AT1 investors have filed a petition in court against the RBI, YES Bank
and the government. Media reports indicate that parties are exploring an out-of-court settlement, with AT1 investors clamoring for conversion of AT1s into equity.
Under the Basel III framework, AT1 instruments are designed to be loss-absorbing tool. The holders of the debt might not get repaid in the event of financial stress. Indian regulations state that such instruments should absorb losses while the bank remains a going concern.
RBI's decision to permanently write down YES Bank's AT1s was in line with the agency’s view that these instruments will absorb losses at private sector banks, not public sector banks, rating agency said.
Indian banks' AT1s categorically provide that any capital infusion by the government of India into the issuer as the promoter in the normal course of business may not be construed as a point of non-viability trigger. The thinking goes that, since the government owns the bank, it has the right to inject capital into the lender.
The government has indeed been infusing regular capital into state-owned banks
to help them meet their regulatory requirements. A couple of years back, most of the public sector banks were also allowed to exercise early call options for their AT1 instruments under what was deemed a ‘regulatory event’.
S&P said it has always maintained that the Indian regulator would not likely extend such flexibility to private sector banks.