Yes Bank AT-1 Bonds: Supreme Court Pulls Up RBI for Acting as 'Mere Bystander', Striking Down Rs 8,415 Crore Write-Off as Arbitrary Excess

In a significant blow to the central bank’s handling of stressed banking assets, the Supreme Court has dismissed appeals filed by Yes Bank, the Union government, and the Reserve Bank of India (RBI), affirming the Bombay High Court's ruling that struck down the controversial March 2020 write-off of Rs 8,415 crore worth of Additional Tier 1 (AT-1) bonds. A bench comprising Justices Dipankar Datta and Augustine George Masih held that the RBI-appointed administrator acted wholly outside his statutory mandate and contrary to the regulatory framework governing perpetual debt instruments.

The apex court delivered a scathing critique of the banking regulator's conduct, directly describing the RBI as a "mere bystander" during the build-up to Yes Bank's collapse. The bench observed that the regulator allowed the lender’s Common Equity Tier 1 (CET1) ratio to plummet to an alarming 0.6 percent while irregular financial practices were conducted without decisive intervention. The justices underscored that penalizing investors to paper over regulatory omissions and supervisory failure was unacceptable in law, especially when criminal prosecutions had already established that former bank executives conducted fraudulent lending.

At the center of the judicial rejection was a glaring procedural breach during the rollout of the Yes Bank Reconstruction Scheme 2020. While the initial draft scheme released by the central bank contained a specific clause authorizing the cancellation of AT-1 bonds, that provision was consciously dropped from the final gazetted rescue plan. Despite the explicit omission, the bank's administrator unilaterally issued an order writing down the entire Rs 8,415 crore bond portfolio on March 14, 2020. The top court ruled that once the central government notified the finalized reconstruction plan without the write-off clause, the administrator possessed zero legal authority to revive an extinguished power.

The judgment establishes a crucial legal precedent regarding the boundaries of executive discretion during financial rescue operations. While AT-1 instruments carry high-yield risks and contractual loss-absorption clauses, the court emphasized that crisis management cannot serve as a blanket license to override binding procedural rules and property rights. By holding both the central bank and the administrator accountable, the ruling exposes severe cracks in India's resolution architecture, demonstrating that regulatory emergencies do not grant financial authorities immunity from constitutional fair play and statutory compliance.