The Supreme Court's judgment in the Yes Bank AT1 bond matter, delivered on Thursday, restored the bonds that had been valued at zero since March 2020. The court upheld the Bombay High Court's 2023 order that had quashed the decision of the YES Bank administrator to write down the AT1 bonds during the bank's reconstruction. According to The Hindu BusinessLine, nearly six years after many investors had written off any hope of recovery, the verdict has come as major relief for mutual funds, financial institutions and retail investors. The fund houses confirmed that the Supreme Court's latest judgment has restored the bonds, prompting them to review the implications for the schemes and move swiftly to safeguard investor interests.
Kotak Mahindra Asset Management Company and Nippon India Mutual Fund have temporarily halted fresh subscriptions in certain debt schemes that still hold exposure to the securities. As reported by The Hindu BusinessLine, Kotak Mahindra Mutual Fund had exposure of about ₹2,680 crore to the bonds, while Nippon India Mutual Fund's exposure stood at around ₹2,150 crore. Both fund houses specifically halted fresh lumpsum and switch-in transactions, as well as fresh SIP/STP registrations, with the move aimed at preventing new investors from benefiting from a potential windfall that rightfully belongs to existing unitholders. Nippon India Mutual Fund stated that it was holding YES Bank AT1 bonds in the Nippon India Retirement Fund Wealth Creation Scheme, which was not segregated and was valued at nil after the RBI had passed an order to write them off.
In contrast to the suspension approach, Franklin Templeton had adopted a different strategy when the crisis unfolded in March 2020. The fund house, which had exposure of about ₹590 crore to the bonds across three debt schemes, created a segregated portfolio on March 6, 2020, and issued separate units to investors who held the schemes on that date. According to The Hindu BusinessLine, Franklin Templeton stated that any amounts realised from these bonds will be distributed to unit-holders of the respective segregated portfolios in proportion to their holdings. Aakanksha Shukla, AVP-Wealth Management at Master Capital Services, noted that the distribution of proceeds will be easier for debt funds that ring-fenced the troubled bonds through a segregated portfolio.
The ruling has brought significant relief to retail investors, with around 1,346 retail investors holding AT1 bonds worth about ₹679 crore. Of these, 1,311 were existing YES Bank customers, including retired employees, senior citizens and homemakers, with investments aggregating around ₹663 crore. As reported by The Hindu BusinessLine, the AT1 bonds, which offered a coupon of 9-9.5 per cent and required a minimum investment of ₹1 crore, had attracted investors seeking a steady annual income. The Supreme Court verdict is expected to provide recovery for investors who had long considered their investments lost. Apart from mutual funds, several institutional investors also stand to gain, with Sammaan Capital expecting to recover about ₹662 crore, while 63 Moons Technologies could recover nearly ₹300 crore.
The Supreme Court's ruling has prompted broader industry caution, with multiple fund managers taking similar precautionary measures. As reported by Business Standard, Kotak Mahindra Asset Management and Nippon Life India Asset Management have paused fresh investments as they review how the SC's decision to overturn the 2020 AT1 bond write-off could affect valuations. Both fund managers are reviewing the judgment and are awaiting clarity on how the bonds would be valued. The funds with total assets worth ₹2,680 crore currently value the AT1 debt at zero market value, with the bonds having been worth around ₹130 crore in March 2020 when Yes Bank's restructuring was finalised. Despite the suspension of new subscriptions, existing investors are protected from the changes, with Kotak MF confirming that existing SIP/STP registrations prior to the effective date will continue as usual.
