Additional Tier-1 bonds, and the case against Yes Bank

What are AT1 bonds?

AT1 bonds are unsecured bonds that have perpetual tenor. In other words, these bonds, issued by banks, have no maturity date. They have a call option, which can be used by the banks to buy these bonds back from investors. These bonds are typically used by banks to bolster their core or tier-1 capital.

AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) were among the largest investors in perpetual debt instruments.

What led to the write-off?

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Yes Bank, which was on the verge of collapse, was placed under a moratorium by the Reserve Bank of India in March 2020 and a new management and board were appointed as part of a rescue plan worked out by the RBI. The central bank allowed a write-off of Rs 8,400 crore on AT1 bonds issued by Yes Bank after it was rescued by the State Bank of India.

What did Yes Bank do?

A Sebi probe found that the bank facilitated the selling of AT1 bonds from institutional investors to individual investors. It found that during the process of selling the AT1 bonds, individual investors were not informed about all the risks involved in the subscription of these bonds. The Sebi investigation also found that Yes Bank represented these bonds as a ‘Super FD’ and ‘as safe as FD’ to the investors.

SEBI also found that the push from the managing director of Yes Bank to down-sell the AT1 bonds led its private wealth management team to recklessly sell the bonds to individual investors.