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 act contrary to the final reconstruction scheme.
The Bench of Justice Dipankar Datta and Justice Augustine George Masih dismissed the appeals filed by Yes Bank, the RBI and the Union of India against the High Court’s January 20, 2023 judgment. The dispute concerned two AT-1 bond issuances aggregating ₹8,415 crore, which the Administrator wrote down on March 14, 2020.
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The Court also 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 governing the bonds.
The central question was whether an Administrator appointed to replace a bank’s board could permanently write down AT-1 bonds after the Central Government had omitted the proposed write-down provision from the final reconstruction scheme, and whether the Administrator could exercise powers reserved for the RBI once the bank reached the point of non-viability.
The Court answered both questions against the appellants. It held that the Administrator’s authority to manage the bank did not extend to assuming the RBI’s regulatory role under the applicable Basel III framework.
Yes Bank issued Basel III-compliant AT-1 bonds worth ₹3,000 crore on December 23, 2016, followed by another issuance of ₹5,415 crore on October 18, 2017. Axis Trustee Services Limited was appointed 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 On the same day, the RBI superseded the bank’s board and appointed an Administrator under Section 36ACA.
A draft reconstruction scheme was published on March 6, 2020. It expressly proposed that the bank’s Basel III-compliant AT-1 instruments would be permanently written down in full.
Bondholders and the trustee objected. Among other suggestions, they proposed converting the bonds into equity instead of extinguishing their value.
The Central Government notified the final Yes Bank Limited Reconstruction Scheme, 2020 on March 13, 2020. The express provision for writing down the AT-1 bonds was absent from the notified scheme.
Nevertheless, on March 14, 2020, the Administrator wrote down the bonds and communicated the decision to the stock exchanges. That action led to the writ proceedings before the Bombay High Court.
The Supreme Court examined the draft scheme, the final notified scheme and an internal government note recording deliberations on the treatment of AT-1 bonds.
The note reflected that investor objections had been considered and that conversion into equity had also been discussed. Ultimately, neither a write-down provision nor a conversion provision appeared in the final reconstruction scheme.
The Court held that the omission could not be treated as inconsequential. Read against the deliberations preceding notification, it indicated a conscious decision by the Central Government to leave the bonds untouched through the reconstruction scheme.
According to the Bench, the Administrator’s subsequent action effectively reversed the outcome of that deliberative process. The Court held that the Administrator acted under an erroneous impression that he retained the authority to write down the bonds despite the bank’s reconstruction under the notified scheme.
Yes Bank and its Administrator relied on Clause 6(1) of the reconstruction scheme, which preserved existing contracts, bonds and other instruments on their previous terms.
They argued that the scheme did not extinguish the Administrator’s power to implement the contractual write-down provisions.
The Supreme Court rejected this argument. It held that a general savings provision could not itself confer the specific authority required to write down the bonds after reconstruction.
The treatment of AT-1 instruments was governed by a distinct mechanism under the RBI’s Master Circular and the relevant Information Memoranda. That mechanism had to be followed strictly; an omnibus preservation clause could not supply a power that had not otherwise been conferred.
The Court separately examined whether the Administrator’s action could be sustained under the RBI’s Basel III Master Circular and the bond terms, independently of the reconstruction scheme.
It explained that the framework contemplated two relevant triggers for loss absorption: a pre-specified capital trigger and the point-of-non-viability trigger.
At the pre-specified trigger, the bank could exercise the options available under the applicable bond terms. However, once the point of non-viability was reached, the relevant determination and exercise of regulatory power lay with the RBI.
In this case, the Court noted that the point-of-non-viability trigger had admittedly been activated when the authorities decided to reconstruct the bank, or even earlier. Yet the decision to write down the bonds was taken by the Administrator, rather than the RBI.
The Bench held that the Administrator could not be regarded as having exercised the RBI’s power merely because the RBI had appointed him.
Interpreting Section 36ACA of the Banking Regulation Act, the Court held that an Administrator acts as a substitute for the superseded board of directors.
The provision enables the Administrator to discharge the board’s powers, functions and duties. It does not automatically transfer the RBI’s distinct regulatory powers to the Administrator.
The Court therefore concluded that the Administrator could not assume the regulatory role assigned to the RBI under the Master Circular and the Information Memoranda. An act beyond the authority conferred on the Administrator would be illegal and void.
The appellants argued that the write-down and the subsequent infusion of capital formed essential components of the bank’s rescue. They maintained that both loss absorption and fresh investment were necessary to restore its financial position.
The Supreme Court accepted that both measures might have been necessary for revival, but held that necessity could not override the prescribed manner of exercising the power.
The decisive question was whether the write-down had been undertaken by the competent authority and in accordance with the governing framework. The existence of a financial justification did not cure a failure to follow that framework.
The Court also declined to decide the dispute solely on the basis of the bank’s subsequent financial performance.
Bondholders relied on improvements in the bank’s position after reconstruction, while the appellants warned of serious financial consequences if the High Court’s judgment remained in force.
The Bench held that the validity of the Administrator’s action had to be tested against the facts and law prevailing on March 14, 2020, when the write-down occurred. Subsequent developments could not determine whether that administrative action was lawful when taken.
The Court also raised concerns about the offering of high-risk AT-1 instruments to individual investors. Referring to the Master Circular and material placed before it, the Bench found that Yes Bank had actively offered such instruments to individuals in violation of the applicable framework.
It called for closer scrutiny of the sale of these instruments and the disclosures made to investors about their risks.
The Supreme Court dismissed the appeals and vacated any subsisting interim order, leaving the High Court’s decision setting aside the Administrator’s action intact.
It expressly directed that annual coupon payments must be made in terms of the Information Memoranda. The parties were directed to bear their own costs.
The Bench clarified that its observations were confined to deciding these appeals and that any pending proceedings should be concluded independently, uninfluenced by those observations.
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