The Supreme Court's annulment of Yes Bank's AT1 bond write-off raises questions about the hierarchy of loss absorption in bank resolution. Critically examine.

In 2020, ₹84 billion (~$883.7 million) of Yes Bank's Additional Tier-1 (AT1) bonds were written off. In October 2026 the Supreme Court set that write-off aside [1]. The verdict revives a basic principle of resolution: owners absorb losses before creditors do. It also tests how quickly regulators can act when a bank is failing.

Why the write-off was defensible

• Loss absorption by design: AT1 bonds pay higher returns because they can be written off or converted to equity when a bank is under stress [1].
• Regulatory intent was clear: RBI's draft Reconstruction Scheme, 2020 proposed that AT1 instruments "stand written down permanently, in full" [2].
• Speed of rescue: New investors came in on the basis of a clean balance sheet [1]. Reopening the rescue years later adds risk they never priced in.

Where it inverted the hierarchy

• Equity survived, debt died: AT1 holders lost everything, while shareholders only had 75% of their holdings locked in for three years [1]. This reverses the normal order in which equity absorbs losses first.
• Process over principle: The Bombay HC (2023) ruled for the bondholders, and the appeals by Yes Bank, the RBI and the Centre failed [1]. The dispute was about how this write-off was carried out. The courts did not rule out AT1 write-downs in principle.
• Investor protection: SEBI took adjudication action against the former CEO over the sale of AT1 bonds [3]. This shows retail savers held instruments built to absorb losses.
• Market cost: Restored claims become a liability for current shareholders, including SMBC (24%) [1], who had no part in the 2020 decision.

Implications

• For regulators: Every loss-sharing step must be written into the final notified scheme.
• For the market: Legal certainty may make AT1 bonds more attractive to investors, but more costly for banks to issue.

Overall, the ruling does not invalidate AT1 bonds. It only insists that loss absorption follow a lawful order and procedure. India needs a statutory resolution framework with a clear equity-first loss waterfall, along with tighter suitability checks when hybrid bonds are sold. That would allow bank rescues that are fast and fair, which supports financial stability (SDG 8.10) and the rule of law.