Yes Bank AT1 writedown impact on mutual funds
In March 2020, the Reserve Bank of India’s Yes Bank rescue plan included a complete writedown of Additional Tier-1 (AT1) bonds issued by Yes Bank, causing approximately Rs 8,415 crore in losses to mutual funds and other AT1 holders. The writedown was a watershed event in Indian bond markets, demonstrating that AT1 bonds (perpetual bonds with loss-absorption features) carried real default risk despite their “regulatory capital” status.
For Indian mutual fund investors, the Yes Bank AT1 writedown caused significant NAV mark-downs in debt schemes that had invested in Yes Bank AT1 bonds. The event reshaped Indian mutual fund AT1 investment practices and led to regulatory tightening.
Background
Yes Bank crisis
By early 2020:
- Yes Bank faced mounting asset-quality concerns.
- Promoter and management changes.
- Deposit outflows accelerating.
- Stock price collapsed.
In March 2020:
- RBI placed Yes Bank under moratorium.
- A consortium-led rescue plan (involving SBI, ICICI Bank, Axis Bank, Kotak, HDFC, HSBC, others) was announced.
- The rescue plan included writedown of AT1 bonds.
AT1 bonds
AT1 (Additional Tier-1) bonds are:
- Perpetual bonds: No fixed maturity.
- Subordinated: Junior to deposits and other senior debt.
- Loss-absorbing: Can be written down or converted to equity in crisis.
- Counted as Tier-1 regulatory capital: For bank capital adequacy.
Yes Bank AT1 bonds carried these features but were sold to many investors as “near-bond” instruments. Many investors were unaware of the loss-absorption risk.
The writedown
Rescue plan provision
The Yes Bank rescue plan stipulated:
- Complete writedown of AT1 bonds (100% loss).
- Rationale: AT1 bonds were designed to absorb losses in crisis.
Scale of loss
- Total AT1 bonds outstanding: ~Rs 8,415 crore.
- Mutual fund holdings: ~Rs 2,800 crore.
- Other institutional and retail holdings: ~Rs 5,615 crore.
Mutual funds affected
Notable AMCs with Yes Bank AT1 exposure:
- Nippon India / Reliance: Significant.
- Franklin Templeton: Notable.
- Aditya Birla: Some exposure.
- DSP: Some exposure.
- Others.
Legal challenges
AT1 holder lawsuits
AT1 holders, especially mutual funds, challenged the writedown:
- Bombay High Court: Initially favoured the writedown.
- Securities Appellate Tribunal (SAT): Mixed rulings.
- Eventual settlement: Partial recoveries for some holders.
Investor protection issues
The event raised concerns:
- Many retail investors had been mis-sold AT1 bonds as safe-deposit-like products.
- SEBI investigated mis-selling.
- AMFI / SEBI guidelines on AT1 disclosure tightened.
Policy implications
AT1 investment in mutual funds
SEBI tightened guidelines:
- Mutual fund AT1 holdings: Maximum 10% of debt scheme AUM in AT1/perpetual bonds.
- AT1 designation: Bonds must be clearly disclosed as AT1 with loss-absorption risk.
Risk-O-Meter
Subsequent updates to AMFI Risk-O-Meter reflected AT1 risk more accurately.
Disclosure standards
Factsheet and SID disclosures now include:
- AT1 / perpetual bond exposure breakdown.
- Loss-absorption risk warning.
Lasting impact
Mutual fund AT1 holdings
- Reduced AT1 holdings in debt schemes.
- Higher-quality bias on banking-PSU debt funds.
- Investor awareness of perpetual bond risk improved.
Bank AT1 issuance
- Indian banks continued AT1 issuance but with revised pricing.
- Higher yields demanded post-writedown.
- More sophisticated investor base.
Yes Bank itself
Yes Bank recovered post-rescue with new management, continued operations as a smaller bank.
See also
- Mutual funds in India
- Franklin Templeton April 2020 wind-up
- IL&FS default impact (2018)
- DHFL default impact
- JPM Amtek incident (2015)
- Side-pocketing introduction (2018)
- CDMDF
- Credit quality buckets
- AMFI Risk-O-Meter
- Banking and PSU debt funds
- Debt mutual fund taxation (post-2023)
- SEBI
External references
References
- RBI Yes Bank rescue plan documentation.
- SEBI master circular on AT1 bond holdings in mutual funds.
- AMFI Best Practice Guidelines on AT1 disclosure.