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2021 (5) TMI 359 - HC - Indian LawsValidity of Master Circular dated 01.07.2015 - Issuance of both PNCPS and debt capital instruments/PDI for inclusion as AT1 capital - Jurisdiction of the Circular in view that the Basel III Capital Regulations have not been enacted as law as per Article 253 of the Constitution - Is the Circular ultra vires the Banking Regulation Act - Capital or Debt instruments. Whether the Master Circular was issued without jurisdiction? - HELD THAT - All the conditions specified in the Basel III Report were introduced in the Master Circular and the AT 1 bonds were issued by Yes Bank Limited by incorporating all these conditions in the information memorandum. Although the Petitioners state that they purchased the AT 1 bonds in the secondary market, they cannot claim to be ignorant of the terms and conditions thereof. Significantly, the Petitioners contractually agreed to invest in an instrument which may be permanently written down, if a point of non-viability trigger is reached - there is no doubt that the point of non-viability trigger was reached. Indeed, this is not disputed by the Petitioners. Pursuant thereto, the draft scheme of reconstruction was recommended by the RBI and approved by the Central Government resulting in the Reconstruction Scheme 2020. The final Reconstruction Scheme does not contain the clause dealing with permanent write-down although the said clause was present in the draft scheme of reconstruction. Whether the AT 1 bonds constitute capital or debt instruments? - HELD THAT - These instruments constitute regulatory capital but not share capital for purposes of CA 2013.Given the conclusion that it is not a part of share capital, we are of the view that Section 12 of the BR Act does not apply as regards AT 1 bonds. Consequently, the contention that Section 35 A of the BR Act cannot be relied upon to sustain the Master Circular by relying upon Dharani Sugars is untenable. Therefore, we conclude that the PDI do not constitute share capital for purposes of CA 2013. From the Master Circular, it is clear that both PNCPS and debt instruments/PDI may be issued as AT 1 instruments provided they fulfill the criteria specified therein. These features include a perpetual duration, the absence of a put option, the absence of security or guarantee and, most importantly, loss absorption at a pre-specific trigger point. From these features, it is clear that the only reason instruments such as the AT 1 bonds are permitted to be included in Tier I capital is because they are treated like and equated with equity share capital or CET 1 inasmuch as the holders of such AT 1 instruments cannot demand repayment of their investment in the same manner as the CET 1 shareholders cannot demand a buy-back - the AT 1 bonds do not constitute a debenture as defined in 2(30) and as dealt with in Section 71 of CA 2013. Whether the AT 1 bonds violate CA 2013? - HELD THAT - The controversy centres on statutory directions under Section 35 A of the BR Act that enable the issuance of AT 1 instruments, which constitute a particular form of property. This form of property, by its terms, permits a permanent write-down upon the occurrence of specified contingencies. In private law, many forms of proprietorship are recognized. By way of illustration, a lease confers interest in property but the lessee can agree, by contract, to the unilateral termination of the lease by the lessor even on without cause and without fault basis. Even in the context of sale, as per the TP Act, only absolute restraints on the rights of a purchaser are void. Thus, in our view, the Master Circular is not a subordinate legislation that deals with compulsory acquisition or expropriation. On the contrary, it deals with a form of investment instrument with an inherent inability to demand repayment of the principal. Therefore, we conclude that Article 300 A of the Constitution is not violated. Whether the AT 1 bonds violate the Contract Act or any other legislation? - HELD THAT - The AT 1 bonds do not violate CA 2013, the BR Act, the Contract Act or any other legislation. We further conclude that the RBI is authorized to issue the Master Circular in terms of the BR Act. Given the nature and characteristics of AT 1 bonds, which was disclosed to investors such as the Petitioners, these AT 1 bonds constitute a distinct class and therefore it is not tenable to contend that Article 14, 19, 21 and 300 A of the Constitution are violated. In the result, the Petitioners fail to make out a case to declare the Master Circular as unconstitutional or otherwise invalid. The validity of the Master Circular dated 1.7.2015 is upheld - petition dismissed. As per THE HON BLE CHIEF JUSTICE and SENTHILKUMAR RAMAMOORTHY J., Having gone through the exhaustive and point-wise analysis made by my esteemed colleague, Brother Justice Senthilkumar, there is no facet of the dispute that has remained untouched and, therefore, I find myself entirely in agreement with the views expressed therein, but since certain additional arguments have been advanced once again by Mr.Nithyaesh Natraj, learned counsel for the petitioners and replied to by Mr.P.Giridharan on behalf of the Reserve Bank of India, I have attempted a supplement to the conclusions drawn by my esteemed Brother. The Master Circular has a binding effect, as admittedly the petitioners are investors after the Circular had come into effect and they have with open eyes undertaken risks of making financial investments through instruments, the composition whereof is self-explanatory and would operate with binding force on the petitioners.22. The nature of the instrument did provide an opportunity of profitable venture, but at the same time, the terms and conditions of the risks involved substantially economize the rights