The Supreme Court has sharply questioned the Reserve Bank of India’s oversight of YES Bank, criticising the regulator for remaining a “mere bystander” as the lender’s financial health deteriorated and serious irregularities came to light.
The Court also raised concerns over YES Bank’s sale of high-risk Additional Tier-1 (AT-1) bonds to individual investors, stressing that stricter scrutiny was needed before retail customers were exposed to such complex financial instruments.
A Bench of Justices Dipankar Datta and Augustine George Masih made the observations while dismissing appeals filed by YES Bank, the RBI and the Union government. The ruling upheld the Bombay High Court’s decision to quash the bank’s move to write off AT-1 bonds worth ₹8,415 crore in March 2020.
The Bench noted that YES Bank’s Common Equity Tier-1 (CET1) capital ratio had fallen to an alarming 0.6%, questioning how the situation could deteriorate to that extent without more effective regulatory intervention.
It also pointed out that irregularities in the bank’s operations had surfaced earlier and that criminal proceedings had been initiated against some of its personnel. Passing the consequences of administrative failures on to investors, the Court observed, would be deeply unfair.
Court flags questionable handling of AT-1 bonds
The judges expressed serious reservations about the conduct of the RBI, YES Bank and the bank’s administrator during the lender’s reconstruction in March 2020.
Their handling of bonds valued at more than ₹8,500 crore was described in the judgment as questionable, with the Court examining whether the write-off had been carried out in accordance with the governing legal framework.
The Bench also highlighted evidence suggesting that YES Bank had marketed AT-1 bonds to retail investors despite regulatory restrictions on offering such high-risk securities to individuals.
It referred to an email dated December 28, 2016, purportedly sent by a senior manager and financial adviser of YES Bank in Chennai, offering the instruments to individual investors.
The Court said tighter scrutiny should have been exercised before individual investors were drawn into securities carrying such substantial risks.
Why the ₹8,415-crore write-off was struck down
The dispute originated during YES Bank’s financial crisis in March 2020, when the Central government imposed a moratorium and introduced a reconstruction scheme to stabilise the lender.
An initial draft of the scheme proposed permanently writing down the bank’s AT-1 bonds. However, following objections from investors, the provision was deliberately omitted from the final version.
Despite that deletion, the administrator extinguished the bonds on March 14, 2020, a day after the reconstruction scheme came into force.
The Supreme Court held that the administrator lacked the authority to proceed with the write-off after the relevant provision had been removed from the final scheme.
The Bench warned that permitting such an action despite the government’s deliberate decision to exclude the provision could expose the authorities to allegations of acting clandestinely and committing a fraud on the public. It clarified, however, that it did not believe the government had intended such a result.
Instead, the Court concluded that the administrator had proceeded under the mistaken understanding that the power to write down the bonds remained available even after the reconstruction scheme took effect.
Financial rescue cannot override prescribed procedure
The judgment also addressed the regulatory framework governing AT-1 bonds, which permits such instruments to be written down in specified circumstances.
The Court made clear that the existence of that power did not mean it could be exercised by any authority or without following the prescribed procedure. The decision had to be taken by the competent authority in accordance with the applicable rules.
The argument that writing off the bonds was necessary to rescue YES Bank’s finances did not persuade the Bench to overlook those requirements.
By dismissing the appeals filed by YES Bank, the RBI and the Union government, the Supreme Court left the Bombay High Court’s ruling intact.
The decision underscores a central principle in the handling of financial crises: stabilising a bank does not dispense with legal safeguards, and investors cannot be made to bear the consequences of administrative action taken without proper authority.