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AT-1 bonds explained: what the Supreme Court's YES Bank ruling means for investors
On Thursday the Supreme Court refused to restore the 2020 write-off of ₹8,415 crore of YES Bank's AT-1 bonds, and the bank's shares fell as much as 20%. What these bonds are, why they were wiped out, and who gains or loses now.
The short answer
Additional Tier-1 (AT-1) bonds are perpetual bonds that count towards a bank's core capital and are designed to absorb losses, so they can be written down if the bank gets into trouble. YES Bank wrote off ₹8,415 crore of them during its 2020 rescue, but the Bombay High Court ruled in January 2023 that the administrator had no power to do so at that stage, and on 15 October 2026 the Supreme Court dismissed the appeals against that ruling. Bondholders' claims are revived, while the bank, whose capital ratio could take a hit, is yet to say how it will settle them.
What is an AT-1 bond?
It is a bond a bank issues to strengthen its core capital, on the understanding that investors may lose money if the bank runs into trouble.
Under the global Basel III rules, a bank’s capital comes in layers. The safest layer is common equity, the shareholders’ money. Next comes Additional Tier-1, or AT-1, capital, which is where these bonds sit. They count towards Tier-1 capital, the cushion regulators watch most closely.
To qualify, the bonds must behave more like equity than ordinary debt. They are perpetual, with no fixed date for repayment. The bank can skip interest payments, and a skipped payment is not owed later. And if the bank’s capital falls too low, or the regulator decides it can no longer survive on its own, the bonds can be written down or converted into shares.
Why would anyone buy them?
For the higher interest. Because they carry more risk than a deposit or a normal bond, AT-1 bonds pay more. YES Bank’s bonds paid 9.5% on ₹3,000 crore of them and 9% on the remaining ₹5,415 crore.
For years many buyers treated bank AT-1 bonds as safe, high-yield instruments. That is part of what made the YES Bank case so painful. The Securities and Exchange Board of India later penalised the bank and several former officials for mis-selling the bonds to individual investors, including senior citizens, without explaining the risks.
What happened at YES Bank in 2020?
The bonds were written down to zero as part of the bank’s rescue.
In March 2020 the RBI placed YES Bank under a moratorium and replaced its board with an administrator. A rescue plan, backed by State Bank of India and other lenders, followed. The draft of that plan included writing off the AT-1 bonds. The final YES Bank Reconstruction Scheme, notified by the Centre on 13 March 2020, did not.
The next day, 14 March, the administrator told the stock exchanges that the bonds had been written off in full. Shareholders, whose stake ranks below bondholders in the usual order of losses, kept their shares, though they were locked in for three years.
Why did the courts undo it?
Because the Bombay High Court found that the administrator had acted without the power to do so.
In January 2023 a bench of Chief Justice S V Gangapurwala and Justice S M Modak held that the terms of the bonds allowed a write-down only before the bank was reconstituted. By 14 March the bank had already been reconstituted under the final scheme, which had dropped the write-off clause. The administrator was in office for a few more days only to hand over to the new board, and could not take such a decision.
The Supreme Court stayed that judgment in March 2023 while it heard appeals by YES Bank, the RBI and the Centre. On 15 October 2026 a bench of Justices Dipankar Datta and Augustine George Masih dismissed those appeals, leaving the High Court’s ruling in place.
AT-1 bonds against other ways of lending to a bank
What does the ruling mean for bondholders?
Their claim of ₹8,415 crore is alive again. What they will actually receive, and when, is not yet clear. The bank has not said whether it will repay the principal, pay interest for the years since 2020, or propose some other settlement. It reports its July to September results on 17 October, when investors expect a first answer.
And for YES Bank’s shareholders?
They face a hit to the bank’s capital. Bringing the bonds back onto the books means the bank must recognise a liability it had written off. The rating agency CRISIL estimated in August that a full write-back could cut the bank’s common equity Tier-1 ratio by about 2.3 to 2.5 percentage points. The market’s reaction was swift: the shares fell as much as 20% on Thursday before recovering part of the loss.
Can retail investors still buy AT-1 bonds?
Not new issues. In October 2020, partly in response to the YES Bank episode, SEBI ruled that fresh AT-1 bonds may be sold only to qualified institutional buyers, such as banks, mutual funds and insurers, with a minimum allotment and trading lot of ₹1 crore. The wider lesson of the case for investors is a simple one: an AT-1 bond can lose its value, but only in the way its terms and the law allow, and the courts will hold banks and regulators to those terms.