Updated: March 7, 2020 7:07:53 am
With the RBI announcing its decision to permanently write down the Additional Tier 1 (AT1) capital raised by Yes Bank and, effectively, putting the entire Rs 10,800 crore worth of AT1 at risk, the impacted subscribers are set to approach the courts.
Those impacted include Nippon Life India AMC, mutual fund house Franklin Templeton, UTI Mutual Fund, SBI Pension Fund Trust and Indiabulls Housing Finance among others. These, among others, had invested in bonds issued by Yes Bank that qualified as AT1 that now stands written down permanently.
Announcing its reconstruction scheme, the RBI said: “The instruments qualifying as Additional Tier 1 capital, issued by the Yes Bank Ltd. under Basel III framework, shall stand written down permanently, in full, with effect from the Appointed date. This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework. No accountholder shall be entitled to get any compensation from the Reconstructed bank on account of the changes occurred in the Reconstructed bank by virtue of the Scheme.”
This is in sharp contrast to what the bank itself had said when it sought AT1 capital. Its information memorandum for one AT1 instrument said that “the claims of the bondholders in bonds shall be superior to the claims of investors in equity shares and perpetual non-cumulative preference shares issued by the bank.” In other words, as a CEO of a bondholder told The Indian Express: “This memorandum implies clearly that unless the equity is Zero, bond holders can’t be Zero.”
So the matter is set to reach the courts and a top official of one of the subscribers of Yes Bank’s AT1 bonds said it could come as early as Monday morning.
For bondholders, the stakes are high.
Sources said while Nippon Life India AMC has exposure of around Rs 2,480 crore to NCDs issued by Yes Bank that qualify as AT1, Indiabulls Housing Finance has holds bonds amounting to Rs 600 crore. SBI PF Trust also holds AT1 Bonds worth Rs 97 crore issued by the beleaguered bank. Others that have exposure to AT1 bonds of the bank include Templeton MF, UTI MF among others. Even high net worth individuals and retail investors have exposure to these bonds.
Shares of Nippon Life India Asset Management fell 10.6 per cent. Indiabulls Housing share price, too, fell by 10.9 per cent on Friday.
According to Basel III definition of capital, “Additional Tier 1 capital is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors”.
However, mutual fund companies questioned this aspect of the plan. Said the CEO of a leading MF who did not wish to be named: “This is the first time when AT1 bonds are written-off ahead of equity. Equity shareholders will still own 51 per cent of restructured bank but AT1 bond holders will suffer full loss. This will shut down AT1 market. Most PSU banks can’t access equity capital market other than from LIC. With this step they won’t be able to participate in debt market as well. This is a retrograde step.”
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