The Supreme Court on Thursday upheld the Bombay High Court's decision quashing Yes Bank's Rs. 8,415 crore Additional Tier-1 (AT-1) bond write-down, restoring bondholders' rights and raising pointed questions about the conduct of the Reserve Bank of India, the bank and its administrator during the lender's 2020 rescue.
The ruling is a significant victory for investors whose securities were extinguished during the reconstruction of Yes Bank more than six years ago. It also draws a clear legal boundary around the powers available to authorities during a banking rescue, holding that investor rights cannot be extinguished through measures that the governing reconstruction scheme did not authorise.
In a sharp observation, the court described the conduct of the RBI, the administrator and Yes Bank in handling the bonds as "questionable", adding that investors had been exposed to risks that could have been avoided.
The difference between the draft reconstruction scheme and the final version approved by the central government in March 2020 was the central disputed point in the case. The draft contained a provision allowing the complete write-down of the AT-1 instruments. That provision was omitted from the final scheme, a distinction the Supreme Court considered decisive.
"The final Reconstruction Scheme did not provide for write-down of the AT-1 Bonds," the court said, adding that the rights of bondholders had been left untouched by the final arrangement.
The distinction matters because the write-down was not merely a restructuring of the bank's liabilities. It extinguished securities worth Rs. 8,415 crore, leaving investors with the loss of their principal. Bondholders challenged the action, arguing that neither the final scheme nor the applicable law authorised the administrator to take that step after the reconstruction framework had come into force.
The Supreme Court agreed that the administrator could not exercise a power that the final scheme did not confer. It rejected the argument that general provisions of the Banking Regulation Act could provide an independent basis for extinguishing the bonds.
"The Administrator acted beyond the powers conferred upon him," the court held.
The judgment placed particular weight on the omission of the write-down provision from the final scheme. The court said the omission was a conscious decision, made after objections from bondholders and trustees had been considered during the process of finalising the reconstruction plan. Authorities could not subsequently act as though the deleted provision remained available to them.
That reasoning also shaped the court's assessment of when the write-down could have been carried out. Referring to the RBI's Basel III framework governing AT-1 instruments, the bench said that if the bonds were to be written down following a determination that the bank had reached the point of non-viability, the exercise ought to have been completed before the reconstruction scheme came into force.
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"If the AT-1 Bonds had to be written down, the same ought to have been done before the Reconstruction Scheme came into force," it said.
Allowing the administrator to extinguish the securities after the scheme had taken effect would, in the court's assessment, undermine the finality of the reconstruction framework. The judgment warned that such an interpretation would leave the resolution exercise incomplete, describing the resulting position as a "half-baked" reconstruction scheme.
The ruling also addresses the continuing contractual rights attached to the bonds, including coupon payments in accordance with the instruments' terms. The consequences therefore extend beyond the invalidation of the original write-down to the entitlements that bondholders retain under their securities.
The Supreme Court dismissed the appeals and allowed the Bombay High Court's judgment to stand, bringing the challenge to the Rs. 8,415 crore write-down to a decisive conclusion.
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