The decision of the Bombay High Court to set aside the complete write-down of approximately ₹8,415 crore worth of Additional Tier One bonds issued by Yes Bank has reopened a critical legal conversation on the relationship between banking regulation, contractual certainty, and constitutional discipline. With the matter now pending before the Supreme Court, the controversy has moved beyond the immediate interests of a defined class of bondholders and into a broader examination of how financial crises are addressed within the bounds of statutory authority.
The dispute does not turn on whether the State may intervene decisively to prevent the collapse of a systemically important bank. Rather, it raises a more nuanced question. When extraordinary powers are exercised, do they remain anchored to law, or do they drift into expediency at the cost of legal coherence? The Yes Bank episode provides a rare opportunity to examine this tension in a concrete setting.
Additional Tier One bonds form part of a bank’s regulatory capital under the Basel Three framework and corresponding Reserve Bank of India guidelines. They are hybrid instruments designed to absorb losses in periods of financial stress, thereby reducing the likelihood of taxpayer-funded bailouts. Investors in these instruments accept enhanced risk in return for higher yields, with the understanding that loss absorption will occur only upon specified trigger events and in accordance with clearly defined procedures.
The contractual terms governing AT-1 bonds typically allow for conversion into equity or write-down when capital thresholds are breached. However, these mechanisms are not free-standing. They operate within a tightly regulated framework that links contractual rights to statutory and regulatory timelines. The legitimacy of loss absorption depends not only on the existence of a trigger but also on the stage at which it is invoked.
Indian jurisprudence has long recognised that commercial certainty depends upon faithful adherence to contractual architecture. In Energy Watchdog v Central Electricity Regulatory Commission, the Supreme Court emphasised that contracts in regulated sectors must be interpreted strictly and cannot be rewritten through executive action.
Yes Bank’s reconstruction was undertaken under Section 45 of the Banking Regulation Act 1949. On March 13, 2020, the Central government notified the final reconstruction scheme, which immediately acquired statutory force. From that point onward, the scheme governed all actions relating to the bank’s reconstitution, capital structure, and stakeholder rights.
The legal character of such schemes has been settled by precedent. In Life Insurance Corporation of India v D J Bahadur, the Supreme Court held that once a statutory scheme comes into effect, it supersedes prior arrangements to the extent of inconsistency, but cannot be altered except in accordance with law. Similarly, in Union of India v Hindustan Development Corporation, the Court affirmed that statutory schemes generate legitimate expectations that cannot be defeated by subsequent administrative discretion.
The significance of the Yes Bank scheme lies in what it included and what it omitted. Earlier drafts contained a provision for write-down of AT-1 bonds. The final notified version did not. This omission, viewed in statutory interpretation, is not neutral. It reflects a conscious legislative choice.
The write-down of AT-1 bonds occurred on March 14, 2020, one day after the reconstruction scheme was notified. This sequencing lies at the heart of the legal controversy. Both the bond documentation and the Reserve Bank’s regulatory framework contemplate that loss absorption through write-down must occur prior to reconstitution or amalgamation.
Once the scheme came into force, the legal landscape changed. Administrative authority became circumscribed by the statute. In State of Tamil Nadu v P Krishnamurthy, the Supreme Court held that subordinate or executive action inconsistent with statutory instruments is vulnerable to invalidation.
The Bombay High Court’s intervention reflects this settled principle. The issue is not whether the Administrator acted with stabilisation in mind, but whether he acted within the authority that remained available after the statutory scheme had crystallised.
Financial crises often test the resilience of legal systems. While courts traditionally show deference to economic policy, that deference is not unqualified. In R K Garg v Union of India, the Supreme Court acknowledged the need for flexibility in economic legislation but cautioned that such flexibility cannot excuse arbitrariness.
The rule of law requires that even emergency measures adhere to statutory limits. In Maneka Gandhi v Union of India, the Court famously held that arbitrariness is antithetical to equality before law. This principle applies with equal force in financial regulation.
The concern raised by the Yes Bank write-down is that regulatory discretion may have crossed into an area reserved for statutory determination. Such crossings unsettle markets because they introduce uncertainty into what investors assume to be rule-based systems.
One of the more complex dimensions of the dispute involves capital hierarchy. Conventionally, equity absorbs losses before hybrid instruments and debt. This hierarchy is not merely a commercial convention but an organising principle of banking law.
In ICICI Bank v APS Star Industries, the Supreme Court underscored the importance of predictability in financial transactions. Investors structure their decisions based on established priority rules. Any deviation from these expectations requires explicit statutory backing.
In the Yes Bank reconstruction, equity shareholders retained value while AT-1 bondholders were fully extinguished. Whether this outcome was legally sustainable is a matter before the Supreme Court. However, the episode highlights the importance of clarity when statutory schemes alter conventional ordering.
A distinctive feature of this case is the presence of retail investors among the bondholders. Many had exposure through mutual funds or direct holdings. While mis-selling allegations fall within a separate regulatory domain, their relevance lies in the broader question of trust in financial markets.
In Sahara India Real Estate Corporation v Securities and Exchange Board of India, the Supreme Court observed that investor confidence is the cornerstone of capital markets. Regulatory actions that appear unpredictable or procedurally flawed risk undermining that confidence.
For an economy seeking to deepen its debt markets, such perceptions carry long term consequences.
The reconstruction scheme allowed pre-existing equity shareholders to retain a limited stake despite acknowledged governance failures. This aspect has raised concerns about moral hazard. If shareholders responsible for mismanagement are insulated from full loss while creditors bear the burden, the disciplining function of markets weakens.
The Supreme Court in Centre for Public Interest Litigation v Union of India emphasised that public interest considerations must include accountability and transparency. Banking regulation, while aimed at stability, must also reinforce responsible governance.
India’s financial markets operate in a global ecosystem. International investors assess not only returns but also legal reliability. Jurisdictions that demonstrate consistency in applying statutory frameworks are rewarded with lower risk premiums.
The Yes Bank episode has therefore attracted attention beyond domestic boundaries. It raises questions about how India balances regulatory intervention with contractual certainty. The answer will shape perceptions of India’s debt markets for years to come.
The Yes Bank AT-1 write-down controversy is not merely a dispute about bonds. It is a legal examination of how statutory authority interacts with contractual instruments during moments of crisis. The pending proceedings before the Supreme Court present an opportunity to clarify foundational principles governing bank resolution.
Financial stability and the rule of law need not stand in opposition. When statutory frameworks are applied with fidelity and restraint, they reinforce confidence rather than erode it. The outcome of this case will therefore resonate beyond the immediate parties, offering guidance on how India navigates the delicate balance between necessity and legality in financial governance.
About the author: Kushal Kumar is a Co-Founder Partner of Erudite Legal.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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