The Supreme Court has observed that it would be “highly unfair” to make investors bear the consequences of administrative lapses, after the Reserve Bank of India (RBI) allegedly allowed YES Bank's Common Equity Tier 1 (CET1) ratio to fall to 0.6% despite earlier irregularities in the bank's functioning.

“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. It cannot be denied that material irregularities in functioning of YES BANK were noticed much prior; criminal prosecution has also been initiated against the personnel of YES BANK. However, to have the investors at the receiving end of the administrative lapses would be highly unfair.”, a bench of Justice Dipankar Datta and Justice Augustine George Masih observed while setting aside the write-down of ₹8,415 crore worth of Additional Tier 1 (AT-1) bonds.

The Court upheld the Bombay High Court's decision, holding that YES Bank's Administrator lacked the authority to write down the bonds after the final reconstruction scheme came into force.

“…administrator appointed under the BR Act has to act squarely within the four corners of the powers conferred upon him under the statute. He acts as a substitute for the Board of Directors, to run the company in an efficient manner. Any act performed by the administrator beyond the powers clothed upon him would be wholly illegal and void.”, the Court said, emphasizing that an Administrator cannot be said to have exercised the power vested in the RBI.

Yes Bank's write-down was against RBI's Master Circular on Basel III Capital Regulations

The Court noted that material irregularities in YES Bank's functioning had been noticed much earlier and criminal prosecution had also been initiated against bank personnel. However, it said investors could not be made to bear the consequences of administrative failures.

Although the draft reconstruction scheme expressly provided for a permanent write-down of AT-1 bonds, the clause was omitted from the final scheme notified on March 13, 2020. The Administrator nevertheless wrote down the bonds the next day, extinguishing investors' claims.

Interpreting the RBI's Master Circular on Basel III Capital Regulations, the Court held that the prescribed conversion or write-down upon activation of the point-of-non-viability trigger had to take place before the reconstruction scheme took effect.

“The question is not whether the AT-1 Bonds could have been or ought to have been written down off. The question is the manner in which it was done, de hors the Master Circular and the Information Memoranda…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. Putting the investors to such uncalled-for risk, could have well been avoided. The purpose of the AT-1 Bonds is imperative: it acts as a safety barrier to the Bank from collapsing altogether. That purpose could have been served had the RBI and YES BANK acted in accordance with the terms of the Master Circular.”, the Court said.

Questions Raised Over Sale Of High-Risk AT-1 Bonds To Individual Investors

The judgment authored by Justice Datta also raised concerns over YES Bank's practice of offering AT-1 bonds to individual investors, despite the RBI's regulatory framework contemplating that such high-risk securities should be offered only to institutional investors.

“However, we find that YES BANK not only permitted but actively offered these instruments to individual investors in violation of the Master Circular,” the Court observed.

It noted that the Securities and Exchange Board of India (SEBI), in its counter-affidavit, had stated that bonds traded on the BSE and NSE platforms complied with the applicable SEBI regulations. SEBI had also imposed penalties on a private wealth management firm and YES Bank's then Managing Director for facilitating the sale of the bonds to individual investors.

However, the Court pointed out that bonds offered directly by YES Bank to individual investors fell outside the purview of SEBI regulations.

The Court also referred to an email dated December 28, 2016, placed on record by a party-in-person, which appeared to have been sent by YES Bank's Senior Manager–Financial Advisor in Chennai, offering the bonds for sale to individual investors.

Observing that banks had previously faced regulatory action for selling such instruments to individual investors without adequate risk disclosures, the Court said:

“A tighter scrutiny ought to have been exercised before luring individual investors to such high-risk securities.”

In terms of the aforesaid, the appeal was dismissed.

YES BANK LIMITED & ANR. VERSUS AXIS TRUSTEE SERVICES LIMITED & ORS.

Appearance:

For Appellant(s) : Mr. Tushar Mehta, Solicitor General Mr. Raghav Shankar, Additional Solicitor General Mr. Vivek Shetty, Adv. Mr. Nishant Upadhyay, Adv. Mr. Akhilesh Menezes, Adv. Mr. Bhuvan Kapoor, Adv. Mr. Aman Mehta, Adv. Mr. Aditya Dixit, Adv. Mr. Neelasbh Bist, Adv. Ms. Pallavi Mishra, Adv. Ms. A. Sinha, Adv. Mr. Navneet R., AOR Mr. Shyam Divan, Sr. Adv. Mr. Balbir Singh, Sr. Adv. Ms. Shally Bhasin, Adv. Ms. Veena Sivaramakrishnan, Adv. Mr. Siddhant Kant, Adv. Mr. Prateek Gupta, Adv. Mr. Mrityunjoy Roy, Adv. Mr. Arpith Jacob Varaprasad, Adv. Mr. S. S. Shroff, AOR

