AT-1 bonds absorb losses during banking crises, but administrators cannot write them off without explicit authority in the final government-sanctioned scheme.
Additional Tier-1 (AT-1) bonds are high-yield, perpetual debt instruments designed to absorb losses if a bank's core capital drops below statutory regulatory thresholds. When a bank undergoes restructuring, these bonds can be written down or converted into equity, provided the official government-approved reconstruction framework explicitly permits it. In October 2026, the Supreme Court of India established that a bank administrator cannot write off AT-1 bonds on their own authority once a final reconstruction scheme without such a write-off clause has taken effect. Consequently, any write-off executed outside the terms sanctioned by the central government is illegal, preserving bondholders' legal rights to seek recovery.
What's happening now
In October 2026, the Supreme Court of India delivered a landmark judgment upholding the quashing of an Rs 8,415 crore write-off of Additional Tier-1 (AT-1) bonds issued by YES Bank. A bench comprising Justice Dipankar Datta and Justice Augustine George Masih dismissed appeals filed by YES Bank, the Reserve Bank of India (RBI), and the Central Government against a January 2023 Bombay High Court ruling. The decision establishes a clear legal precedent regarding administrator powers and debt priority during banking bailouts.
The dispute stems from the financial collapse of YES Bank in early 2020. On 5 March 2020, the RBI placed the lender under a temporary moratorium and appointed an administrator to oversee operations. To save the bank, the RBI drafted a reconstruction scheme that initially included a clause allowing for the complete write-off of outstanding AT-1 bonds. However, when the Central Government officially notified the final reconstruction scheme on 13 March 2020, the write-off clause had been deleted.
Despite its omission from the final approved scheme, the bank's administrator informed stock exchanges on 14 March 2020 that all outstanding AT-1 bonds worth Rs 8,415 crore had been written down to zero. Debenture trustees acting for institutional investors, mutual funds, and individual retail bondholders promptly challenged the administrator's decision in court. They argued that the administrator possessed no legal authority to extinguish bond liabilities after the final government scheme came into force without explicit statutory authorization.
By confirming that the administrator acted beyond his legal authority, the Supreme Court confirmed that regulatory authorities and bank managers must strictly follow the procedural bounds set by government-sanctioned schemes. Following the announcement of the verdict in October 2026, YES Bank shares fell by up to 15 per cent in trading as market participants reacted to potential liability claims.
How AT-1 bond write-offs work during bank distress
1. Issuance of perpetual bonds Banks issue Additional Tier-1 bonds to raise core capital under Basel III norms. These instruments have no maturity date and pay higher coupon rates because they carry loss-absorption clauses.2. Regulatory intervention If a bank's capital adequacy ratio falls below statutory thresholds or faces acute distress, the Reserve Bank of India steps in. The central bank can impose a moratorium and appoint an administrator under the Banking Regulation Act, 1949.3. Formulation of a reconstruction scheme The RBI prepares a draft restructuring plan outlining recapitalisation, equity induction, and the treatment of debt obligations. This draft is submitted to the Central Government for review and formal notification.4. Sanctioning the final scheme The Central Government reviews feedback and approves the final reconstruction scheme. The terms specified in this government notification legalise every asset revaluation, equity issuance, and debt write-down.5. Execution by the administrator The administrator executes the restructuring strictly within the provisions contained in the notified scheme. If a specific loss-absorption mechanism, such as writing down AT-1 bonds, is omitted from the final government notification, the administrator cannot independently enforce it.
Who it affects
The Supreme Court ruling directly affects institutional investors, mutual fund houses, and thousands of individual retail bondholders in India who had invested Rs 8,415 crore in YES Bank's AT-1 instruments. Mutual funds like Reliance Nippon (now Nippon India Mutual Fund) and individual high-net-worth investors faced severe write-downs in March 2020 when the bank wiped out the debt obligations overnight.
More broadly, the judgment impacts the entire Indian banking sector and its capital-raising capabilities under Basel III guidelines. AT-1 bonds rely heavily on predictable contract terms and transparent write-off triggers. By establishing that regulators cannot erase capital without adhering strictly to statutory schemes, the ruling restores institutional confidence in Indian bank-issued debt instruments.
On a global level, loss-absorption mechanisms in banking resolution have faced scrutiny worldwide, notably following the write-down of Credit Suisse's AT-1 bonds in Switzerland in 2023. The Indian Supreme Court's ruling reinforces the principle that statutory schemes and clear contract terms govern loss absorption, protecting bondholder rights against administrative overreach.
What's being done, and is it working
Supreme Court of India (Working so far): Dismissed appeals from YES Bank, the RBI, and the Centre, upholding the High Court ruling that quashed the write-off. In October 2026, a bench ruled that the administrator lacked legal authority to extinguish AT-1 bonds outside the terms of the final government scheme.
Axis Trustee Services Limited and bondholders (Working so far): Litigated against the unilateral write-down of Rs 8,415 crore worth of AT-1 bonds across multiple court levels. Successfully secured favourable rulings in both the Bombay High Court in January 2023 and the Supreme Court in October 2026.
Reserve Bank of India and Central Government (Not working): Appealed the High Court order to defend the administrator's powers and regulatory discretion during bank bailouts. The Supreme Court rejected their arguments on merits, confirming that administrative powers remain constrained by the notified scheme.
YES Bank Management (Mixed results): Executed the March 2020 write-off under administrator directions and subsequently challenged the quashing order. While the overall 2020 reconstruction plan saved the bank from collapse, the quashing of the AT-1 write-off led to a 15% drop in shares upon the October 2026 judgment.
What you can do
- Review the information memorandum and offer terms carefully before buying perpetual or high-yield banking bonds.
- Verify whether a debt security contains explicit loss-absorption or equity-conversion triggers tied to statutory capital thresholds.
- Consult a qualified financial professional to evaluate credit risk and loss priority before allocating capital to unsecured bank instruments.
- Track statutory reconstruction notifications issued by the Reserve Bank of India whenever a financial institution enters formal resolution.
What we still don't know
- How YES Bank will fulfill potential financial liabilities arising from the court-ordered restoration of the Rs 8,415 crore AT-1 bonds.
- Whether the Reserve Bank of India will update master circulars and contract templates for future AT-1 bond issuances to clarify write-down triggers.
