How YES Bank Tried to Cancel Bonds
During the reconstruction, the administrator appointed under Section 36ACA of the Banking Regulation Act, 1949, purported to write down the AT-1 bonds. Section 36ACA allows the Reserve Bank to supersede the board of a banking company for a limited period and to appoint an administrator to manage its affairs. The administrator steps into the shoes of the board. He runs day-to-day management, takes decisions needed to keep the bank functioning, and prepares the ground for a scheme of reconstruction.
In the YES Bank matter, the administrator treated the write-down as part of those steps. The bondholders contended that the administrator had gone beyond management and had exercised a regulatory power of cancellation that the statute did not give him. They pointed to the final reconstruction scheme framed under Section 45 of the Banking Regulation Act. That scheme, which carried statutory force once notified, did not contain a provision for write-down of AT-1 bonds. An earlier draft had contemplated such a step, but the final version intentionally omitted it. Despite that omission, the write-down was given effect.
The Bombay High Court accepted the bondholders' challenge and set aside the cancellation. It restored the bonds to their position before the write-down. The Supreme Court has now affirmed that outcome, after examining the interaction between Section 36ACA, Section 45, and the Basel III Master Circular.
Why the Supreme Court of India Agreed
The bench started with the statutory framework. Section 36ACA creates an administrator who acts as a substitute for the board. Section 45 provides for preparation and sanction of a scheme of reconstruction or amalgamation. The Basel III Master Circular lays down the conditions under which AT-1 instruments may be written down. Read together, the Court said, these provisions did not confer on the administrator an independent power to cancel bonds.
The Court observed that under the framework, the write-down power was to be exercised by the bank or by the central regulator in accordance with the Circular and the terms of issue. In this case, neither had exercised it. The final reconstruction scheme, which was the governing legal instrument for the rescue, had deliberately left out the write-down provision. The Court treated that omission as intentional. Where the scheme makers had considered a write-down and then dropped it, the administrator could not reintroduce it through his own order.
The judgment also rejected the argument that a general or omnibus savings clause could supply the missing authority. Such clauses are often inserted in schemes to protect actions taken in good faith or to preserve continuity of contracts, employment, and proceedings. The Court said an omnibus clause cannot be read to vest extraordinary regulatory powers in an administrator acting as a board substitute. A power as serious as permanent cancellation of listed debt instruments must flow from clear statutory language or from an express provision in the scheme. It cannot be implied from broad saving words.
Administrator Is a Substitute, Not Regulator
A large part of the judgment explains the limits of an administrator's role. When the Reserve Bank supersedes a board under Section 36ACA, the administrator manages the bank's affairs. He can operate accounts, approve payments, deal with staff, engage with depositors, and take steps to stabilise the institution. What he cannot do is assume the separate role of the regulator.
The Reserve Bank has a distinct position under the Banking Regulation Act and under the Basel framework. It sets capital standards, issues master directions, and approves reconstruction schemes. The bank itself, through its board or through the terms of the bond contract, triggers loss absorption when the contractual and regulatory conditions are met. The administrator is neither. He is a temporary manager, not the author of capital regulations and not the sanctioning authority for the scheme.
The Court said allowing an administrator to write down AT-1 bonds on his own would blur that separation. It would let a person appointed to manage the bank exercise a power that the statute reserves for the bank acting within regulatory limits and for the Reserve Bank acting under the scheme process. Indian company and banking law often draws this line between management and ownership, and between management and regulation. The judgment applies that line to bank resolution. Temporary control does not equal plenary power over investor rights.
What Before Reconstitution Actually Means
One technical argument concerned the phrase before reconstitution in Clause 2.15 of Annex 16 to the Basel III Master Circular. The provision deals with the timing of actions relating to AT-1 instruments around the period of reconstruction. Arguments were raised that the phrase could support a write-down ordered in the run-up to the new scheme.
The Court clarified that before reconstitution signifies the period prior to the scheme taking effect. It does not create a free-standing window in which the administrator can impose a write-down after the final scheme has omitted it. Timing language cannot substitute for substantive power. Even if an action falls within a particular period, it still needs a holder of the power and a legal instrument authorising it. Here, the final scheme contained no such authorisation, and the bank and the central regulator had not exercised the write-down power under the Circular.
This reading matters for future drafting. Offer documents, information memoranda, and master circulars often use phrases such as before reconstitution, upon trigger, or at the point of non-viability. Courts will read them in their full context and in line with the final notified scheme, not in isolation. A single phrase will not be stretched to permit cancellation of capital instruments worth hundreds of crores unless the scheme and the statute clearly allow it.
What Bondholders and Banks Should Do Now
The immediate effect is straightforward. The write-down stands quashed, and the Bombay High Court order restoring the bonds stands affirmed. The bonds revive with their contractual consequences. Questions of interest for the period of cancellation, listing and payment mechanics, and tax treatment will now have to be worked out between the bank, the trustee for the bondholders, and the market authorities in line with the courts' orders and the terms of issue. Investors holding through mutual funds and portfolio structures that had written off these exposures will need to reconcile their books with the restored position.
For banks and their advisers, the judgment tightens process discipline in any future reconstruction. If a write-down of AT-1 instruments is intended, it must be anchored in the bank's decision taken under the Basel framework and must find clear expression in the final scheme under Section 45. Draft provisions that do not survive into the notified scheme cannot be acted upon. Reliance on general savings language will not cure the gap. Boards, administrators, and legal teams will need to check the chain of authority document by document, from the statute to the Circular to the bond terms to the notified scheme, before capital instruments are cancelled. That discipline protects both the rescue process and the investors who fund it.
