The long-running legal battle over Yes Bank's written-off AT-1 bonds is heading back to India's Supreme Court, after the bondholders' trustee accused the lender of failing to deliver a concrete plan to restore them.
Axis Trustee Services, which represents the bondholders, filed a contempt petition on November 6, according to Reuters, saying Yes Bank has not provided a “concrete roadmap” to restore or reactivate the 84 billion rupees (about $896 million) of additional tier 1 (AT-1) bonds. The trustee is asking the court to issue directions and alleges noncompliance by the bank and some officials.
The move follows a Supreme Court ruling last month that upheld a 2023 Bombay High Court decision setting aside the write-off of these bonds. But the courtroom victory, the trustee argues, has not translated into action.
What are AT-1 bonds and why were they written off?
AT-1 bonds are a type of bank debt designed to absorb losses in a crisis. They sit in a regulatory capital tier that can be written down or converted into equity if a bank's capital falls below a certain threshold. This feature is what makes them “loss-absorbing” — and it's also what makes them riskier than ordinary bonds, which is why they typically offer higher yields.
In Yes Bank's case, the Reserve Bank of India orchestrated a rescue in 2020 after the lender's financial health deteriorated sharply. As part of that bailout, the AT-1 bonds were written off entirely, while shareholders mainly faced restrictions on selling their stock. The write-off was meant to help recapitalise the bank without using taxpayer money.
But bondholders challenged the move, arguing that the write-off was unfair and that the terms of the bonds had not been properly followed. The Bombay High Court agreed in 2023, setting the write-off aside. The Supreme Court's recent ruling upheld that decision, but the practical details of how the bonds would be restored — and what happens to interest payments — remain unresolved.
Why the case matters for investors
For everyday investors, the key issue is what this means for the broader market in AT-1 bonds, which are issued by banks across India and globally. These instruments only work as crisis-ready capital if investors believe the rules are clear, predictable, and hard to contest. When a court overturns a write-off, and trustees have to go back to the Supreme Court because there's still no restoration plan, investors start to price in extra legal and process risk on top of ordinary default risk.
In practice, that can mean buyers demand higher yields for new AT-1 deals, or some investors step back entirely. The knock-on effect is simple: if this layer of regulatory capital gets more expensive or harder to issue, banks may have to rethink how they build balance-sheet buffers and what it costs them to do so.
This is not just a Yes Bank problem. Indian banks have been active in the bond market recently, with institutions like PFC planning a large bond sale and PNB Housing Finance issuing notes to meet demand. If AT-1 issuance becomes more expensive, it could ripple through the broader funding landscape.
What happens next?
The Supreme Court will now have to decide whether Yes Bank has complied with its earlier order. The contempt petition adds a new layer of legal pressure on the lender, which has said it is committed to resolving the matter but has not yet laid out a specific plan.
For investors, the case is a reminder that even seemingly settled legal victories can take time to translate into actual payments. The uncertainty also highlights the risks inherent in AT-1 bonds, which are designed to be loss-absorbing but whose triggers and processes can be challenged in court.
As the case unfolds, market watchers will be looking for clarity on two fronts: how Yes Bank plans to restore the bonds, and whether the Supreme Court's decision will set a precedent that affects how AT-1 bonds are structured and sold in the future. For now, the message for investors is to understand the risks of these instruments — and to keep an eye on how this legal saga develops.
