The Supreme Court of India has dismissed appeals filed by YES Bank Limited, the Reserve Bank of India (RBI), and the Union of India challenging the Bombay High Court's decision setting aside the write-down of Additional Tier 1 (AT-1) bonds issued by YES Bank during its financial crisis in 2020.

In its judgment dated October 15, 2026, in YES Bank Limited & Anr. v. Axis Trustee Services Limited & Ors., reported as 2026 INSC 1132, a bench comprising Justice Dipankar Datta and Justice Augustine George Masih held that the Administrator appointed to oversee YES Bank could not independently exercise the RBI's regulatory power to write down the bonds. The Court also found that the final reconstruction scheme had deliberately omitted the provision contained in the draft scheme that proposed the permanent write-down of the AT-1 bonds.

The judgment examines the limits of an Administrator's statutory authority, the interpretation of the RBI's Basel III Capital Regulations, and the protection of investors' interests during the reconstruction of a financially distressed bank.


Background of the Case

YES Bank issued Basel III-compliant AT-1 bonds worth ₹3,000 crore on December 23, 2016, followed by another issuance worth ₹5,415 crore on October 18, 2017. Axis Trustee Services Limited was appointed as the trustee for both issuances.

AT-1 bonds are a form of regulatory capital designed to absorb losses when a bank's financial position deteriorates. They carry significant risks, including the possibility of being written down or written off when specified regulatory triggers are activated.

By early 2020, YES Bank was facing a serious financial crisis. On March 5, 2020, the Central Government imposed a moratorium under Section 45 of the Banking Regulation Act, 1949. On the same day, the RBI appointed an Administrator under Section 36ACA of the Act, superseding the bank's Board of Directors.

A draft reconstruction scheme was published on March 6, 2020, inviting comments from the public and other stakeholders. The draft contained a provision for permanently writing down the AT-1 bonds in full.

However, when the final YES Bank Limited Reconstruction Scheme, 2020 was notified on March 13, 2020, the provision for writing down the bonds had been omitted.

Despite this omission, the Administrator ordered the complete write-down of the AT-1 bonds on March 14, 2020, extinguishing the bonds issued in 2016 and 2017.

The action was challenged before the Bombay High Court, which set aside the Administrator's decision by its judgment dated January 20, 2023. YES Bank, the RBI and the Union of India subsequently approached the Supreme Court.


Issues Before the Supreme Court

The Court considered three principal issues:


  1. Whether developments following the write-down of the AT-1 bonds made a decision on the merits unnecessary.
  2. Whether the Administrator could write down the bonds in the absence of a specific provision authorising the action in the final reconstruction scheme.
  3. Whether the write-down complied with the RBI's Master Circular on Basel III Capital Regulations and the terms of the relevant Information Memoranda.

The Court examined these issues independently, focusing on the legal position at the time the bonds were written down rather than the subsequent financial recovery of YES Bank.


Draft Reconstruction Scheme Versus the Final Scheme

One of the central aspects of the judgment was the difference between the draft reconstruction scheme and the final scheme notified by the Central Government.

The draft scheme expressly provided that the AT-1 instruments issued by YES Bank would be permanently written down in full. However, this clause was removed from the final reconstruction scheme.

The Court examined the sequence of events leading to this omission. Following publication of the draft scheme, Axis Trustee Services Limited and other investors raised objections to the proposed write-down. The trustee suggested that the bonds be converted into equity instead, and the RBI's internal note recorded consideration of these concerns during the revision of the scheme.

The final reconstruction scheme retained provisions preserving the rights and liabilities of creditors and the continuity of existing contractual instruments, but it did not include the clause authorising the complete write-down of the AT-1 bonds.

The Court considered this omission significant. It found that the Central Government had consciously approved a final scheme that excluded the provision contained in the draft scheme.

The Administrator's subsequent decision to write down the bonds therefore contradicted the final scheme. The Court held that the Administrator had acted under an erroneous belief that the power to write down the bonds continued to exist after the scheme came into force.

The Court concluded that the action was impermissible and ultra vires the RBI's Master Circular read with the reconstruction scheme.


Can General Powers Authorise an Action Not Specifically Permitted?

YES Bank and its Administrator argued that the reconstruction scheme preserved existing contractual instruments and residual powers, and that the omission of the write-down provision did not eliminate the Administrator's authority to write down the bonds.

The Supreme Court rejected this argument.

It explained that a general provision preserving existing rights, liabilities and powers could not, by itself, confer a specific authority to write down the AT-1 bonds after the reconstruction scheme had come into force.

The treatment of the bonds was governed by the RBI's Master Circular and the relevant Information Memoranda, which prescribed a distinct framework for exercising the power to write down or convert the instruments.

The Court reiterated the principle that a power not specifically conferred cannot be implicitly derived from a general saving clause.

Accordingly, the Administrator could not rely on general or residual powers to undertake an action that was not authorised by the final reconstruction scheme and the applicable regulatory framework.


