Yes Bank Ltd. & Anr. v. Axis Trustee Services Ltd. & Ors.

What happened

Yes Bank issued Basel III compliant AT-1 bonds of Rs. 3,000 crore on 23 December 2016 and Rs. 5,415 crore on 18 October 2017, with Axis Trustee Services as trustee. A moratorium under section 45 of the Banking Regulation Act, 1949 was imposed on 5 March 2020 and an Administrator was appointed the same day under section 36ACA. The draft scheme of 6 March 2020 had a clause in clause 6 saying the AT-1 instruments would stand written down permanently in full, objections were received and the trustee wrote asking for conversion into equity, and an internal RBI note to the Department of Financial Services recorded that the related provision of the draft scheme might be dropped. The final Yes Bank Limited Reconstruction Scheme, 2020, notified on 13 March 2020, omitted that clause, and the Administrator by letter of 14 March 2020 wrote down the bonds, relying on clause 2.15 of Annex 16 of the Master Circular. The Bombay High Court set that action aside by the impugned judgment, and the bank, the Administrator, the RBI and the Union appealed. They argued that the Scheme's savings clause preserved the Administrator's power, that the reconstruction was a continuing process, that writing down the bonds and the State Bank of India's infusion were both necessary, and that later events made a decision unwarranted. The bondholders relied on the omission from the Scheme and on the Information Memoranda.

Questions before the court

• Could the Administrator write down Yes Bank's AT-1 bonds on 14 March 2020 after the Reconstruction Scheme was notified without a clause for it, and was it consistent with the Master Circular and Information Memoranda?

Why the court ruled this way

The validity of the action must be tested as on 14 March 2020 under Nawabkhan Abbaskhan v. State of Gujarat, so the later recovery of the bank and the sale of State Bank of India's stake do not decide the case (paragraphs 13 to 16). The deletion of the write-down clause between the draft and the final scheme was a conscious decision after the objections and the pending writ petition of the trustee, and the Administrator's act reversed it; the general savings clause in clause 6(1) cannot supply a specific power that was not conferred (paragraphs 17 to 42). Clause 2.15 says AT-1 instruments are to be written down or converted 'before' reconstitution, which means before the Scheme takes effect and not at any point in the following three years, as shown also by the DBS-Lakshmi Vilas Bank amalgamation where the bonds were written down a day before the scheme came into force (paragraphs 57 to 64). Under clauses 56 and 57 of the Information Memoranda and clause 3.1 of Annex 16, the first trigger, the pre-specified level, was for the bank, which did not use it despite a CET1 ratio of 0.6% at 31 December 2019, and the point-of-non-viability trigger is for the RBI, so the Administrator under section 36ACA, who stands in for the Board, could not exercise the RBI's regulatory role (paragraphs 46 to 54, 65 to 73). Necessity of bail-in does not allow it to be done other than in the manner the Master Circular prescribes (paragraphs 74 to 78). The Court also noted that the bank had offered these high-risk bonds to individual investors contrary to the Master Circular (paragraph 79).

Controlling point

The Administrator had no power to write down the AT-1 bonds, and the act was ultra vires the Master Circular read with the Reconstruction Scheme.

Order and next steps

The appeals were dismissed, the High Court judgment left undisturbed, interim orders vacated, the annual coupon to be paid in terms of the Information Memoranda, parties to bear their own costs, and observations were made only for deciding the appeals.

Practical implications

An investor in perpetual or loss-absorbing bank instruments can cite this judgment to challenge a write-down that is not made by the authority, at the time and in the manner the instrument's terms and the RBI Master Circular prescribe; issuers should note the limit on offering AT-1 bonds to individuals.

Limits of this ruling

• The Court did not decide whether the bonds could or should have been written down by the RBI in some other manner, it addressed the manner of write-down and not the relief to bondholders such as the quantum of any restoration, and its observations were confined to deciding these appeals so pending proceedings remain uninfluenced.