Investors have lost their life savings in bonds of Yes Bank

Four institutional and three individual investors challenged the decision of Yes Bank Limited to write off AT1 bonds from their books in the Bombay High Court. The decision to write off was quashed. Apparently, Yes Bank Limited had sold these bonds to individual investors (apart from institutional investors), terming it as Super Fixed Deposits.

Commenting on the judgment of Bombay High Court, Yes Bank MD & CEO Prashant Kumar said that there was no compulsion on the bank to pay interest on or redeem its additional tier-1 (AT1) bonds, which are the subject of litigation with investors. While commenting on the possible impact on the balance sheet of the bank, he said that “the worst case scenario for the bank was that the common equity tier-1 capital – consisting of pure equity without any subordinate debt – would come down. However the capital adequacy would be maintained as the AT1 capital increases.”

He has also claimed that it is the discretion of the bank to pay coupon (interest) on the bonds and there is no cumulative nature of coupon payment and in a financial year when the bank is in losses, the bank cannot pay the coupon.

It is true that the information memorandum submitted to SEBI at the time of AT1 bond issue contains the following terms and conditions: (Section 3.f) “Non-Payment due to Bank’s weak capital position: Potential investors should be aware that in case the Bank’s capital falls below the regulatory requirements, it may not make the payment of the coupon due on the Debentures. The Bank can exercise the said right at an early stage of risk detection.”

The following was also there under Clause 54 of the Information memorandum: “Coupon Discretion (i) The Bank shall have full discretion at all times to cancel Coupon either in part or full. On cancellation of payment of Coupon, these payments shall be extinguished and the Bank shall have no obligation to make any distribution/Coupon payment in cash or kind. (ii) The Bonds do not carry a ‘dividend pusher’ feature i.e. if the Bank makes any payment (coupon/dividend) on any other capital instrument or share, the Bank shall not be obligated to make Coupon payment on the Bonds…..”

Hence, the above statement from the bank’s spokesperson is perfectly right. But there is another dimension to the cancellation of write-off. At the time of writing off AT1 bond from the books, the bank could have taken the amount to its Profit and Loss Account. Now when the court has disallowed the write off, the reversal entry will be to debit the Profit and Loss Account and bring back the AT1 bond outstanding under Liability.

Hence, the bottom line in the balance sheet will take a hit. The spokesman from the bank has not clarified how the bank will account for it now and what will be its impact.

It is clear from the terms of the AT1 bonds that the bank can decide not to pay any coupon (interest) on the bonds for any number of years. It can also decide to write off the bonds, of course subject to conditions of wiping out equity capital also. Which individual investor could have subscribed for the bond, if she knew that the bank might not pay any interest or even might not pay the principal at all?

It is understood that the bank will approach the Supreme Court against the High Court verdict. It may take any number of years to get the final verdict. Both the regulators, SEBI and RBI, may at least direct the bank for payment of coupon on the debentures to individual investors. Most of these individuals are senior citizens above the age of 70 years and they had given their entire life savings because they were mis-sold these bonds.

(The author is a retired banker)