New Delhi — India’s Supreme Court on Thursday upheld a Bombay High Court ruling that invalidated the cancellation of Yes Bank’s Additional Tier-1 (AT1) bonds during its 2020 financial rescue, delivering a significant legal victory for investors who lost their investments in the restructuring.
A two-judge bench comprising Justices Dipankar Datta and Augustine George Masih dismissed appeals filed by Yes Bank, the Reserve Bank of India (RBI) and the central government, leaving intact the High Court’s January 2023 decision to overturn the write-down of bonds totaling Rs 8,415 crore.
The decision concludes a lengthy legal dispute over how bondholders were treated during the government-backed rescue of the financially troubled lender.
The Supreme Court issued its ruling nearly five months after reserving judgment following extensive arguments from the bank, regulators, government representatives and investor groups.
The case originated in March 2020, when Yes Bank faced a severe financial crisis caused by deteriorating loan quality and declining depositor confidence.
The RBI responded by replacing the bank’s board and imposing a temporary moratorium on its operations. The government subsequently approved a reconstruction plan supported by fresh capital from a group of investors led by State Bank of India.
As part of the rescue effort, the bank’s administrator ordered the complete write-down of AT1 bonds worth Rs 8,415 crore, effectively wiping out the value of those securities for investors.
AT1 bonds are a category of high-risk bank securities designed to absorb losses when financial institutions encounter severe difficulties. Under certain contractual and regulatory conditions, banks can reduce or eliminate the value of these instruments to protect their financial stability.
However, the Yes Bank dispute centered on whether the authorities had the legal power to extinguish the bonds under the circumstances surrounding the lender’s reconstruction.
One of the central questions before the Supreme Court was whether the write-down was authorized by the government’s reconstruction scheme or by the RBI’s regulatory rules and the contractual terms governing the bonds.
The justices also examined provisions of the Banking Regulation Act, particularly Section 45, which governs the reconstruction of banking institutions.
The court considered when a bank should be regarded as fully reconstructed under the law and whether a regulatory determination that a bank had become nonviable could independently justify writing down AT1 bonds.
The ruling leaves the Bombay High Court’s decision in place and represents a significant development for bondholders who challenged the losses imposed during the bank’s rescue.
The case also highlights the legal questions surrounding investor protections, regulatory authority and the treatment of high-risk financial instruments during banking crises. (Source: IANS)
