Emphasising that the final scheme’s deliberate omission of the write-down provision could not be overridden, the Supreme Court has held that the Administrator could neither assume the RBI’s write-down power at the point of non-viability nor exercise it after the reconstruction scheme took effect. The Court treated its omission from the final reconstruction scheme as a conscious decision by the Central Government to leave the bonds untouched through that scheme.
The Apex Court clarified that under Clause 2.15 of Annex 16 to the RBI Master Circular, conversion or permanent write-down had to precede the scheme’s commencement, and continuing obligations under the scheme did not extend the write-down window. Accordingly, the bank’s discretion at the pre-specified trigger level was distinct from the RBI’s power at the point of non-viability. An Administrator appointed under Section 36ACA replaces the board of directors, not the regulator.
Even if both bond write-down and fresh capital infusion were necessary to revive Yes Bank, the write-down still had to follow the Master Circular, since the issue was the legality of the manner adopted, and not whether the bonds could or ought to have been written down. Hence, the Apex Court upheld the High Court’s decision setting aside the write-down and vacated any interim order. It also directed that annual coupon payment remain unaffected by the appeals’ outcome and be made in accordance with the Information Memoranda.
Briefly, Yes Bank issued Basel III-compliant Additional Tier I (AT-1) bonds in two tranches in December 2016 and October 2017, with Axis Trustee Services Limited acting as trustee. Following a sharp deterioration in the bank’s financial position, the Central Government imposed a moratorium on 5 March 2020, and the RBI appointed an Administrator under Section 36ACA of the Banking Regulation Act, 1949. The draft reconstruction scheme expressly provided for permanently writing down the AT-1 bonds in full, but that provision was omitted from the final scheme notified on 13 March 2020. Nevertheless, the Administrator wrote down the bonds on 14 March 2020. The Bombay High Court set aside that action.
A Two-Judge Bench comprising Justice Dipankar Datta and Justice Augustine George Masih observed that the Administrator’s action had to be examined against the facts and law existing on 14 March 2020, and the bank’s subsequent financial recovery could not determine its legality. The Court found that the omission of the write-down provision from the final reconstruction scheme reflected a conscious decision by the Central Government after considering stakeholders’ objections. The Administrator could not reverse that decision, and the general savings provision in Clause 6(1) did not independently confer a specific power to write down the bonds after reconstruction.
The Court further explained that Clause 2.15 of Annex 16 to the RBI’s Master Circular – Basel III Capital Regulations required conversion or permanent write-down before the reconstruction scheme took effect, not at any time before all obligations under the scheme were completed. It also distinguished the bank’s discretion at the pre-specified trigger level from the RBI’s regulatory power at the point of non-viability.
The Court said that an Administrator appointed under Section 36ACA substitutes for the board of directors, but he cannot assume powers vested in the RBI. Financial necessity could not excuse non-compliance with the prescribed manner of exercising the write-down power.
