The Supreme Court of India has upheld the Bombay High Court’s decision to quash the 2020 action by the Administrator of Yes Bank Limited to write down Additional Tier 1 (AT-1) bonds worth ₹8,415 crore. In a significant ruling that provides clarity on the limits of administrative authority during banking reconstruction, the bench comprising Justices Dipankar Datta and Augustine George Masih ruled that the Administrator acted without legal sanction when attempting to extinguish the bondholders' interests post-notification of the Reconstruction Scheme.

The judgment settles a contentious legal battle initiated after the Central Government imposed a moratorium on Yes Bank on March 5, 2020. Following this, the Administrator, appointed by the Reserve Bank of India (RBI), exercised powers under the Banking Regulation Act, 1949, to write down the AT-1 bonds as part of the bank's revival strategy. However, the Supreme Court determined that this action violated both the specific reconstruction framework and the regulatory standards established in the Master Circular on Basel III Capital Regulations.

Regulatory Oversight and Administrative Overreach

The Court’s analysis centered on the deliberative process between the publication of the Draft Scheme and the final notification of the Yes Bank Limited Reconstruction Scheme, 2020. The judges noted that while a clause providing for the write-down of AT-1 bonds existed in the draft version, it was conspicuously omitted from the final version notified by the Central Government. The bench reasoned that this omission represented a conscious policy choice, noting, “The Central Government thought it fit not to tinker with the bonds at all through the Reconstruction Scheme.”

The Administrator’s subsequent attempt to write down the bonds was framed by the bench as an act ultra vires the reconstructed framework. According to the judgment, the Administrator operated under the erroneous impression that general residual powers allowed him to bypass the specific terms of the notified scheme. The Court observed, “For the Administrator to then turn volte-face the decision of the Central Government by writing down the AT-1 Bonds entirely, did away with the deliberative process that occurred between the Draft Scheme and the Reconstruction Scheme.”

The justices further criticized the regulatory environment that preceded the crisis. They highlighted that while AT-1 bonds are classified as high-risk instruments intended for institutional investors, Yes Bank had aggressively sold them to individual investors without adequate disclosure. The bench was notably sharp in its critique of the regulator’s role, remarking, “The RBI was a mere bystander, allowing the CET1 ratio of YES BANK to drop to an astonishing low of 0.6% while the business of YES BANK was being carried out in a clandestine manner.”

Interpreting the Basel III Framework

A significant portion of the Court’s reasoning addressed the interpretation of clause 2.15 of the Master Circular, which dictates the conditions under which non-equity regulatory capital instruments can be written off or converted. The appellants had argued that the reconstruction of a bank is a continuous process, and therefore, the power to trigger a write-down remained with the Administrator for the duration of the revival efforts.

The Court rejected this interpretation, noting that the trigger for such drastic measures must strictly precede the commencement of the reconstruction itself. To allow the Administrator the discretion to invoke these triggers at any point during the three-year lock-in period would, in the Court’s view, create an inherent absurdity and subject investors to unpredictable risks. The judgment clarified that "the preposition ‘before’ can only mean before the Reconstruction Scheme takes effect. True, the effects of a reconstruction scheme may run for years together; but that, by itself, cannot be read as empowering the relevant authority to write down the AT-1 Bonds at any point within the following three years."

Safeguarding Investor Interests

The ruling serves as a vital safeguard for investors, emphasizing that while banks must maintain capital adequacy under Basel III standards, the mechanisms for loss absorption cannot be used as an arbitrary tool by administrators. The Court expressed concern that the "triumvirate" of the RBI, the Administrator, and the bank had conducted the affairs surrounding the bonds in a manner that was questionable and detrimental to the interests of bondholders who were kept at the receiving end of administrative lapses.

The Court’s rejection of the appeals effectively restores the contractual position of the AT-1 bondholders as they existed under the original terms of the Information Memoranda. By confirming that the Administrator lacked the specific authority to execute the write-down after the Reconstruction Scheme was finalized, the ruling mandates that the annual coupon payments remain unaffected.

As it stands, the Supreme Court’s decision is final, and the interim orders previously in place have been vacated. The judgment mandates that the bank proceed with its obligations in strict accordance with the Information Memoranda, leaving the parties to bear their own costs. The court explicitly noted that these findings were confined to the legal validity of the Administrator’s action and were not intended to influence any other ongoing proceedings, including those related to the criminal investigations into the bank’s former management. With this ruling, the legal uncertainty surrounding the treatment of AT-1 bonds during banking distress has been significantly narrowed, setting a precedent that regulatory bodies and administrators must adhere strictly to the written terms of reconstruction schemes, ensuring that the process of reviving a financial institution does not unfairly sacrifice the rights of its creditors.