By Legum Pacific Editorial ·
Suppose you held a Basel III AT‑1 bond issued by a bank, or your mutual fund held such bonds. The bank underwent a reconstruction exercise and a final Reconstruction Scheme was published. Soon after, the Administrator announced the AT‑1 bonds had been written down to nil. Bondholders challenged that step in court.
What does the law say?
The judgment examines the Reserve Bank of India’s Master Circular on Basel III and the information memorandum for the AT‑1 bonds. The Master Circular classifies regulatory capital and treats Additional Tier 1 (AT‑1) instruments as having loss‑absorbency features (conversion or write‑down) triggered in certain circumstances.
Two triggers are central in the Master Circular and the bond documents. First, a pre‑specified trigger tied to the bank’s Common Equity Tier 1 (CET1) ratio. At that level the bank has options under each instrument’s information memorandum about whether to write down, convert or otherwise treat the instruments. Second, the Point of Non‑Viability (PONV), where the Master Circular contemplates the regulator’s role in activating loss absorption to protect depositors and financial stability.
The Banking Regulation Act (section 36ACA) provides for appointment of an Administrator when the Reserve Bank supersedes a bank’s board.
What did the Supreme Court decide?
The Court tested the Administrator’s action by looking at the documents and law as they existed on the date the write‑down was announced. It observed that the Draft Scheme initially contained a clause addressing AT‑1 instruments, but the final Reconstruction Scheme did not include a clause authorising a write‑down of those bonds.
On that basis the Court held two points. First, the Administrator’s decision to write down the AT‑1 bonds could not stand where the notified Reconstruction Scheme omitted the draft clause that provided for write‑down. The omission in the final scheme was treated as deliberate and dispositive of the scheme’s effect on bondholders’ rights.
Second, the Master Circular and the information memorandum allocate distinct roles for loss absorption. The pre‑specified trigger gives the issuing bank an option under the information memorandum; the PONV trigger envisages the regulator’s involvement in determining non‑viability and the amount of non‑equity capital to be written down. The Court held that the Administrator could not exercise the regulatory role that the Master Circular assigns to the Reserve Bank.
For these reasons the High Court’s order setting aside the Administrator’s write‑down was upheld on those legal grounds.
What does this mean for ordinary people and investors?
If you held AT‑1 bonds and an administrator or other authority announces a write‑down, the court will test the validity of that step based on the law and documents in force on the date the action occurred. A final reconstruction scheme that omits a proposed power to alter bond rights may be treated as intentionally leaving those rights untouched.
The decision emphasises that who is authorised to trigger loss absorption matters. Where the Master Circular and the bond’s information memorandum contemplate the Reserve Bank’s role in a PONV write‑down, that role cannot be assumed by the Administrator appointed under the Banking Regulation Act.
This ruling does not rewrite the regulatory rules. It applies the specific Master Circular provisions and the Reconstruction Scheme as they appeared in the record of this case, and determines whether the Administrator acted within the statutory and contractual framework when the write‑down was declared.
How long does the legal test take?
The Court stated that challenges to administrative actions are judged by the law and facts as they stood on the date of the action. Subsequent events that change the bank’s financial position do not alter the legal analysis of whether the step taken then was authorised by the scheme, the regulator’s rules, and the bond documents.
Key points
- The Master Circular and each bond’s information memorandum set out when AT‑1 instruments may be written down or converted and who has the role at each trigger.
- A final Reconstruction Scheme that omits a draft clause authorising write‑down can be taken as not authorising that power.
- The Administrator appointed under section 36ACA acts within statutory powers and cannot exercise regulatory functions reserved to the Reserve Bank under the Master Circular.
- Legality of a write‑down is judged by the law and documents in force on the date the write‑down was ordered.
Source: Supreme Court of India (official judgment) (opens in a new tab) · Yes Bank Limited v. Axis Trustee Services Limited & Ors., C.A. No. 3182 of 2025, 2026 INSC 1132