Yes Bank AT1 Bonds: What the Supreme Court Verdict Means for Investors

The Supreme Court has refused to let Yes Bank's 2020 write-off of ₹8,415 crore of AT1 bonds stand. On 15 October 2026, a bench of Justices Dipankar Datta and Augustine George Masih dismissed appeals from Yes Bank, the RBI and the Union government, upholding the Bombay High Court's January 2023 order that had quashed the write-down. The ruling is final in its core finding, but what it costs the bank, and who gets paid what, is still open.

What actually happened in 2020

When Yes Bank neared collapse in March 2020, the government and RBI put together a reconstruction scheme. An administrator then wrote off the bank's Additional Tier 1 (AT1) bonds, instruments the bank had issued in 2016 and 2017. Holders, many of them retail and high-net-worth investors who had been sold the bonds as high-yield paper, saw their principal wiped out overnight.

SBI put roughly ₹8,000 crore into the bank during the rescue. According to submissions made by the government side, that investment was made on the understanding that the AT1 bonds would be written down.

Why the Court struck it down

The judgment turns on authority, not on whether AT1 bonds can ever be written down. The draft reconstruction scheme contained a clause allowing the write-down. The Centre removed that clause from the final scheme it sanctioned on 13 March 2020. The Court held that, with the clause gone, the administrator had no specific power to extinguish the bonds, and that a general provision preserving existing contracts could not fill the gap. It also found the write-down did not comply with the RBI master circular and the bond terms.

This is a procedural defect with a large financial consequence. The regulator did not lose an argument about whether loss-absorption is legitimate. It lost an argument about whether the paperwork gave the administrator the power to do it.

What the ruling does not settle

Do not read the verdict as a cheque for ₹8,415 crore. Reports indicate the Court did not order immediate cash repayment and did not put a number on any liability for coupons missed since 2020. How the bonds are restored, whether in cash, through a debt-to-equity route or by some other mechanism, remains to be worked out.

Yes Bank has told exchanges it is examining the judgment, and reports say it is preparing to seek a review, with the RBI reportedly weighing whether to join. Review petitions rarely succeed, but they do add months of uncertainty.

Why capital ratios are the pressure point

AT1 bonds count as regulatory capital. When they were written off, they stopped sitting in the bank's capital stack as a liability that could be claimed. Reinstating them reverses that accounting. Yes Bank has said that restoring the full principal would lower its CET1 ratio by about 250 basis points on a pro-forma basis. That figure is an estimate, not a loss already booked.

CET1, or Common Equity Tier 1, is the core measure of a bank's loss-absorbing strength. A drop of that size does not by itself signal distress, since it depends on where the ratio starts and on how any restoration is structured. But it explains why the market reacted sharply on the day. Different outlets reported Yes Bank's shares falling somewhere between roughly 15% and 20% intraday, a reminder that the market priced in uncertainty, not a known number.

What this means for AT1 bonds in general

AT1 bonds are perpetual, pay a higher coupon than ordinary bank bonds, and are designed to be written down or converted when a bank's capital falls below a trigger or when the regulator judges it non-viable. That risk is the reason for the extra yield. The Yes Bank case shows the second layer of risk: even when a write-down is permitted in principle, it has to follow the exact legal route laid out in the bond terms, the RBI rules and, in a reconstruction, the sanctioned scheme.

The verdict therefore cuts both ways for the market. Holders of other AT1 paper have a stronger argument that regulators and administrators must follow their own documents to the letter. Issuers and regulators, in turn, have a clearer reason to draft reconstruction schemes precisely, because an omission can be expensive years later.

The retail investor angle

Most individual investors never meet this risk directly, because AT1 bonds are typically issued to institutions and larger investors, and SEBI tightened rules on how they are sold after the Yes Bank episode. The exposure is more likely to arrive indirectly. Some debt mutual funds and portfolios have held bank AT1 and Tier 2 paper, and a fund's holdings list will show it.

If you hold a debt fund, check its portfolio disclosure for perpetual or AT1 instruments and look at what share of the fund they make up. A fund that stays almost entirely in sovereign and top-rated corporate paper carries a different risk from one reaching for higher yield in subordinated bank debt. Neither is wrong by definition, but they are not the same product, and the yield gap exists for a reason.

Watch the next two things on the calendar: whether Yes Bank files its review petition, and what the bank's next quarterly disclosure says about how it plans to treat the bonds in its capital computation. Those two documents will tell you far more than the headline did.