of the investors in AI Tier Bonds. The potential nature of the instrument had its inherent risks. It was a composite package that simultaneously offered a substantial rate of interest, but at the same time a status of uncertainty of the principal capital in the event of non-viability. The instrument of offer itself contains clear recitals that the Reserve Bank of India would have the authority to write-off. This is evident from the extracts that have been quoted above. Thus, to raise the argument to the level of the Reserve Bank of India not being possessed of legal authority stands curtailed by the recitals contained in the offer of instrument itself that were accepted by the petitioners without demur. Whether the Master Circular is liable to be declared ultra vires, void and invalid? - HELD THAT - The validity of the Master Circular, therefore, in the the fundamental rights of the petitioners. The action taken by the Reserve Bank of India on the strength of the circular dated 1.7.2015 cannot be crucified on any constitutional ground, so as to pulverize the Master Circular and thereby nullifying the impact of a prompt action that has been taken in larger public interest by the Reserve Bank of India. An action based on public policy for the good of public purpose on universally accepted principles should not be jettisoned at the instance of those who had not objected to the terms and conditions of the offer instrument and had rather proceeded to reap the dividends therefrom. None of the rights of the petitioners under Part III of the Constitution of India are impinged either violating their right to trade in business or their right to They, as investors in AI Tier Bonds, form a different class by themselves, who cannot be allowed to approbate and reprobate by finding fault with the Master Circular, may be they can question the correctness of the consequential action on grounds which are not subject matter of the present writ petition. The validity of the Master Circular dated 1.7.2015 is upheld - petition dismissed.
Issues Involved:
1. Jurisdiction of the Master Circular. 2. Nature of AT 1 bonds as capital or debt instruments. 3. Compliance of AT 1 bonds with the Companies Act, 2013. 4. Validity of the Master Circular under the Banking Regulation Act. 5. Compatibility of AT 1 bonds with the Indian Contract Act and other legislation. Issue-wise Detailed Analysis: 1. Jurisdiction of the Master Circular: The contention was that the Master Circular was issued without jurisdiction as the Basel III Capital Regulations have not been enacted by Parliament under Article 253 of the Constitution. The court concluded that the Basel III Capital Regulations do not qualify as a treaty or convention. The Master Circular represents the RBI's endeavor to implement the BCBS standards in India, as committed by the RBI in the BCBS. Therefore, the validity of the Master Circular should be tested under Indian law and not with reference to Article 253. The RBI is empowered to issue directions under Section 35 A of the BR Act, which includes ensuring the proper management of banking companies. 2. Nature of AT 1 bonds as capital or debt instruments: The court examined whether AT 1 bonds could be considered part of the capital of a bank for all purposes. It concluded that these instruments constitute regulatory capital but not share capital for purposes of the Companies Act, 2013. The AT 1 bonds are reflected as borrowings in the balance sheet of Yes Bank, not as share capital. Therefore, Section 12 of the BR Act does not apply to AT 1 bonds. The AT 1 bonds are a form of borrowing with specific features such as perpetual duration, absence of a put option, and loss absorption at a pre-specified trigger point. 3. Compliance of AT 1 bonds with the Companies Act, 2013: The court concluded that AT 1 bonds are debt instruments and are required to be reflected as borrowings for accounting purposes. However, they do not qualify as debentures under Section 2(30) read with Section 71 of the Companies Act, 2013, because of their unique characteristics, such as perpetual duration and loss absorption features. The Master Circular prevails over the Companies Act, 2013, to the extent of any inconsistency. 4. Validity of the Master Circular under the Banking Regulation Act: The court held that the RBI is empowered to issue the Master Circular under Section 35 A of the BR Act. The Master Circular is a measure to enhance the capital adequacy of banks by raising the CRAR and ensuring financial stability. The AT 1 bonds are regulatory capital for purposes of meeting CRAR requirements but are borrowings for all other purposes. The court found that the Master Circular is not unconstitutional and does not violate Articles 14, 19, 21, and 300 A of the Constitution. 5. Compatibility of AT 1 bonds with the Indian Contract Act and other legislation: The court rejected the contention that AT 1 bonds violate Section 25 of the Contract Act, as they provide for a coupon rate and the investors are entitled to receive interest unless written down or converted. The court also rejected the contention that AT 1 bonds violate public policy under Section 23 of the Contract Act. The AT 1 bonds play an important role in ensuring that banks satisfy CRAR requirements. The court concluded that the AT 1 bonds do not violate the Companies Act, 2013, the Banking Regulation Act, the Contract Act, or any other legislation. Conclusion: The court upheld the validity of the Master Circular dated 01.07.2015 and dismissed the writ petition. The court observed that the RBI should revisit the Master Circular regarding direct retail participation in high-risk instruments like AT 1 bonds. The court emphasized the importance of ensuring financial stability and public interest in the banking sector.
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