Yes Bank AT-1 bondholders win in the Supreme Court: the Administrator had no power to write down the bonds
Justices Dipankar Datta and Augustine George Masih upheld the Bombay High Court, holding the write-down of AT-1 bonds after the 2020 reconstruction ultra vires the Master Circular and the scheme itself.
On 13 March 2020 the Central Government notified the scheme to rescue Yes Bank. The draft of that scheme, published a week earlier, had said the bank's Additional Tier 1 bonds would be written down permanently and in full. The final scheme did not say so. The next day, 14 March, the Administrator appointed by the Reserve Bank of India wrote the bonds down anyway. On 15 October 2026 the Supreme Court dismissed appeals by Yes Bank, its Administrator, the Reserve Bank and the Union of India against the Bombay High Court judgment that set that write-down aside. Justice Dipankar Datta, writing for himself and Justice Augustine George Masih, held that the write-down was beyond the Administrator's power under the reconstruction scheme, the Banking Regulation Act, 1949 and the RBI's Master Circular on Basel III capital. The Court described the judgment as possibly the first in which it has interpreted that Master Circular.
Two bond issues and a bank in trouble
Yes Bank issued Basel III compliant AT-1 bonds, in the form of non-convertible debentures, for ₹3,000 crore on 23 December 2016 and for a further ₹5,415 crore on 18 October 2017. Axis Trustee Services Limited was the trustee for both issues, and both were governed by the Master Circular.
AT-1 instruments are loss-absorbing capital. The Court explained that their purpose is to act as a safety barrier that keeps a bank from collapsing altogether, and they can be converted into equity or written down when a bank's capital falls below set levels.
The bank's finances declined steeply. On 5 March 2020 the Central Government imposed a moratorium under Section 45 of the Banking Regulation Act until 3 April. The same day, the RBI issued a notification under Section 36ACA superseding the bank's board and appointing an Administrator. On 6 March a draft reconstruction scheme was published, with public comments invited by 9 March. The final Yes Bank Limited Reconstruction Scheme, 2020 was notified on 13 March, and on 14 March the Administrator wrote the bonds down and informed the Bombay Stock Exchange and the National Stock Exchange.
Bondholders challenged the write-down in several writ petitions. On 20 January 2023 the Bombay High Court allowed them and set aside the Administrator's action. Yes Bank, the Administrator, the RBI and the Union appealed.
The clause that disappeared
The case turns on the difference between the draft scheme and the final one.
Clause 6 of the draft, which dealt with the rights and liabilities of the reconstructed bank, contained a sentence stating that the AT-1 instruments issued under Basel III would stand written down permanently, in full, from the appointed date, in conformity with RBI regulations. Clause 6 of the notified scheme reproduces every other part of that clause in five sub-clauses. The write-down sentence is the one that is missing.
The Court traced what happened in between. On 3 March 2020 Indiabulls Housing Finance Limited, an AT-1 investor, wrote asking the bank to redeem the bonds and not write them down. On 4 March Axis Trustee wrote to the bank expressing concern for bondholders and asking for a meeting within twenty-four hours. After the draft was published, Axis Trustee wrote on 8 March on behalf of institutional and retail bondholders, raising among other things the delayed results for the December 2019 quarter, and asked that the bonds be converted into equity instead. Indiabulls also wrote to the RBI opposing the write-down. Axis Trustee then filed a writ petition, and on 11 March wrote to the RBI again proposing conversion and undertaking to withdraw the petition if that course was adopted.
The parties also relied on an internal note the RBI sent to the Department of Financial Services to obtain the approval of the Finance Minister and the Cabinet. The bondholders later obtained it under the Right to Information Act, 2005. The note recorded that the RBI had received comments after the draft was published from individuals and investors worried about the write-down. It listed three AT-1 series: ₹280 crore issued in 2013, the ₹3,000 crore series and the ₹5,415 crore series, totalling ₹8,695 crore. It noted that the 2013 series alone carried an express write-down clause in its term sheet.
The test is the date of the act
The appellants argued that upholding the High Court would set off a financial avalanche, for Yes Bank and for the banking system, by undoing the reconstruction. The bondholders replied that the bank's position had since risen well above regulatory levels, its share price had climbed after the State Bank of India invested under the scheme, and SBI had sold its majority stake at a substantial profit once the three-year lock-in ended. On their case, everyone had gained.
The Court did not decide the case on those later events. Relying on Nawabkhan Abbaskhan v. State of Gujarat, it held that a challenge to an administrative action is tested on the facts and law as they stood on the date of the action, here 14 March 2020. What happened afterwards cannot change the answer. The Court also noted that no document recording SBI's sale had been placed on record and that it was merely recording the submission. It referred to Yash Deep Trexim Private Limited v. Namokar Vinimay Pvt. Ltd., where a related question had been left open for a future case.
No power under the scheme
On the second issue, the Court agreed with the High Court. Once the reconstruction scheme was notified on 13 March, Yes Bank stood reconstructed in its entirety and was viable enough to survive as a bank. The Court found it unreasonable to infer that the RBI and the Union had gone through the whole exercise of drafting the scheme and left out the crucial part about the AT-1 bonds, so that the scheme would be “akin to a half-baked pie” with the final step left to the Administrator.
