YES Bank AT-1 Bonds: The Limits of Administrative Power and the Legality of Write-Down
Background
The Supreme Court’s decision concerning the write-down of Additional Tier-I (AT-1) bonds issued by Yes Bank Limited in Yes Bank Limited & Anr. v. Axis Trustee Services Limited & Ors., 2026 INSC 1132 underscores a fundamental principle of administrative law: an authority cannot exercise a power that has neither been expressly conferred upon it nor validly preserved under the governing legal framework. The judgment also clarifies the distinction between the contractual and regulatory conditions governing AT-1 bond write-downs and the authority competent to exercise that power.
Facts
Yes Bank Limited issued Basel III-compliant Additional Tier-1 (AT-1) bonds worth ₹3,000 crore on 23.12.2016, followed by a further issuance of ₹5,415 crore, with Axis Trustee Services Limited acting as the debenture trustee. Subsequently, the Bank’s Common Equity Tier-1 (CET-1) capital ratio fell below the prescribed minimum, prompting the Central Government to impose a moratorium and supersede its Board of Directors by appointing an Administrator under the Banking Regulation Act, 1949. Following the notification of the Final Reconstruction Scheme, the Administrator ordered the write-down of the AT-1 bonds, resulting in the extinguishment of the bondholders’ investments. Aggrieved by the decision, the bondholders challenged the write-down before the Bombay High Court, which set aside the impugned decision on 20.01.2023.
Reasoning
The Supreme Court considered three principal issues: (a) whether subsequent developments rendered adjudication unnecessary; (b) whether the Administrator possessed authority to write down the bonds in the absence of an express provision in the Final Reconstruction Scheme; and (c) whether the action complied with the applicable RBI Master Circular and the bond information memorandum.
Relying on Nawabkhan Abbaskhan v. State of Gujarat, (1974) 2 SCC 121, the Court emphasised that the validity of administrative action must be assessed with reference to the circumstances and law prevailing when the action was taken. Subsequent developments cannot retrospectively validate an otherwise unlawful decision or render its legality irrelevant thus answering the first issue.
The Draft Reconstruction Scheme contemplated a complete write-down of AT-1 bonds; however, that provision was omitted from the Final Reconstruction Scheme. The Court also considered representations made by investors and the trustee, along with an internal RBI note indicating that the proposed write-down had been dropped to avoid existing and future litigation. These materials supported the conclusion that the Administrator acted under an erroneous understanding of his authority. The Apex Court holds against the actions of Administrator by holding that a power not specifically conferred cannot be implicitly vested through a general, omnibus savings clause.
Examining Clause 2.15 and Clauses 56 and 57 of the RBI Master Circular on Basel III Capital Regulations, 2015, the Court distinguished the contractual trigger from the point of non-viability. The applicable capital threshold had been breached by 31 December 2019. At the relevant trigger stage, the bank could exercise the discretion available under the governing framework. Once the point of non-viability was reached, however, the regulatory framework required the write-down to be effected by the RBI. The Administrator could not substitute himself for the authority designated under the Master Circular. Consequently, the impugned action was legally unsustainable.
Conclusion/ Takeaway
A serious financial crisis does not dispense with statutory limits. Even where regulatory intervention is necessary, the action must remain within the boundaries of the governing scheme and the powers conferred by law. An action may appear commercially necessary yet still be unlawful if the authority exercising it lacks the requisite legal power.
