Additional Tier-I Bonds

Additional Tier-I Bonds

News: The Bombay HC quashed the write-off of Additional Tier-1 (AT1) bonds worth Rs 8,400 crore issued by Yes Bank Ltd, bringing relief to investors. 

What is the issue?
• Yes Bank, which was on the verge of collapse, was placed under a moratorium by the RBI in 2020 and a new management and board were appointed as part of a rescue plan worked out by the RBI.
• The central bank allowed a write-off of Rs 8,400 crore on AT1 bonds issued by Yes Bank after it was rescued by the SBI.
• A SEBI probe found that the bank facilitated the selling of AT1 bonds (as a ‘Super FD’ and ‘as safe as FD’) from institutional investors to individual investors, who were not informed about all the risks involved in the subscription of these bonds.

What are AT-I Bonds?
• AT-I Bonds are unsecured bonds (issued by banks) that have perpetual tenor (no maturity date). These bonds are typically used by banks to bolster their core or tier-1 capital.
• Tier I capital is a bank’s highest quality capital because it is fully available to cover losses and is made up primarily of share capital and disclosed reserves.
• They have a call option, which can be used by the banks to buy these bonds back from investors.
• These bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) were among the largest investors in perpetual debt instruments.