The Supreme Court of India on Thursday formally declined to interfere with a pivotal Bombay High Court order that had previously quashed the decision to write off Additional Tier 1 (AT-1) bonds issued by Yes Bank . The ruling effectively upholds the high court’s mandate in favor of investors, bringing a conclusion to a protracted legal dispute involving approximately ₹8,415 crore in wiped-out investments. The development marks a significant shift for institutional and retail bondholders who had challenged the validity of the write-off initiated during the bank’s emergency restructuring in March 2020 .

A Division Bench of the Supreme Court, comprising Justices Dipankar Datta and A.G. Masih, dismissed the appeals filed by the Reserve Bank of India and Yes Bank . In delivering the verdict, the Bench emphasized that the matter had been adjudicated on its technical merits rather than through procedural shortcuts. “We have decided on merits, and our answers to both the questions are in the negative. Therefore, for the reasons assigned in our judgment, we have held that we see no reason to interfere with the impugned judgment . The appeals are dismissed,” the court stated in its judgment.

Market Divergence Follows Judicial Verdict

The judicial finality of the case triggered immediate and contrasting reactions in the financial markets, highlighting the uncertainty that has surrounded the status of these instruments for over four years. Following the announcement, shares of Yes Bank experienced a decline of approximately 10%, reflecting investor apprehension regarding the potential financial liability the institution may now face to compensate bondholders or restore the corresponding entries in depositories’ records.

Conversely, market interest in Sammaan Capital , formerly known as Indiabulls Housing Finance , surged as investors anticipated a possible recovery of historical exposure. Sammaan Capital holds a reported investment of approximately ₹662 crore in the affected AT-1 bonds. The company saw its share price rise by nearly 4% as the trading session progressed, driven by expectations that the restoration of bondholder rights might pave the way for reclaiming a portion of its previously written-off assets. While this movement signals market optimism, analysts note that the actual recovery of funds will depend heavily on the subsequent implementation of the court’s order and the individual entitlements of the bondholders.

Administrative Authority Under the Reconstruction Scheme

At the heart of the litigation was the authority of the bank’s administrator to execute a write-off during the reconstruction process under Section 45 of the Banking Regulation Act, 1949 . The Supreme Court identified three core issues for consideration: the relevance of subsequent developments, the scope of the administrator's powers in the absence of specific provisions in the final reconstruction scheme , and the consistency of the act with regulatory master circulars.

The court noted: “The first [issue is], whether, in view of developments subsequent to the writing down of the AT-1 bonds, a decision on merits is unwarranted. Secondly, whether the Administrator could write down the AT-1 bonds, in the absence of a specific provision in the reconstruction scheme , and thirdly, whether the act of the Administrator in writing down the AT-1 bonds was in consonance with the Master Circular and the terms of the information memorandum of the AT-1 bonds.”

The dispute originated when the Reserve Bank of India initiated the reconstruction of Yes Bank , during which a draft scheme included provisions for writing off AT-1 bonds. However, in a critical legal development, that provision was conspicuously omitted from the final reconstruction scheme notified on March 13, 2020 . Despite this omission, the administrator proceeded to communicate the write-off to stock exchanges on March 14, 2020 . Axis Trustee Services Limited , acting on behalf of debenture holders, successfully argued before the Bombay High Court that the administrator lacked the legal authority to exercise such powers after the final scheme had become effective without the necessary authorization.

Implications for Institutional Bondholders

The Bombay High Court ’s original reasoning, now left undisturbed by the Supreme Court, rested on the fact that once the final reconstruction scheme was notified on March 13, 2020 , the administrator’s powers were bound by the constraints of that specific document. By ruling against the write-off, the court has effectively invalidated the communication issued on March 14, 2020 . This decision holds profound implications for the banking sector, as it reinforces the necessity for administrators and regulators to strictly adhere to the specific language of a reconstruction scheme once it has been legally activated.

For bondholders, the path forward remains complex. The restoration of rights does not guarantee an immediate cash payout. The legal process has concluded in terms of establishing the invalidity of the write-off, but the mechanism for implementing this judgment—including potential coupon obligations and the precise accounting treatment of the assets—now rests with the involved parties and regulatory oversight.

Investors are now turning their attention to upcoming regulatory filings from both the banking institution and major bondholders like Sammaan Capital . These disclosures are expected to provide clarity on whether the historical exposure will be recognized as a recoverable asset and how the bank intends to manage the associated financial obligations. The verdict serves as a stark reminder of the risks inherent in perpetual debt instruments and the high stakes involved when regulatory reconstruction protocols are challenged through the judicial system. As the dust settles on this litigation, the banking community continues to monitor whether this outcome will necessitate changes in how future bank reconstruction schemes are drafted and implemented under the existing regulatory framework.