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AT-1 bonds: Supreme Court upholds quashing of Yes Bank write-down

By CAShorts DeskPublished Sources: Supreme Court judgment (2026 INSC 1132); RBI capital adequacy Directions and draft scheme; Business Standard; Business Today; Value Research; Verdictum

AT-1 bonds: Supreme Court upholds quashing of Yes Bank write-down
Illustration (AI-generated)

The Supreme Court on 15 October 2026 dismissed appeals by Yes Bank, the Reserve Bank of India and the Centre, leaving intact the Bombay High Court's 2023 ruling that quashed the March 2020 write-down of Rs 8,415 crore of Additional Tier 1 (AT-1) bonds. At the point of non-viability, it held, only the RBI, not the administrator, could order it.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Current Affairs & IR; GS2 · Statutory & Regulatory Bodies

Why this matters for UPSC

GS3 Economy, banking: Prelims can ask what AT-1 bonds are, the Basel III capital tiers and the point of non-viability trigger; Mains, how section 45 rescues balance depositors, bondholders and the RBI's powers.

Why it matters

An individual who put savings into Yes Bank's AT-1 bonds saw them wiped out overnight in March 2020. The ruling restores that claim, and the court said the annual coupons must be paid as the bond terms provide. For banks, these bonds are a cheap way to raise capital precisely because investors agree to bear losses in a crisis. The judgment does not change that bargain; it says the loss can be imposed only by the authority, and at the moment, that the rules name. That clarity may make investors more willing to buy such bonds, but it also warns regulators that a rushed rescue can be undone years later. The larger question is how to save a failing bank quickly without overriding the law.

Prelims pointers

  • RBI capital minima: CET1 at least 5.5%, Tier 1 at least 7% and total capital (CRAR) at least 9% of risk-weighted assets.
  • Capital Conservation Buffer: an extra 2.5% of risk-weighted assets that a bank must hold in the form of CET1 capital.
  • Within the 7% Tier 1 minimum, AT-1 capital counts up to 1.5% of risk-weighted assets; Tier 2 counts up to 2% within the 9% minimum.
  • AT-1 instruments in India: Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDIs); no put option, call after five years with RBI approval.
  • Pre-specified trigger for AT-1 conversion or write-down: CET1 falling below 6.125% of risk-weighted assets; CET1 need not be written down first.
  • PONV trigger: the earlier of an RBI decision that write-off or conversion is needed, or a decision to inject public capital to keep the bank viable.
  • Section 36ACA, Banking Regulation Act: the RBI, consulting the Centre, may supersede a bank's board for up to six months, extendable to twelve in all.
  • Section 45, Banking Regulation Act: the Centre orders a moratorium on the RBI's application; the RBI frames the reconstruction scheme; the Centre sanctions and notifies it.

Practise a UPSC-style question

With reference to bank capital under the Basel III framework as applied in India, consider the following statements:

1. Within the minimum Tier 1 ratio of 7 per cent, Additional Tier 1 capital can be counted up to 2.5 per cent of risk-weighted assets.

2. Tier 1 capital is treated as going-concern capital, while Tier 2 capital is treated as gone-concern capital.

Which of the statements given above is/are correct?

  1. (a) 1 only
  2. (b) 2 only
  3. (c) Both 1 and 2
  4. (d) Neither 1 nor 2
Show the answer

Answer: (b) 2 only

Answer: (b) 2 only. AT-1 is capped at 1.5 per cent within Tier 1, and Tier 1 absorbs losses while the bank runs.

Statement 1: incorrect. CET1 must be at least 5.5 per cent and Tier 1 at least 7 per cent, so AT-1 counts up to 1.5 per cent of risk-weighted assets; 2.5 per cent is the Capital Conservation Buffer.

Statement 2: correct. The RBI's capital rules call Tier 1 (CET1 plus AT-1) going-concern capital and Tier 2 gone-concern capital, which absorbs losses in liquidation.

Eliminate: Judge statement 1 first: 7 minus 5.5 leaves 1.5 per cent, so statement 1 is incorrect. Out: (a), (c).

Eliminate: Statement 2 is the standard split of regulatory capital, so it is correct. Out: (d).

Trap: Near-miss figure. The 2.5 per cent of the Capital Conservation Buffer is planted in place of the 1.5 per cent cap on AT-1.

Remember: CET1 5.5 + AT-1 1.5 = Tier 1 7; plus Tier 2 2 = CRAR 9; CCB 2.5 on top.

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