VIEW | Uncertain period ahead for Yes Bank shareholders and bond holders

Shares of Yes Bank on Monday and thereafter will react not only to the third quarter results but also to the judgment of the Bombay High Court, quashing the writing down of Rs 8,300 crore of Additional Tier 1 (AT1) bonds by the bank's administrator on June 14, 2020.

While Yes Bank has said it will contest the decision in the Supreme Court, it still means several months of uncertainty for its investors.

The High Court has held that while the Reserve Bank of India's (RBI) draft resolution contained the writing down of the bonds, this clause was dropped by the government in its final order on the reconstruction of the bank. Hence, the court ruled that the administrator acted beyond his powers by writing down the bonds on the day after the reconstitution of the bank became effective.

Legal eagles say the bank and RBI may still have a good chance of defending the writing down of the bonds in the Supreme Court. They contend that the AT1 bonds are a contract between two private parties (the bank and the bond investors), and the contract allows for writing down the bonds if the bank becomes non-viable. The act of reconstitution of the bank proves the bank's non-viability, which in turn triggers the writing down of the bonds. The administrator was well within his powers to write down the bonds.

However, should the Supreme Court agree with the High Court, the bank faces the prospect of paying out a maximum of Rs 8,300 crore to bond holders. (The bank's profit in Q3 was Rs 51.5 crore). It's also possible the payout could be lower. And it is equally likely the Supreme Court rejects the purely legalistic view of the Bombay High Court.

But for investors, it's a tortuous period of uncertainty. Also, most other banks have reported spectacular results; hence, investors have many alternatives in the same sector to choose from.

Yes Bank’s results too were not as spectacular as that of most other banks. Slippages have risen sharply and the bank’s loan growth at 10.4 percent is below the sector’s growth of 17 percent.

The positive is the Court’s order doesn't make any reference to the misselling of the bonds by Yes Bank in its final order., even though it notes that the petitioner had put forth that argument.