SC ruling clarifies Yes Bank AT-1 bonds as debt, raises questions on repayment: Ashvin Parekh

The Supreme Court's (SC) decision to uphold the Bombay High Court's ruling on Yes Bank's Additional Tier-1 (AT-1) bonds has clarified that the instruments are debt securities and cannot be permanently written off, according to Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services.

The verdict is expected to influence how AT-1 bonds are treated in India going forward, while raising implementation questions around repayment of principal, coupon payments and accounting treatment.

Parekh said investors across mutual funds, banks, non-banking financial companies (NBFCs) and institutions stand to benefit from the ruling once the detailed order is examined.

"The instrument has found a character. It's not an equity instrument. Certainly, it's a debt instrument, and it cannot just be written off like that," Parekh said.

He said the judgment also reinforces the right of investors to receive coupon payments, although the exact mechanism will depend on the detailed Supreme Court order and the terms of the information memorandum governing the bonds.

According to Parekh, mutual funds (MFs) were among the largest holders of Yes Bank's AT-1 bonds, and many may have shifted the securities into segregated portfolios while awaiting the outcome of the legal proceedings. Institutional investors, banks, NBFCs, private equity funds and some retail investors also held the securities.

"The interest has to be paid... mutual funds will certainly benefit. Those who've been holding this particular Yes Bank AT-1 bonds will certainly benefit," he said.

Parekh added that banks that had written off or fully provided for their investments in the bonds may now have to reassess their accounting treatment after studying the Supreme Court's order.

Parekh noted that AT-1 bonds are perpetual instruments and redemption remains at the issuer's discretion. However, he believes both the principal amount and accrued interest will ultimately have to be restored.

He said that questions remain over whether six years of unpaid interest will be settled in one payment or through a phased approach.

He also highlighted practical challenges, particularly for mutual funds, which may need to identify investors who held units at the time the bonds were written down in 2020 before determining how any restoration of value should be distributed.

Parekh said greater clarity is expected once the detailed Supreme Court judgment is released and examined by market participants.

For the full interview, watch the accompanying video

Catch all the latest updates from the stock market here