Das (in a press conference yesterday) and SBI chairman at today’s presser. The banking regulator and the country’s largest bank which has led the bail-out have vouched for Yes Bank’s safety and there can be no greater assurances to the retail depositor in the bank.

AT1 bond investors set for legal battle

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Though the rescue deal has been planned well, Yes Bank’s tryst with its Additional Tier 1 (AT1) bondholders, having Rs 8,415 crore worth of such papers, is unlikely to end any time soon. The stage is set for a long legal battle after investors moved the Bombay High Court shortly after the RBI’s decision to write down these papers became public.

The outcome of the case will be crucial for Yes Bank’s investors in these papers, especially retail investors, who had approached the regulator and the courts to seek respite from the decision. Technically, the bank could write down these bonds but the court will have to take a call on whether this amounts to injustice to the investors. Yes Bank’s new board and management will have to address these concerns going ahead, bond dealers said.

The call to write down Yes Bank’s AT1 papers was taken and notified by the Reserve Bank of India while framing the bailout scheme of the scam-ridden Yes Bank, whose co-founder Rana Kapoor is now being investigated for multiple quid-pro-quo deals and financial irregularities.

Yes Bank collapsed financially following years of careless lending and financial irregularities. Its financial ratios and capital position worsened beyond the central bank’s tolerance levels triggering a hurried bailout. Yes Bank was then rescued by a team of banks led by State Bank of India and half of India’s private banking sector, who together pooled in about Rs 10,000 crore to keep the bank alive. The process is still on.

What are AT1 bonds?

AT1 securities are a type of contingent convertible bonds designed after the financial crisis to try to ensure that investors would be on the hook if a bank runs into financial stress. After the Yes Bank reconstruction scheme was notified by the government, there was confusion in the market on March 14 on whether these bonds will be honoured or extinguished as said in the draft reconstruction scheme made public by the Reserve Bank of India (RBI). But, Yes Bank’s RBI-appointed administrator Prashant Kumar clarified that these bonds will be written down fully, as per the agreed reconstruction scheme. This is because the reconstruction scheme was formed after the RBI invoked Section 45 of the Banking Regulation Act, 1949, which arises when the bank is deemed to be non-viable or approaching non-viability, enabling the write-down of certain Basel III AT1 Bonds.

“In light of the above provisions of the Basel III Circular, the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the Bank for an amount of Rs 3,000 crore on December 23, 2016 and the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the Bank for an amount of Rs. 5,415 crore on October 18, 2017 have been fully written down and stand extinguished with immediate effect,” Kumar informed exchanges.

Investors in these bonds have already started approaching courts for resolution. Last week, Axis Trustee representing, bondholders of Yes Bank’s AT1 bonds filed a writ petition in the Bombay High Court seeking remedy against the Reserve Bank’s decision to extinguish these bonds. The petitioners have argued that the total write-down of AT1 bonds, treating these instruments below equity is not fair. Besides Axis Trustee, Larsen & Toubro and Indiabulls Housing Finance too have reportedly moved the Bombay High Court separately against the AT1 bond writedown decision.

Industry cautious

The AT1 bond write-down will not end with Yes Bank alone. This will likely rattle investors in AT1 bonds of other banks as well, bond dealers said. Private lender IndusInd had deferred its fundraising plan post the Yes bank collapse. Bondholders have invested a total of nearly Rs 94,000 crore in AT1 bonds issued by Indian banks, according to rating agency ICRA. AT1 bonds, also called perpetual bonds, are considered quasi-equity instruments and are riskier than Tier 1 bonds.

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