For Respondent(s) :Dr. A.M. Singhvi, Sr. Adv. Mr. C.A. Sundaram, Sr. Adv. Mr. Shyam Divan, Sr. Adv. Mr. Balbir Singh, Sr. Adv. Ms. Hinanshu Chaubey, Adv. Mr. Siddharth Garg, Adv. Mr. L.S. Kamyar, Adv. Mr. Rishi Chouksey, Adv. Ms. Nitya Prabhakar, Adv. Mr. Srijan Sinha, AOR Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Mr. Kamaldeep Dayal, Adv. Mr. Ankur Saigal, Adv. Mr. Amit Bhandari, Adv. Ms. Sukriti Bhatnagar, Adv. Ms. Shivani Agarwal, Adv. Mr. Mihir Kamdar, Adv. Mr. E. C. Agrawala, AOR Mr. Aman Raj Gandhi, AOR Mr. Vikram B. Trivedi, Adv. Mr. Sunil Tilokchandani, Adv. Mr. Himalaya Chaudhari, Adv. Mr. Nagarkatti Kartik Uday, AOR Mr. Paras Parekh, Adv. Ms. Malvika Kapila, AOR Ms. Harbani Shinh, Adv. Ms. Apoorva Jain, Adv. Mr. Kanishk Sachdeva, Adv. Ms. Ankita Roy, Adv. Ms. Vanshita Shah, Adv. Mr. S. S. Shroff, AOR Ms. Shally Bhasin, Adv. Ms. Veena Sivaramakrishnan, Adv. Mr. Siddhant Kant, Adv. Mr. Prateek Gupta, Adv. Mr. Mrityunjoy Roy, Adv. Mr. Arpith Jacob Varaprasad, Adv. Ms. Vanya Gupta , AOR Mr. P. S. Sudheer, AOR Mr. Rishi Maheshwari, Adv. Ms. Anne Mathew, Adv. Mr. Bharat Sood, Adv. Mr. Jashan Vir Singh, Adv. Mr. Kaushik Choudhury, AOR Mr. Deepanshu Jain, Adv. Mr. Shaantanu Jain, Adv. Mr. Jyotirmoy Chatterjee, Adv. Ms. Aaheli Roy, Adv. Ms. Jahanvi Khanna, Adv. Mr. Hitendra Nath Rath, AOR Mr. Tushar Mehta, Solicitor General Ms. Aishwarya Bhati, A.S.G. Ms. Archana Pathak Dave, A.S.G. Mr. K M Nataraj, A.S.G. Mr. Gurmeet Singh Makker, AOR Mr. Shailesh Madiyal, Adv. Mr. Shashank Bajpai, Adv. Mr. Navneet R., AOR M/S. K Ashar & Co., AOR Mr. Pratap Venugopal, Sr. Adv. Mr. Abhishek Singh, Adv. Mr. Abhishek Yadav, AOR Mr. Saurabh Yadav, Adv. Ms. Ritu Yadav, Adv. Mr. Hetal Thakore, Adv. Ms. Jyoti Ghag, Adv. Mr. Kunal Parekh, Adv. M/S. Dua Associates, AOR Respondent-in-person Mr. Ravi Tyagi, AOR Mr. Mayank Mishra, Adv. Ms. Manmilan Sidhu, Adv. Mr. Daman Popli, Adv. Mr. Abhijay Basu, Adv. Mr. Abhishek Rathi, Adv. Mr. P. V. Yogeswaran, AOR Mr. Supratik Sarkar, Adv. Mr. Saurav Gupta, AOR Mr. Srijan Sinha , AOR Mr. Himanshu Chaubey, AOR Mr. Somesh Chandra Jha, AOR Mr. Mayank Pandey, AOR Ms. Rohini Prasad, AOR Mr. Rajiv Jain, Adv. Ms. Ashika Ranjan, Adv. Ms. Shruti Sakshi, Adv. Mr. Zaid Hashmat, Adv. Ms. Anupama Jha, Adv. Mr. Tushar Mehta, Solicitor General Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Shubhra Kapur, Adv. Mr. Anuraj Mishra, Adv. Ms. Mahima Kapur, Adv. Mr. Sanchit Garga, AOR Mr. Ishit Saharia, AOR Mr. Abhindra Maheshwari, Adv. Mr. Pulkit Agarwal, AOR

CA Nos. 3183-3192/2025 Mr. Neeraj Kishan Kaul, Sr. Adv. Mr. Vikram B. Trivedi, Adv. Mr. Sunil Tilokchandani, Adv. Mr. Himalaya Chaudhari, Adv. Mr. Nagarkatti Kartik Uday, AOR Mr. Raghav Aggarwal, Adv. Mr. M.R. Shevaaz Khan, Adv.