The Supreme Court has upheld the Bombay High Court’s decision setting aside the write-down of Yes Bank’s Additional Tier-1 (AT-1) bonds, holding that the bank’s Administrator could not assume regulatory powers vested in the Reserve Bank of India or extinguish the bonds contrary to the applicable reconstruction framework.
A Bench of Justice Dipankar Datta and Justice Augustine George Masih dismissed the appeals filed by Yes Bank, its Administrator, the RBI and the Union of India against the High Court’s January 20, 2023 judgment. The dispute concerned two tranches of Basel III-compliant AT-1 bonds issued for ₹3,000 crore and ₹5,415 crore.
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Yes Bank issued the first disputed tranche of AT-1 bonds on December 23, 2016, and the second on October 18, 2017. Axis Trustee Services Limited acted as the trustee for both issuances.
Following a steep deterioration in the bank’s financial position, the Central Government imposed a moratorium on March 5, 2020, under Section 45 of the Banking Regulation Act, 1949. On the same day, the RBI superseded the bank’s Board of Directors and appointed an Administrator under Section 36ACA.
A draft reconstruction scheme was published on March 6, 2020, inviting public comments. It expressly proposed that the bank’s Basel III-compliant AT-1 instruments would be permanently written down in full.
However, the final Yes Bank Limited Reconstruction Scheme, 2020, notified on March 13, 2020, omitted that provision. The next day, the Administrator ordered the two bond tranches to be fully written down and extinguished with immediate effect.
Bondholders and their trustee challenged the action before the Bombay High Court, which set it aside. That ruling led to the appeals before the Supreme Court.
A central issue was whether the Administrator could write down the bonds despite the omission of the enabling provision from the final reconstruction scheme.
The Supreme Court examined the objections submitted by investors and an internal note placed before the Government during the scheme’s approval process. The material showed that the authorities had considered concerns about the proposed write-down, including a suggestion that the bonds should instead be converted into equity.
The Court noted that proposals concerning both write-down and conversion were ultimately absent from the notified scheme. It concluded that the Government had consciously chosen not to alter the bonds through the reconstruction scheme.
Against that background, the Administrator’s subsequent decision to extinguish the bonds undermined the deliberative process preceding the final scheme.
The Bench held that the Administrator had acted under an erroneous impression that he retained authority to write down the bonds after reconstruction. His action was impermissible and beyond the authority available under the Master Circular read with the reconstruction scheme.
Yes Bank and the Administrator relied on Clause 6(1) of the final scheme, which preserved existing contracts, bonds and other instruments on their earlier terms.
They argued that the scheme had not taken away the Administrator’s existing powers to implement a write-down.
Rejecting that argument, the Court held that a general savings provision could not independently confer a specific power to write down the bonds after the bank had been reconstructed. Their treatment was governed by the distinct requirements of the Master Circular and the respective Information Memoranda.
A power not specifically conferred could not be inferred merely from a general clause preserving existing arrangements.
The Court also examined Clause 2.15 of Annex 16 to the RBI’s Master Circular on Basel III Capital Regulations.
That provision treats a bank as non-viable or approaching non-viability when the relevant authorities decide to reconstruct or amalgamate it under Section 45. It activates the applicable conversion or write-down triggers and requires the exercise to occur before reconstruction or amalgamation.
The appellants argued that reconstruction was a continuing process, beginning with notification of the scheme and lasting until all obligations under it had been discharged. On that interpretation, the Administrator’s power to write down the bonds continued after the scheme was notified.
The Supreme Court rejected this reading. It held that the required conversion or write-down had to take place before the reconstruction scheme took effect.
Although implementation of a scheme could extend over several years, that did not extend the period available for exercising a power expressly required to be used before reconstruction.
Independently examining the bond terms and the Master Circular, the Court distinguished between two loss-absorption triggers: a pre-specified capital threshold and the point of non-viability.
The pre-specified trigger concerned the bank’s Common Equity Tier-1 capital ratio falling below the stipulated level. At that stage, the bank could exercise the options available under the governing bond terms.
Once the bank reached or approached the point of non-viability, the relevant determination and exercise of regulatory power rested with the RBI.
The Court noted that Yes Bank had not exercised its available option at the earlier stage. At the point of non-viability, it was the Administrator, rather than the RBI, who decided to write down the bonds and communicated the decision to the stock exchanges.
The Bench held that an Administrator appointed under Section 36ACA substitutes for the bank’s Board of Directors. That appointment does not confer the RBI’s separate regulatory powers.
Consequently, the Administrator could not exercise a power reserved for the regulator merely because he had been appointed by it.
The appellants maintained that writing down the bonds and subsequently infusing fresh capital were interconnected measures essential to the bank’s revival.
The Court accepted that both measures might have been necessary. However, necessity could not override the prescribed manner of exercising the write-down power.
The question was therefore not simply whether the bonds could or should have absorbed losses. It was whether their extinguishment had been ordered by the competent authority, at the proper time and in accordance with the governing framework.
The Court found that those requirements had not been met.
The appellants warned that allowing the High Court’s ruling to stand could have serious financial consequences for Yes Bank and the wider banking system.
The respondents, meanwhile, pointed to the bank’s subsequent improvement and the benefits arising from its reconstruction.
The Supreme Court declined to decide the dispute on either basis. It held that the legality of the Administrator’s action had to be assessed against the facts and law existing on March 14, 2020, when the write-down was ordered.
Subsequent improvements or changes in financial circumstances could not determine whether the original action was lawful.
The judgment also criticised the handling of the bank’s deteriorating capital position. The Court noted that its CET1 ratio stood at just 0.6% as of December 31, 2019, according to financial results considered by the Administrator in March 2020.
It observed that investors should not be made to bear the consequences of administrative lapses where the authorities had failed to act in accordance with the governing regulations.
The Bench further expressed concern about the offering of high-risk AT-1 instruments to individual investors. Referring to material on record, including an email offering the bonds to individuals, it called for tighter scrutiny of such sales and the associated risk disclosures.
These observations accompanied the Court’s finding that the bonds’ loss-absorption purpose could have been served through action complying with the Master Circular.
Dismissing the appeals, the Supreme Court left intact the Bombay High Court’s decision setting aside the Administrator’s write-down and vacated any subsisting interim order.
It expressly directed that payment of the annual coupon rate would remain unaffected by the outcome of the appeals and must be made in accordance with the Information Memoranda.
The parties were directed to bear their own costs. The Court also clarified that its observations were confined to deciding these appeals and should not influence other pending proceedings.
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