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HIGH COURT OF JUDICATURE AT MADRAS
A.P. SAHI & SENTHILKUMAR RAMAMOORTHY, JJ.
Piyush Bokaria & Others – Appellant
Versus
Reserve Bank of India, Chennai & Others – Respondents
Writ Petition No.12586 of 2020 & W.M.P.Nos.15519 & 15524 of 2020
Decided On : 30-09-2020
The writ petition challenging the Master Circular issued by the Reserve Bank of India (RBI) on Basel III Capital Regulations is dismissed. The Court held that the RBI is empowered to issue the Master Circular under Section 35A of the Banking Regulation Act, 1949 (BR Act). The Court also held that the Additional Tier 1 (AT1) bonds do not constitute share capital for purposes of the Companies Act, 2013 (CA 2013), and that the AT1 bonds are a particular form of borrowing, wherein the only enforceable debt obligation is the payment of the coupon rate provided it is not written-down.
Fact of the Case:
The Petitioners, who invested in AT1 bonds issued by Yes Bank Limited, challenged the Master Circular issued by the RBI on Basel III Capital Regulations. The Petitioners contended that the Master Circular was issued without authority or jurisdiction, that it violated Articles 14, 19, 21, 253 and 300A of the Constitution of India, and that it was contrary to the provisions of the CA 2013, the BR Act, and the Transfer of Property Act, 1882 (TP Act).
Finding of the Court:
The Court held that the RBI is empowered to issue the Master Circular under Section 35A of the BR Act. The Court also held that the AT1 bonds do not constitute share capital for purposes of the CA 2013, and that the AT1 bonds are a particular form of borrowing, wherein the only enforceable debt obligation is the payment of the coupon rate provided it is not written-down.
Issues: 1. Whether the Master Circular was issued without authority or jurisdiction? 2. Whether the AT1 bonds constitute share capital for purposes of the CA 2013? 3. Whether the AT1 bonds violate Articles 14, 19, 21, 253 and 300A of the Constitution of India? 4. Whether the AT1 bonds violate the provisions of the CA 2013, the BR Act, and the TP Act?
Ratio Decidendi: 1. The Court held that the RBI is empowered to issue the Master Circular under Section 35A of the BR Act. The Court relied on the following grounds: * Section 35A of the BR Act empowers the RBI to issue directions to banking companies in the public interest, in the interest of banking policy, or to secure the proper management of any banking company. * The Master Circular is a measure to enhance capital adequacy of banks by raising the Capital to Risk-weighted Assets Ratio (CRAR) and ensuring that it is maintained at levels consistent with the financial stability of a bank. * The Master Circular is not a measure to implement international law, and therefore, it does not require Parliament to enact a law under Article 253 of the Constitution. 2. The Court held that the AT1 bonds do not constitute share capital for purposes of the CA 2013. The Court relied on the following grounds: * The AT1 bonds are not issued under Section 12 of the BR Act, which provides for the issue of share capital by banking companies. * The AT1 bonds are not reflected as share capital in the balance sheet of the issuer company. * The AT1 bonds are classified as borrowings for accounting purposes. 3. The Court held that the AT1 bonds do not violate Articles 14, 19, 21, 253 and 300A of the Constitution of India. The Court relied on the following grounds: * The AT1 bonds are a particular form of borrowing, wherein the only enforceable debt obligation is the payment of the coupon rate provided it is not written-down. * The AT1 bonds are not a form of expropriation of property. * The AT1 bonds are not a form of debt that is secured or guaranteed. * The AT1 bonds are not a form of debt that is perpetual. 4. The Court held that the AT1 bonds do not violate the provisions of the CA 2013, the BR Act, and the TP Act. The Court relied on the following grounds: * The AT1 bonds are not subject to the requirements of the CA 2013, as they do not constitute share capital. * The AT1 bonds are not subject to the requirements of the BR Act, as they are not issued under Section 12 of the BR Act. * The AT1 bonds are not subject to the requirements of the TP Act, as they are not a form of gift.
Final Decision: The writ petition challenging the Master Circular issued by the RBI on Basel III Capital Regulations is dismissed.
JUDGMENT :
SENTHILKUMAR RAMAMOORTHY J.
(Prayer : Petition filed under Article 226 of the Constitution of India praying to issue a writ of Declaration to declare the impugned Master Circular – Basel III Capital Regulations issued by First Respondent Reserve Bank of India dated 01.07.2015 bearing RBI/2015-16/58 DBR No.BP.BC.1/21.06.201/2015-16 insofar as it relates to issuance and write off of Additional Tier 1 Capital Bonds, as ultra-vires, without authority of law, unconstitutional, void, invalid in law being violative of Articles 14,19,21, 253 and 300-A of Constitution of India, 1949, and being contrary to, including but not limited to, provisions of The Companies Act, 2013 (r/w 1956), the Indian Contract Act 1872 and the Transfer of Property Act, 1881 and also to consequently declare all proceedings issued by Reserve Bank of India dated 01.07.2015 bearing RBI/2015-16/58 DBR No.BP.BC.1/21.06.201/2015-16 insofar as it relates to issuance and write off of Additional Tier 1 Capital Bonds as null.)
THE PREFACE
1. Capital adequacy has long been considered of paramount importance to the stability of the financial system, both global and Indian, in general, and, in particular, to the financial health of the principal actor in the financial system, banks. The Basel Committee on Banking Standards (the BCBS), which we will discuss at greater length later, has been at the forefront of global efforts in this direction. The Reserve Bank of India (the RBI) is India's representative on the BCBS. The BCBS prepared a report titled Based III: A Global Regulatory Framework for Resilient Banks and Banking Systems (the Basel III Report), which is regarded as the Basel III Capital Regulations, and its members agreed to implement it in their respective domestic jurisdictions in a phased manner. The Basel III Capital Regulations set out the elements of capital for capital adequacy purposes and specify the different types of equity, preferred capital or debt instruments that would be reckoned and, in what manner, for such purpose. The RBI initiated action to implement the Basel III capital Regulations in 2012. By Master Circular dated 01.07.2015 (the Master Circular), the circulars issued earlier on the subject were consolidated. The Master Circular is the focal point of the present writ petition wherein it is challenged insofar as it permits banks, under its supervisory control, to issue and write-off a form of regulatory capital, which is referred to as Additional Tier 1 (AT1) Capital Bonds. The Master Circular is challenged on the ground that it violates Articles 14, 19, 21, 253 and 300-A of the Constitution of India. In addition, it is challenged on the ground that it is contrary to the provisions of the Companies Act, 2013 (CA 2013), the Indian Contract Act, 1872 (the Contract Act), the Transfer of Property Act, 1882 (the TP Act) and the Banking Regulation Act,1949 (the BR Act).
2. The provenance of the Bank of International Settlements (BIS) and consequently, of the Basel III Capital Regulations is traceable to the aftermath of World War-I. On 17.05.1930, several countries, including India, entered into the Hague Agreement. The Hague Agreement stipulated that various functions relating to but not limited to the complete and final settlement of reparations by Germany and other named Axis powers would be transferred to the BIS which was to be established in terms of the aforesaid Hague Agreement. Shortly thereafter, the Reserve Bank of India (the RBI) was constituted under the Reserve Bank of India Act, 1934 (the RBI Act). Under the RBI Act, the Government of India transferred the functions relating to currency management and entrusted the carrying on of banking business, as specified in Section 3 of the RBI Act, to the RBI. Thereafter, the RBI stepped into the shoes of the Government of India as regards the BIS. The BIS constituted various committees
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