Yes Bank AT-1 Bonds: Why SC Quashed the Write-Down

News reference: the Supreme Court verdict of 15 October 2026 (2026 INSC 1132); the bank's and the rating agency's reactions 16-20 October 2026 | Economy - Banking | GS-III

To save a bank, its investors' money can be written off - but by whom, when and by what process? Quashing the write-down of Yes Bank's ₹8,415 crore of AT-1 bonds, the Supreme Court has said that even in a crisis, the power and the method of its use are two different things. This verdict is a lesson in three things: banking regulation, investor protection and regulatory accountability.

Why in the News

On 15 October 2026, the Supreme Court dismissed the appeals of Yes Bank, the Reserve Bank of India (RBI) and the Government of India, and upheld the Bombay High Court's verdict of 20 January 2023, which had declared the write-down of Yes Bank's AT-1 bonds in March 2020 illegal. The bench of Justice Dipankar Datta and Justice Augustine George Masih made clear that bondholders will keep receiving annual coupon payments as per the Information Memorandum. After the verdict, Yes Bank stated on 16 October 2026 that this will affect its CET1 capital ratio by about 250 basis points (as of the position on 30 June 2026), while the overall Tier-1 ratio will remain unchanged at 14 percent; on 20 October 2026, Moody's estimated CET1 to fall from 13.7 percent to 11.4 percent (September 2026, pro forma position) and kept the bank's Ba1 deposit rating with a stable outlook.

What are AT-1 bonds?

Additional Tier-1 (AT-1) bonds are perpetual debt instruments issued by banks - they have no maturity date and the coupon payment can be deferred at the bank's discretion. After the global financial crisis of 2008, they were designed in the Basel-III framework of the Basel Committee (BCBS, Basel, Switzerland) as a bank's 'going-concern capital': on the arrival of a crisis, these bonds can absorb losses - by converting into equity or being written off permanently. At the time of the events of this case (2016-2020) and of the rules examined in the verdict, they were governed by RBI's Master Circular - Basel III Capital Regulations (1 July 2015); the analysis of the verdict is based on this very circular and the bonds' Information Memorandum. (Currently, the authoritative norms of capital adequacy for commercial banks are in RBI's Commercial Banks - Prudential Norms on Capital Adequacy Directions, 2025 - the version updated up to 7 October 2026; this article does not detail those new norms.)

Background of the case

According to the facts recorded in the verdict, Yes Bank issued Basel-III compliant AT-1 bonds of ₹3,000 crore (9.5 percent coupon) on 23 December 2016 and ₹5,415 crore (9.0 percent coupon) on 18 October 2017 - ₹8,415 crore in all; the trustee was Axis Trustee Services. The bank's financial position deteriorated fast: on 31 December 2019 its CET1 ratio fell to merely 0.6 percent against the required 7.375 percent. On 5 March 2020 the central government imposed a moratorium under Section 45 of the Banking Regulation Act, 1949, and the RBI superseded the board under Section 36ACA and appointed an administrator.

On 6 March 2020 the draft reconstruction scheme was put out for public comment, containing an AT-1 bond write-down clause. On 9 March, Axis Trustee filed a petition in the Bombay High Court. During this period, an internal note of the central government (quoted by the court) said that for AT-1 bonds the RBI's existing rules and the bond terms apply, so no separate provision should be kept in the scheme - the related clause of the draft could be removed. On 13 March 2020, the final 'Yes Bank Limited Reconstruction Scheme, 2020' was notified - without the write-down clause. The very next day, 14 March 2020, the administrator wrote down the AT-1 bonds completely and informed the stock markets.

What the court said: the power is one thing, the method another

The first question - had later events made the case irrelevant? The bank's argument was that the reconstruction succeeded, SBI invested capital and sold its stake at a profit after the three-year lock-in, so the verdict no longer means anything. The court said: the validity of an administrative action is tested by the position on that day and the law of that day; later events cannot change it.

The second question - did the administrator have the power? The court accepted that removing the clause between the draft and the final scheme was the central government's considered decision. Under Section 36ACA the administrator is a substitute for the board - its power is limited to running the company; it cannot assume the RBI's regulatory role. On a reading of the Master Circular and the Information Memorandum, the court's conclusion: on the predetermined trigger (CET1 going below 6.125 percent), the bank had an option - it did not use it; at the point of non-viability (PONV), the decision to write down was for the RBI to make - it did not. The administrator exercised a power it simply did not have.

