The Supreme Court on October 15, dismissed appeals filed by YES Bank, the Reserve Bank of India (RBI) and the Union Government against a Bombay High Court judgment that set aside the write-down of Additional Tier 1 (AT-1) bonds worth ₹8,415 crore. The Court held that the bank’s administrator could not permanently write down the bonds in the manner adopted after the government notified the bank’s reconstruction scheme in March 2020.
A Bench of Justice Dipankar Datta and Justice Augustine George Masih found that the action was inconsistent with the reconstruction scheme and the applicable RBI regulations.
Background
YES Bank issued AT-1 bonds worth ₹3,000 crore in December 2016 and another ₹5,415 crore in October 2017. These instruments help banks absorb losses during financial distress but carry significant risks for investors.
Following the deterioration of YES Bank’s financial position, the Central Government imposed a moratorium on March 5, 2020, and the RBI appointed an administrator. The government subsequently notified the YES Bank Limited Reconstruction Scheme, 2020, on March 13.
The draft scheme had expressly provided for writing down the bonds. However, that provision was omitted from the final scheme. Despite this change, the administrator ordered the permanent write-down of the bonds on March 14, 2020.
Axis Trustee Services Limited and other affected parties challenged the decision before the Bombay High Court, which set it aside on January 20, 2023. YES Bank, the RBI and the Union Government subsequently appealed to the Supreme Court.
The Court found that the omission of the write-down provision from the final reconstruction scheme was significant. It held that a general provision preserving existing contractual arrangements could not independently grant the administrator specific authority to write down the bonds after reconstruction.
The Bench also examined the RBI’s Basel III Capital Regulations, particularly the requirement that AT-1 instruments be written down or converted before a bank’s reconstruction takes effect when the relevant trigger is activated.
Explaining the timing requirement, the Court observed:
“The preposition ‘before’ can only mean before the Reconstruction Scheme takes effect.”
The Bench rejected the argument that the administrator’s authority continued throughout the implementation of the reconstruction scheme. It held that the regulations did not permit the write-down to be carried out at any arbitrary point after the scheme had come into force.
The Court also raised concerns about the treatment of investors, noting that the bonds were high-risk instruments intended for institutional investors but had also been offered to individual investors.
The Supreme Court found no reason to interfere with the Bombay High Court judgment and dismissed the appeals. It vacated any interim orders and clarified that annual coupon payments must remain unaffected by the outcome of the appeals and be made in accordance with the bond information memoranda.
The parties were directed to bear their own costs.
-300x169.webp&w=2048&q=75)
