Discuss the role of Additional Tier-1 capital under Basel III. Should loss-absorbing instruments be sold to retail investors in India?

Under Basel III, Additional Tier-1 (AT1) capital is the second layer of a bank's core capital. It consists of perpetual bonds that absorb losses while the bank is still running. In 2026 the Supreme Court upheld the order setting aside the write-down of ₹8,415 crore of Yes Bank AT1 bonds [1]. That ruling has reopened the question of who should carry this risk.

Role of AT1 under Basel III

• Absorbs losses while the bank is running: RBI norms say AT1 principal must absorb losses through conversion or write-down once CET1 falls to a trigger of 6.125% of risk-weighted assets [2].
• Point of non-viability (PONV): the bond terms must let the regulator write off or convert the bonds when a bank fails [2]. This bail-in moves the rescue cost from taxpayers and depositors to investors.
• Capital without diluting shareholders: banks meet their Tier-1 needs without issuing new shares. Coupons are discretionary, so the bank can skip them to save cash in stress.
• Use in a real rescue: Yes Bank's 2020 draft reconstruction scheme wrote AT1 down "permanently, in full" and kept deposits on the same terms [3].

Case for retail access

• A wider pool of capital: RBI lets banks issue AT1 to retail investors with Board approval [2]. This deepens the bond market at a time when banks need capital.
• Choice and yield: an informed investor can earn a premium over fixed deposits in return for taking the risk.

Case against

• Mis-selling: SEBI found that Yes Bank sold AT1 bonds as fixed-deposit substitutes. It fined the bank and its former CEO [4].
• Legal uncertainty: the courts later struck down the write-down itself [1]. If even regulators can get the process wrong, retail savers cannot price that risk.
• Loss of trust: losses on household savings shake confidence in banks. That is why deposits were protected in 2020 [3].

Verdict: restrict, don't ban

• Sell to institutional investors by default. Allow retail buyers only above a high minimum ticket size, after suitability tests and with signed risk disclosures.
• Hold sales staff personally accountable, and write the bail-in power into the law itself, for example through an FRDI-type resolution law.

AT1 is essential to Basel III's aim of making investors, not taxpayers, bear bank losses. It works only if the legal triggers are clear and the holders understand the risk. India should keep AT1 mainly with institutions and allow retail access only with strict suitability safeguards. It should also put bail-in powers into law, which serves both SEBI's investor-protection mandate and financial stability.