The third question - was the process in line with the rules? The court held that clause 2.15 of the Master Circular (an AT-1 write-down 'before reconstruction' on a Section 45 reconstruction) means before the scheme takes effect, not at any point during a years-long course of reconstruction; otherwise investors will be forced to keep thinking at which moment the guillotine's blade will fall on them (para 63). For comparison, the court gave the example of Lakshmi Vilas Bank: there, Tier-2 bonds of ₹318.20 crore were written down on 26 November 2020 - exactly one day before the merger scheme with DBS took effect. Justice Datta wrote: the need for crisis resolution (bail-in/bail-out) gave the right to write down the bonds, not the method.

A comment on regulatory accountability: the court called the role of the RBI, the administrator and Yes Bank "surrounded by question marks" - the RBI remained a "mere spectator" until CET1 fell to 0.6 percent. The court also noted that AT-1 bonds are high-risk securities made for institutional investors, yet Yes Bank actively sold them to individual investors; SEBI had imposed a penalty on a wealth-management firm and the bank's then managing director in this connection.

What happens next?

With the bonds restored, the capital calculation will change: the bank stated on 16 October 2026 that the effect on CET1 will be about 250 basis points (on the 30 June 2026 position, including profit), but the overall Tier-1 ratio will remain at 14 percent - because the restored bonds will be counted in regulatory capital. According to Moody's (20 October 2026), CET1 will fall from 13.7 percent to 11.4 percent (September 2026, pro forma); the agency kept the deposit rating Ba1 stable. The bank has said it will study the verdict and make appropriate disclosures. According to legal experts, the bank has the limited option of a review petition within 30 days. The direct meaning for bondholders: annual coupon payments will continue as per the Information Memorandum.

Dimensions of the debate

Crisis resolution versus investor protection: in para 78 the court called the purpose of AT-1 bonds a safety barrier that saves a bank from complete collapse, and added that this purpose could have been fulfilled even then, if the RBI and Yes Bank had acted in accordance with the Master Circular's conditions. That is, the dispute was not of the purpose but of the process: the right authority (the RBI), the right time (before the scheme took effect), the right document (the Master Circular and the Information Memorandum). In para 83 the court also made clear that its comments are only for the decision of these appeals - pending proceedings can reach their logical outcome unaffected by them.

Protection of retail investors: the sale of a high-risk, complex institutional product to individual investors - on which the court made a sharp comment - raises again the old question of product suitability and risk disclosure in capital-market regulation.

The regulator's role: the verdict's "spectator" comment about the RBI brings forward the debate on how early and how deep regulatory intervention should be at the first signs of a crisis.

Conclusion

The Yes Bank AT-1 case is a lesson at three levels: in bank-crisis resolution, a separate examination of method along with power is necessary; regulatory power should be exercised only by the one to whom the law has entrusted it; and in the sale of complex financial products, investor protection is the first condition. From the exam's perspective, this case links Basel-III, Sections 45/36ACA of the Banking Regulation Act and the inter-relation of investor protection.

Answer Outline

Introduction: the structure of AT-1 bonds and the Basel-III purpose.

Main Body: the Yes Bank timeline (moratorium, scheme, write-down); the court's power-versus-method analysis (the administrator's limit, the RBI's role, the meaning of the removed clause); the dimensions of procedural governance; investor protection and the issue of retail sale.

Conclusion: Regulatory authority and lawful procedure must go together in crisis resolution. Include investor protection and responsibility for retail sales in the assessment.

Prelims Practice

Consider the following statements:

Statement 1: AT-1 bonds are perpetual debt instruments that have no fixed maturity date.
Statement 2: Under the rules examined in this case, the decision on a write-off of AT-1 bonds at the point of non-viability (PONV) was made by the board of the bank concerned.
Statement 3: Under Section 45 of the Banking Regulation Act, 1949, the central government can impose a moratorium on a bank.

Which of the above statements are correct?
(a) Only 1 and 3
(b) Only 2 and 3
(c) Only 1 and 2
(d) 1, 2 and 3

See answer and reason

Answer: (a) Only 1 and 3.

Statement 2 is wrong - under the 2015 Master Circular and that reading of the Information Memorandum which the Supreme Court adopted in this case, the decision on a write-off at PONV and its amount are fixed by the RBI, not the bank's board; this very distinction is the essence of the verdict.

Sources

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