Interpretation of the RBI's Basel III Capital Regulations

The Court also examined the RBI's Master Circular on Basel III Capital Regulations, particularly Annex 16, which governs the loss-absorption features of AT-1 instruments.

The judgment explained that the framework recognises two principal triggers:

1. Pre-Specified Trigger Level

Under the terms applicable to the bonds, the trigger was linked to YES Bank's Common Equity Tier 1 (CET1) capital ratio falling below the specified threshold. Upon activation, the bank could exercise the options available under the relevant Information Memorandum, including writing down or converting the bonds.

2. Point of Non-Viability (PONV)

The second trigger applies when the bank is deemed non-viable or is approaching non-viability. Under the applicable regulatory framework, the RBI determines the necessary treatment of the non-equity regulatory capital instruments.

The Court noted that YES Bank's CET1 ratio had fallen to 0.6% as of December 31, 2019, substantially below the applicable regulatory threshold. The bank had the option to act under the pre-specified trigger but had not exercised it.

When the reconstruction process was initiated, the point of non-viability was deemed to have been triggered. However, the question before the Court was not merely whether the bonds could be written down. It was whether the correct authority had exercised the power in accordance with the prescribed procedure.

The Court interpreted the requirement that the bonds be written down or converted before reconstitution to mean before the reconstruction scheme came into force, rather than at any point during the subsequent implementation of the scheme.

It rejected the argument that the reconstruction process remained ongoing for several years and that the Administrator could therefore exercise the power at any time during that period.

The Court held that the regulatory framework could not be interpreted to extend the power beyond the stage contemplated by the Master Circular.


The Administrator Could Not Exercise the RBI's Regulatory Power

A further question concerned the scope of the Administrator's powers under Section 36ACA of the Banking Regulation Act, 1949.

The provision enables the RBI, in specified circumstances, to supersede a bank's Board of Directors and appoint an Administrator. The Administrator exercises the powers, functions and duties that would otherwise be exercised by or on behalf of the Board, subject to the statutory framework and directions issued by the RBI.

The appellants argued that the Administrator was empowered to write down the AT-1 bonds under the applicable regulations and the terms of the Information Memoranda.

The Supreme Court rejected the argument insofar as it sought to transfer the RBI's specific regulatory power to the Administrator.

The Court held that the Administrator acts as a substitute for the Board of Directors and must remain within the powers conferred by the statute. Any action beyond those powers would be illegal and void.

Under the applicable regulatory framework, the bank could exercise the options available at the pre-specified trigger, while the RBI was responsible for determining the treatment of the bonds at the point of non-viability.

The Court found that neither YES Bank nor the RBI had exercised the relevant power in the manner required by the framework. The Administrator could not assume the RBI's regulatory role and exercise a power that had not been conferred upon him.

The Court therefore held that the Administrator's action could not be sustained.


The Court's Observations on Regulatory Lapses and Investor Protection

The judgment also examined the conduct of YES Bank, the RBI and the Administrator during the reconstruction process.

The Court observed that the financial crisis and the need to revive the bank did not justify disregarding the prescribed legal procedure. Even if writing down the bonds and subsequently infusing public-sector capital were considered necessary to restore the bank's financial viability, the actions had to be carried out in accordance with the applicable regulatory framework.

The Court questioned the failure to follow the prescribed process despite the involvement of the bank, its regulator and the Administrator in the reconstruction exercise.

It further noted that the AT-1 bonds were high-risk instruments intended, under the RBI's framework, to be offered to specified classes of investors, including institutional investors. However, YES Bank had also offered these instruments directly to individual investors.

The Court referred to the concerns arising from the sale of such instruments to individual investors without adequate scrutiny of the risks involved. It observed that tighter scrutiny ought to have been exercised before offering high-risk securities to individual investors.

These observations highlight the importance of regulatory compliance, clear disclosure of investment risks and adherence to the prescribed conditions governing financial instruments.


Final Decision of the Supreme Court

The Supreme Court found no reason to interfere with the Bombay High Court's judgment and dismissed the appeals.

The Court's decision means that the High Court's order setting aside the Administrator's write-down of the AT-1 bonds remains in force.

It also clarified that the payment of the annual coupon rate would remain unaffected by the outcome of the appeals and must be made in accordance with the relevant Information Memoranda.

The parties were directed to bear their own costs.


Conclusion

The judgment in YES Bank Limited & Anr. v. Axis Trustee Services Limited & Ors. underscores the importance of statutory authority and procedural compliance in the regulation and reconstruction of banks.

The Supreme Court made clear that the financial necessity of rescuing a distressed bank cannot justify disregarding the terms of the final reconstruction scheme or the regulatory framework governing AT-1 bonds. The Administrator's authority was limited by the Banking Regulation Act, the reconstruction scheme and the RBI's Master Circular.

By dismissing the appeals, the Court upheld the decision that the Administrator could not independently write down the bonds in the absence of the required legal authority.

The ruling is significant for banking regulation, investor protection and the interpretation of regulatory capital instruments. It reinforces the principle that even in circumstances involving serious financial distress, regulatory powers must be exercised by the appropriate authority and in accordance with the law.