The Reserve Bank of India has defended its decision to write off additional tier-1 bonds issued by Yes Bank Ltd., saying the decision was in keeping with regulations governing such securities and the information memorandum issued to investors at the time of investment. It was “at best an investment decision gone wrong” for which investors can neither blame the regulator nor seek compensation from the lender, the regulator has argued.
The arguments came in an affidavit filed by the RBI in the Madras High Court in response to a petition filed by 63 Moons Technologies Ltd. challenging the decision. 63 Moons Technology had invested Rs 300 crore in AT-1 bonds issued by Yes Bank. AT-1 bonds worth Rs 8,415 crore were completely written off after a scheme of reconstruction for the bank was approved by the government and the RBI.
BloombergQuint has reviewed a copy of the affidavit. The petitioner’s case is undeserving of any relief, interim or final, as it is contrary to both the Basel-III Circular and the terms of the Information Memorandum. It amounts to seeking interference with an economic policy decision of experts. Further, it is submitted that even the principle of estoppel and public interest are opposed to any relief being granted. The principle of estoppel is a legal principle which prohibits a person from arguing or asserting a right which contradicts something they previously agreed upon. In this case, the RBI argues, the bondholders agreed to the conditions specified in the information memorandum. AT-1 Bonds Fall Under Basel-III Norms
A key argument made by the RBI is that AT-1 bonds fall under the Basel-III regulations, issued by the central bank in 2015. The RBI argues that the Basel-III circular has statutory force and there is no challenge to that circular.
According to Basel-III rules, such AT-1 bonds are required to absorb losses as per the specified trigger and at point of non-viability (PONV). The banks issuing such AT-1 bonds have discretion to even skip payment of coupon payment when capital falls below a specified trigger.
To compensate for the higher risks, these bonds carry a higher interest rate. It is clear that the AT-1 bonds carry higher risk for which interest rate is also on the higher side. Investors in such financial instruments are by nature savvy, with risk appetite and cognizant of the high reward – high risk principle. Separately, the RBI argued that since the […]