The Court went further. It had good reason, it said, to infer that the Union took a conscious decision to drop the write-down clause after considering the objections. Had the Government meant the Administrator to write the bonds down after removing the clause, that would have exposed it to the criticism of acting clandestinely and to an accusation of fraud on the public. The Court did not think the Government intended that. It held that the Administrator acted under a mistaken belief that he kept the power despite the reconstruction, and that his act was impermissible and ultra vires the Master Circular read with the scheme.
Senior counsel for Yes Bank and the Administrator relied on clause 6(1) of the scheme, which keeps existing instruments in force as they were before, and on the Administrator's residuary powers. The Court held that a general savings clause cannot confer the specific authority to write the bonds down after reconstruction. A power not specifically given cannot be implied from an omnibus savings provision, particularly when the Master Circular and each issue's Information Memorandum lay down their own procedure for these bonds.
The Master Circular, and who holds the trigger
On the third issue, the Court read the Master Circular with the Information Memoranda. Banks must hold minimum capital against risk-weighted assets, at least 5.5 per cent of it as Common Equity Tier 1. For Yes Bank's bonds the pre-specified trigger was the CET1 ratio falling below 5.5 per cent before 31 March 2019 and below 6.125 per cent after that date. At that threshold the bank could choose to convert or write down the bonds. Once a bank reaches, or is approaching, the point of non-viability, the choice is no longer the bank's. The RBI must decide.
The point of non-viability was admittedly reached when the authorities decided to reconstruct the bank, or earlier. That meant the RBI had to act. It did not. The Administrator wrote the bonds down instead, and the question was whether he could exercise a power that belongs to the RBI. The Court answered: “We hold he cannot.” An Administrator under Section 36ACA takes the place of the board of directors to run the company. He must stay within the powers the statute gives him, and anything beyond them is wholly illegal and void.
There were two triggers for writing the bonds down. One was for the bank, which did not use it. The other was for the RBI, which signalled that it would not use it by removing the clause, and then did not. The Administrator could not take on the regulator's role.
Senior counsel for Yes Bank, supported by the Solicitor General, argued that both a bail-in by writing down the bonds and a bail-out by SBI's investment, in that order, were needed to revive the bank. The Court accepted that both may well have been necessary, but held that necessity cannot override the way a write-down must be carried out. The bail-in and bail-out created a right to write the bonds down. They did not dictate how.
Questions the appellants did not answer
The Court set out questions it said the appellants had not answered. Did SBI, which was putting in equity, not know about the draft, the final scheme and the missing clause? Did the RBI not know the consequences of dropping it? Did the RBI and its Administrator not know who had authority to write the bonds down under the Master Circular? Did the Union not know the bonds had not been written down when it notified the scheme?
The issue, the Court said, was not whether the bonds could or should have been written down, but the way it was done, outside the Master Circular and the Information Memoranda. It described the conduct of the RBI, the Administrator and the bank as questionable, to put it mildly. The bonds would have served their purpose had the RBI and the bank followed the Master Circular. Instead, “The RBI was a mere bystander”, allowing the bank's CET1 ratio to fall to 0.6 per cent while its business was run in a clandestine manner. The Court acknowledged that serious irregularities at the bank had been noticed much earlier and that criminal proceedings had been started against its personnel, but held that it would be highly unfair to make investors bear the consequences of administrative lapses.
Sold to the wrong investors
The Court added a finding about who bought the bonds. Under the Master Circular, AT-1 instruments are high-risk and may be offered only to specified classes of investors, such as mutual funds and insurance companies, and not to individuals. The Court found that Yes Bank permitted and actively offered these instruments to individual investors in breach of the Master Circular.
SEBI told the Court that bonds traded on BSE and NSE complied with its regulations, and that it had penalised a private wealth management firm and the bank's then Managing Director for facilitating sales to individuals. Bonds the bank sold directly to individuals fell outside SEBI's regulations. A party appearing in person placed on record an email dated 28 December 2016, apparently from a Senior Manager – Financial Advisor at the bank's Chennai office, offering the bonds to individual investors. The Court said much tighter scrutiny should have been applied before drawing individuals into securities of this risk.
Order
The Court found no reason to interfere with the High Court's judgment and dismissed all the appeals: Yes Bank's appeals against Axis Trustee and against Indiabulls Housing Finance and others, the RBI's appeals, and the Union's appeals. Any interim order was vacated. Payment of the annual coupon is unaffected by the outcome and must be made in terms of the Information Memoranda. Parties bear their own costs, and any pending proceedings will run their course without being influenced by the judgment's observations.
The Solicitor General, Mr Tushar Mehta, appeared for the RBI and SBI. Senior advocates Mr Shyam Divan and Mr Balbir Singh appeared for Yes Bank and its Administrator. Senior advocates Mr C.A. Sundaram, Dr Abhishek Manu Singhvi and Mr Neeraj Kishan Kaul appeared for the bondholders, and Mr L.V. Srinivasan appeared in person.