Six years after Yes Bank’s reconstruction, the Supreme Court has ruled in favour of investors whose additional tier (AT-1) bonds were written down to zero, even as the bank’s equity shareholders were spared. Upholding the Bombay High Court’s decision, the court set aside the administrator’s action, legally restoring AT1 bonds worth Rs 8,415 crore onto Yes Bank’s balance sheet.
The judgment has three implications for bank resolution in India. It underscores the importance of due process even during a financial crisis, clarifies the limits of powers exercised by RBI-appointed administrators, and exposes the inadequacy of India’s legal framework for resolving financial distress.
Bondholders wiped out, shareholders spared
A quick recap. In 2020, the Reserve Bank of India (RBI) orchestrated a consortium-led recapitalisation of Yes Bank, which had been weakened by mismanagement and excessive exposures. As part of the restructuring, AT1 bonds worth roughly Rs 8,415 crore were written down in full, while equity capital was left untouched. These AT1 bonds were held largely by mutual funds, high-net-worth individuals, and other investors. As we argued earlier, this inverted the conventional hierarchy of loss absorption in corporate finance, under which equity shareholders bear losses before bondholders.
The bondholders challenged the write-down before the Bombay High Court, which ruled in their favour in 2023. The RBI and Yes Bank appealed to the Supreme Court, which upheld the decision nearly four years, 23 hearings and six bench changes later.
Due process matters, even in bank resolution
The Supreme Court’s decision rests on three legal infirmities in the manner in which the AT1 bonds were written down.
First, the reconstruction scheme notified by the Central Government did not authorise the write-down of AT1 bonds, although the draft scheme had expressly provided for it. This omission was significant. Correspondence between the RBI and the Ministry of Finance suggested that concerns about potential investor litigation may have influenced the decision to drop the provision from the final scheme.
Second, the Court questioned the RBI-appointed administrator’s authority to write down the bonds. Since the reconstruction scheme did not expressly confer this power, the administrator sought to rely on general residuary powers. The Court rejected this argument.
Third, it was argued that the administrator could write down the AT1 bonds under their information memorandum and the RBI’s regulatory framework, even without express authority under the reconstruction scheme. The Court rejected this on two grounds. Under the information memorandum, only Yes Bank could exercise the write-down power, which it had not done despite a significant deterioration in its capital adequacy. Further, the applicable regulatory framework required the write-down to precede reconstruction, rather than follow the notification of the reconstruction scheme.
Trite as these details of procedure may appear, the broader principle laid down by the judgment is consequential. The legitimacy of extraordinary regulatory interventions — such as those entailing the alteration or extinguishment of investor rights — depends on their being supported by clear statutory powers, exercised by the appropriate authority and through a legally defensible process. For investors, this is not a question of mere procedure. The value of their investments depends not only on contractual terms and financial performance, but also on the predictability of regulatory intervention when a financial institution encounters distress.
Also read: Yes Bank AT-1 bonds: Why SC ruled against Rs 8,415 cr write-off and called RBI ‘mere bystander’
Powers of administrators in bank restructuring
The judgment also highlights an important distinction between the powers of regulators and administrators. While the RBI exercises statutory powers, an administrator appointed to oversee a bank’s reconstruction cannot assume powers beyond those legally conferred upon the administrator.
This distinction may appear technical, but it becomes critical in the compressed and often uncertain circumstances of a financial rescue. When the viability of an institution is at stake, decisions involving its capital structure, liabilities and ownership may have to be taken rapidly. Ambiguity about who is authorised to take those decisions, and the limits of that authority, creates scope for challenge after the immediate crisis has passed.
Future restructuring schemes must therefore specify, with much greater precision, the administrator’s powers and responsibilities; the decisions reserved to the regulator; the circumstances in which particular resolution measures may be invoked; and the procedural requirements governing their implementation. Clarity at the outset can prevent legal uncertainty from undermining an otherwise necessary intervention.
Moving from case-specific solutions to a resolution law
India’s experience with Yes Bank, Lakshmi Vilas Bank and other recent episodes of banking distress demonstrates the authorities’ ability to devise bank-specific solutions. While such flexibility is valuable in a crisis, bespoke interventions are no substitute for a coherent resolution framework. Without clear rules, each intervention risks becoming a fresh test of regulatory authority, contractual rights and procedural fairness, resulting in prolonged litigation and uncertainty.
The Supreme Court’s emphasis on due process strengthens the case for a comprehensive financial resolution law. Such a law should specify when resolution may be initiated, the powers of resolution authorities, the hierarchy of claims, and safeguards for creditors and investors. It must also preserve the flexibility needed to respond to financial distress without sacrificing legal certainty.
The Financial Resolution and Deposit Insurance (FRDI) Bill, introduced in 2017 and subsequently withdrawn, sought to address this gap. Its politically contentious provisions, particularly those concerning depositor protection, should not deter efforts to build consensus around a modern financial resolution framework.
The urgency of this task has increased. The advanced and Cabinet-approved privatisation of IDBI Bank and the substantial private capital invested in India’s financial services sector are welcome developments. But, as India’s financial sector attracts greater private capital, the need for a predictable resolution framework becomes more pressing. Investors must have confidence that the rules governing their rights will remain clear and enforceable when a financial institution encounters distress.
Bank resolution must respect the rules of risk
None of this means insulating investors from losses. AT1 bonds are designed to absorb losses, and their investors must bear the risks they have contractually assumed. But there is a fundamental distinction between losses imposed under agreed contractual terms and those imposed without lawful authority or due process. A credible bank resolution framework must preserve that distinction.
Bhargavi Zaveri-Shah is the co-founder and CEO of The Professeer. She tweets @bhargavizaveri. Harsh Vardhan is a management consultant and researcher based in Mumbai. Views are personal.
(Edited by Prashant Dixit)