YES Bank AT-1 bond write-down set aside: Supreme Court says administrator lacked authority to act after reconstruction scheme omitted the clause

YES BANK issued Basel III-compliant Additional Tier 1 (AT-1) bonds in 2016 and 2017, with Axis Trustee Services Limited appointed as trustee

After YES BANK’s financial position deteriorated, a moratorium was imposed and the RBI appointed an Administrator.

The Draft Reconstruction Scheme proposed writing down the AT-1 bonds, but the final Yes Bank Limited Reconstruction Scheme, notified on 13 March 2020, omitted that provision.

On 14 March 2020, the Administrator nevertheless ordered the bonds written down in full.

Bondholders challenged that action before the Bombay High Court, which set it aside; YES BANK, the RBI and the Union of India appealed.

1. Whether developments after the bonds were written down made a decision on the merits unnecessary.

2. Whether the Administrator could write down the AT-1 bonds when the Reconstruction Scheme contained no specific provision authorising the write-down.

3. Whether the Administrator’s write-down complied with the RBI Master Circular and the bonds’ Information Memoranda.

The Court applied section 45 of the Banking Regulation Act, 1949, under which the Reconstruction Scheme was made, and section 36ACA, which empowers an RBI-appointed Administrator to exercise the powers, functions and duties of the bank’s Board until it is reconstituted.

Under Annex 16, clause 2.15 of the RBI Master Circular on Basel III Capital Regulations, a decision by the relevant authorities to reconstruct or amalgamate a bank under section 45 deems the bank non-viable or approaching non-viability; AT-1 instruments must accordingly be converted or permanently written down before reconstitution.

The Information Memoranda distinguished the pre-specified trigger, under which the Bank could exercise the stipulated discretion, from the point-of-non-viability trigger, for which the RBI determined the trigger and the amount of non-equity capital to be written off.

A general savings clause does not itself confer a specific power not otherwise granted.

The Court also relied on Nawabkhan Abbaskhan v. State of Gujarat, holding that an administrative action’s validity is assessed by reference to the circumstances and law in force when it was taken.

The Court declined to treat subsequent improvements in YES BANK’s financial position as disposing of the challenge; the validity of the write-down had to be assessed as at 14 March 2020.

It considered the omission of the write-down provision from the final Scheme, following stakeholder objections and deliberation, a conscious decision to leave the bonds unaffected; the Administrator could not reverse that decision through a general savings clause.

Independently, “before reconstitution” in clause 2.15 meant before the Reconstruction Scheme came into force, not at any time while its effects continued.

Although the point of non-viability had been triggered, the Master Circular and Information Memoranda assigned the relevant write-down decision to the RBI, not the Administrator.

Section 36ACA made the Administrator a substitute for the Board, but did not confer the RBI’s regulatory power on him.

The need to revive the Bank could not excuse non-compliance with the prescribed authority and procedure.

It dismissed the appeals and left the Bombay High Court’s judgment setting aside the write-down undisturbed.

Annual coupon payments remain governed by the Information Memoranda and are unaffected by the appeals.