Kotak Mutual Fund halts subscriptions in two Yes Bank AT-1 bond schemes after SC order

Kotak Mahindra Mutual Fund has suspended subscriptions in two of its debt schemes holding Yes Bank's Additional Tier-1 (AT1) bonds, which were written down to zero during the lender's 2020 rescue, as the Supreme Court on Thursday overturned the controversial Rs 8,415 crore write-off.

The fund house said Kotak Medium Term Fund and Kotak Credit Risk Fund hold the bonds, which have carried zero valuations since March 2020. It suspended new subscriptions in both schemes earlier on Thursday, before the Supreme Court delivered its judgment.

"Kotak Medium Term Fund and Kotak Credit Risk Fund hold Yes Bank AT1 bonds that were valued at zero following their write-off during the reconstitution of Yes Bank in March 2020," Kotak Mahindra Asset Management Company said in a statement.


"Earlier today, we proactively suspended subscriptions in both funds as a prudent measure to safeguard the interests of our investors. The Honourable Supreme Court's judgment in the Yes Bank AT1 bond matter, delivered later in the day, has restored the Bonds," it added.

The fund house said it was reviewing the judgment and would determine its next course of action.

What happened in the Yes Bank AT1 bond case?

The Supreme Court on Thursday upheld the Bombay High Court's January 2023 judgment quashing Yes Bank's decision to permanently write off AT1 bonds worth Rs 8,415 crore during its financial crisis in March 2020.

The ruling came as a major relief to bondholders who have fought a legal battle for more than six years to recover their investments.

Yes Bank had issued the bonds in 2016 and 2017 to strengthen its regulatory capital. However, the lender subsequently ran into financial difficulties amid mounting bad loans, governance concerns and deteriorating capital levels.

In March 2020, the Reserve Bank of India imposed a moratorium on Yes Bank and superseded its board. The bank was subsequently rescued through a reconstruction scheme backed by State Bank of India and other financial institutions.

As part of the restructuring, the bank's administrator wrote off its outstanding AT1 bonds, effectively wiping out investments held by institutions, mutual funds and individual investors.

AT1 bonds are perpetual debt instruments that banks issue to bolster their capital. They generally offer higher yields than conventional bonds but carry substantial risks, including the possibility of losses when a bank faces severe financial stress.

Yes Bank said it was examining the final judgment and its implications and would make further disclosures as required.

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