Court Upholds Bombay High Court Ruling, Questions RBI Oversight and Sale of High-Risk Bonds to Individual Investors
Supreme Court Sets Aside YES Bank AT-1 Bond Write-Down
The Supreme Court has set aside the ₹8,415 crore write-down of YES Bank AT1 Bonds. The Court upheld the Bombay High Court’s ruling and questioned the Reserve Bank of India’s (RBI) regulatory oversight.
A Bench comprising Justice Dipankar Datta and Justice Augustine George Masih examined the bank’s financial crisis and the disputed write-down.
The judges criticised the RBI for failing to intervene effectively as YES Bank’s financial condition deteriorated.
They noted that the bank’s Common Equity Tier 1 (CET1) capital ratio had fallen to just 0.6%.
Furthermore, the Court observed that regulators had detected irregularities in the bank’s operations before the crisis.
Despite these warning signs, the RBI allegedly failed to take effective corrective measures.
Supreme Court Criticises RBI’s Regulatory Inaction
The Bench strongly criticised the RBI’s handling of YES Bank’s deteriorating financial position.
It observed:
“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.”
The Court also noted that authorities had already initiated criminal prosecution against certain bank personnel.
However, the regulatory response did not prevent the bank’s financial difficulties from worsening.
The judges emphasised that investors should not bear the consequences of administrative failures.
According to the Bench, shifting the burden of such lapses onto investors would be “highly unfair”.
Consequently, the Court examined whether the authorities had followed the applicable legal framework.
Administrator Lacked Authority After Final Reconstruction Scheme
The Supreme Court upheld the Bombay High Court’s conclusion regarding the YES Bank Administrator’s powers.
The Court held that the Administrator lacked authority to write down the AT-1 bonds after the final reconstruction scheme took effect.
It examined the Administrator’s statutory role under the Banking Regulation Act, 1949.
The Bench explained that an Administrator temporarily replaces a bank’s Board of Directors.
However, the appointment does not grant unlimited authority.
Instead, the Administrator must exercise only those powers that the law expressly permits.
The Court observed:
“Any act performed by the administrator beyond the powers clothed upon him would be wholly illegal and void.”
Moreover, the Bench clarified that an Administrator cannot automatically exercise powers belonging to the RBI.
Therefore, the Administrator’s appointment did not independently authorise the disputed write-down.
Final Reconstruction Scheme Omitted Bond Write-Down Provision
The Court examined the sequence of events surrounding YES Bank’s reconstruction.
The draft reconstruction scheme expressly proposed a permanent write-down of the bank’s AT-1 bonds.
However, the final scheme omitted that provision.
The authorities notified the final reconstruction scheme on March 13, 2020.
Nevertheless, the Administrator proceeded with the bond write-down the following day.
The action extinguished investors’ claims under the affected instruments.
The Supreme Court examined whether the Administrator could lawfully take that step after the final scheme became effective.
It concluded that the action did not comply with the governing legal framework.
Write-Down Violated RBI’s Basel III Master Circular
The Bench also examined the RBI’s Master Circular on Basel III Capital Regulations.
The circular governs the treatment of certain capital instruments during a bank’s financial distress.
Under the applicable framework, authorities must follow prescribed procedures when triggering a write-down or conversion.
The Court held that the relevant action had to occur before the reconstruction scheme came into effect.
Therefore, the timing and procedure of the Administrator’s decision became central to the dispute.
The Bench explained:
“The question is not whether the AT-1 Bonds could have been or ought to have been written down off. The question is the manner in which it was done, de hors the Master Circular and the Information Memoranda.”
Thus, the Court focused on the legality of the process rather than the general possibility of writing down AT-1 bonds.
The judgment also questioned the conduct of YES Bank, its Administrator, and the RBI.
The Bench described their handling of bonds worth more than ₹8,514 crore as “questionable”.
Court Explains the Purpose of AT-1 Bonds
The Supreme Court also discussed the role of Additional Tier 1 bonds in banking regulation.
These instruments provide an additional capital buffer during financial stress.
They help banks absorb losses and strengthen their ability to withstand a crisis.
However, AT-1 bonds carry substantial risks for investors.
Their terms may permit conversion or write-down when specified regulatory conditions arise.
The Court emphasised that authorities must still comply with the applicable rules.
According to the Bench, proper regulatory compliance could have helped avoid the disputed outcome.
Furthermore, the judges stressed the importance of following the RBI’s Master Circular.
Supreme Court Questions Sale of High-Risk Bonds to Individuals
Justice Dipankar Datta authored the judgment, which also examined YES Bank’s distribution of AT-1 bonds.
The Court raised concerns about the bank’s practice of offering these high-risk securities to individual investors.
It noted that the RBI’s regulatory framework contemplated offers to institutional investors.
However, YES Bank allegedly went beyond merely allowing individuals to acquire the instruments.
The Court observed that the bank actively offered the bonds to individual investors.
It considered this practice contrary to the applicable Master Circular.
Consequently, the Bench questioned whether the bank had adequately complied with investor-related restrictions.
SEBI’s Role in Bond Transactions Examined
The Supreme Court also considered a counter-affidavit from the Securities and Exchange Board of India (SEBI).
SEBI stated that transactions through the BSE and NSE platforms complied with its applicable regulations.
Additionally, SEBI had imposed penalties on a private wealth management firm and YES Bank’s then Managing Director.
Those penalties concerned the facilitation of bond sales to individual investors.
However, the Supreme Court distinguished exchange-based transactions from direct offers by YES Bank.
The Bench observed that the bank’s direct offers to individuals fell outside the purview of SEBI regulations.
Therefore, compliance with exchange-related rules did not resolve the concerns surrounding the bank’s direct distribution practices.
Court Refers to December 2016 Email
The Bench also referred to an email dated December 28, 2016.
A party-in-person placed the communication before the Court.
According to the available account, the email appeared to originate from YES Bank’s Senior Manager–Financial.
The Court considered the communication while examining issues concerning the bond sales.
However, the available report does not provide the email’s full contents.
It also does not explain the Court’s subsequent observations concerning that communication.
Supreme Court Upholds Bombay High Court Decision
The Supreme Court ultimately upheld the Bombay High Court’s ruling against the disputed bond write-down.
The judgment reinforces the requirement that banking authorities follow statutory powers and regulatory procedures.
It also highlights the importance of effective RBI supervision during financial distress.
Furthermore, the Court raised concerns about the sale of complex, high-risk securities to individual investors.
The YES Bank AT1 Bonds dispute therefore raises wider questions about regulatory accountability and investor protection.
The Court’s ruling centres on the Administrator’s lack of authority and the failure to follow the prescribed write-down procedure.
The judgment also underscores the need for banks and regulators to comply with the legal framework governing capital instruments.
