The Supreme Court on Thursday strongly criticised the Reserve Bank of India (RBI) for remaining a “mere bystander” while YES Bank’s financial position deteriorated and its business was allegedly carried out in a clandestine manner. [Yes Bank v. Axis Trusteeship]
The Court also pulled up YES Bank for actively selling high-risk Additional Tier-1 (AT-1) bonds to individual investors in violation of RBI guidelines and called for tighter scrutiny of such practices.
A Bench of Justices Dipankar DattaandAugustine George Masih made these observations while upholding a Bombay High Court judgment that had quashed the March 2020 decision to write down YES Bank’s AT-1 bonds worth ₹8,415 crore.
“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 observed.
The Bench noted that material irregularities in the functioning of YES Bank had been noticed much earlier and that criminal proceedings had also been initiated against its personnel.
“However, to have the investors at the receiving end of the administrative lapses would be highly unfair,” it added.
The Court was particularly critical of the manner in which the RBI, YES Bank and its administrator dealt with the bonds during the bank’s reconstruction in March 2020.
“The triumvirate of the RBI, the Administrator, and of course, YES BANK, in conducting the entire affair of dealing with the bonds worth more than 8,514 crore is, to put it mildly, questionable,” the judgment stated.
The Bench also found that YES Bank had offered AT-1 bonds to retail investors despite the RBI’s restrictions on offering such high-risk instruments to individual investors. It referred to an email dated December 28, 2016, purportedly sent by a senior manager and financial adviser of YES Bank in Chennai, offering the bonds to individual investors.
“A tighter scrutiny ought to have been exercised before luring individual investors to such high-risk securities,” the Court said.
The dispute arose after YES Bank faced a financial crisis in March 2020, prompting the Central government to impose a moratorium and notify a reconstruction scheme. The initial draft of the scheme provided for permanently writing down AT-1 bonds. However, this provision was consciously removed from the final scheme following objections from investors.
Despite its removal, the administrator proceeded to extinguish the bonds on March 14, 2020, a day after the reconstruction scheme came into force. The Supreme Court held that the administrator had no authority to do so.
The Bench further noted that allowing the administrator to write down the bonds despite the government’s conscious deletion of the relevant provision would expose the government to allegations of acting clandestinely and committing a fraud on the public.
The Court, however, clarified that it did not believe the government had intended such an outcome.
It held that the administrator had acted under the mistaken belief that he retained the authority to write down the bonds even after the reconstruction scheme came into force.
The judgment also clarified that although the applicable regulatory framework permitted AT-1 bonds to be written down in certain circumstances, the power had to be exercised by the competent authority and in accordance with the prescribed procedure.
The Court rejected the argument that the financial necessity of rescuing YES Bank could justify departure from that procedure. It consequently dismissed the appeals filed by YES Bank, RBI and the Union government, affirming the Bombay High Court’s decision.
YES Bank and its administrator were represented by Senior Advocates Shyam Divanand Balbir Singh, along with a team from Shardul Amarchand Mangaldas comprising Advocates Shally Bhasin, Veena Sivaramakrishnan, Siddhant Kant, Prateek Gupta, Prateek Yadav, Jyotsna Punshi, Rachna Dubey, Arpith Jacob Varaprasad and Naman Tandon.
RBI was represented by Solicitor General Tushar Mehta and Additional Solicitor General Raghav Shankar, along with Advocates Vivek Shetty, Nishant Upadhyay, Akilesh Menezes, Dhaval Vora, Bhuvan Kapoor, Aman Mehta, Alankrita Sinha, Pallavi Mishra and Neelaabh Bist and Navneet R.
The bondholders and other respondents were represented by Senior Advocates s CA Sundaram, Neeraj Kishan Kaul, Abhishek Manu Singhvi, Ritin RaiandRekha Palli.
Their respective teams included Advocates Sunil Tilokchandani, Himalaya Chaudhari, Shravan Pethe, Sanidhya Kumar, Mahesh Agarwal, Rishi Agrawala, Kamaldeep Dayal, Ankur Saigal, Amit Bhandari, Sukriti Bhatnagar, Shivani Agarwal, Mihir Kamdar, Rishi Maheshwari, Anne Mathew, Bharat Sood and Jashan Vir Singh and Srijan Sinha.
At1 Bonds judgment .pdf
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