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TMI Blog2023 (2) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... L) NO.6589 OF 2021 WITH INTERIM APPLICATION NO.535 OF 2021 WITH WRIT PETITION NO.220 OF 2021 WITH INTERIM APPLICATION NO.133 OF 2021 WITH WRIT PETITION NO.3324 OF 2021 WITH INTERIM APPLICATION NO.1767 OF 2021 WITH WRIT PETITION NO.1997 OF 2021 Mr. Janak Dwarkadas, Sr. Adv. a/w. Dr. Birendra Saraf, Sr. Adv., Mr. Ankit Lohia, Mr. Sunil Tilokchandani, Mr. Sachin Chandarna and Mr. Vikram Trivedi, Ms. Pooja Batra, Ms. Neha Javeri, Ms. Nipa Ghosh i/b. Manilal Kher Ambalal & Co. for Petitioner in WP/785/2021. Mr. Dinyar Madon, Sr. Adv. a/w. Ms. Tanushree Kejriwal i/b. Parinam Law Associates for Petitioner in WPL/849/2020, WP/1518/2022. Mr. Dinyar Madon, Sr. Adv. a/w. Mr. Paras Parekh, Ms. Tanushree Kejriwal, Adv. Shuthara Swami, Mr. Ashish Venugopal, Mr. Abhineet Sharma, Adv. Shonan Bangera i/b. Parinam Law Associates for Petitioner for the Respondents in WP/6589/2021. Mr. Sharan Jagatiani, Sr. Adv. a/w. Ms. Apurva Manwani, Mr. B.Gopalkrishnan a/w. Mr. Nilesh Ghadge, Mr. Parikshit Desai, Mr. Ashish Dalal, Ms. Saloni Shah for Petitioner in WP/220/2021. Mr. Zal Andhyarujina a/w. Mr. Karan Bhide, Mr. Pradeep Bakhru, Mr Nikhil Gupta, Mr. Shreya Sancheti, Ms. Labdhi Mehta i/b. Wadia Ghand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ms. Nikita Mishra, Mr. Kyrus Modi, Mr. Aman Sadiwala i/b M/s. Rashmikant & Partners, for Respondent nos.3 & 4 in WP/1997/2021. Mr. Gautam Ankhad a/w. Mr. Hetal Thakore & Mr. Kunal Parekh i/b. Dua Assocites for Respondent no.15 in WPL/6589/2021. Ms. Chitra Rentala a/w. Mr. Pranay Kamdar, Ms. Sonal Singh i/b. TRILEGAL for Respondent no.5. in WP/785/2021 and WP/1518/2022, for Respondent no.7 & 16 in IA/535/2021 in WPL/6589/2021, WPL/849/2020. Ms. Khursheed Vajifdar i/b. Legasis Partners for Res. CDSL in WP/785/2021 AND WPL/6589/2020. JUDGMENT : (PER : ACTING CHIEF JUSTICE) 1. Rule. Rule made returnable forthwith. By consent of the parties, taken up for final disposal. 2. The substratum of the challenge is the communication dated March 14, 2020 under which the Administrator of the Yes Bank Ltd., informed the (Bombay Stock Exchange) BSE Limited and National Stock exchange the decision ("impugned decision") of the writing off of the Additional Tier 1 Debenture bonds. 3. The petitioner therein seeks that the impugned decision be set aside and quashed. It further seeks directions against the National Securities Depositories Limited and Central Depository Services to take such steps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Petition No. 1145 of 2020 had approached the Supreme Court with a writ petition and they had declined to entertain the same and directed the petitioner to approach the concerned High Court under Article 226. 8. It is further contended by the learned counsel for the Petitioners that the Information Memorandums are statutory contracts as Additional Tier 1 Bonds are common equity Tier 1 instruments that are regulated and governed under Basel Convention as contained in the Master Circular. The Master Circular is binding on the Yes Bank and the provisions, therefore have to be complied by them irrespective of whether all provisions thereof are incorporated in the Information Memorandums or not. The Information memorandums are statutory contracts. Reliance is placed on the judgment of the Apex Court in the case of India Thermal Power Ltd. v. State of Madhya Pradesh and others (2000) 3 SCC 379. It is further contended by the learned counsel for the petitioner that there is a commercial contract in place in the form of Information Memorandums, it would curtail the writ jurisdiction when the subject matter of challenge is an arbitrary decision of the bank supported by RBI which has led t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Final scheme as the clause for writing down the AT-1 bonds was not included in the final scheme after considering the suggestions of the stakeholders. 12. The learned advocates for the petitioners contend that the impugned decision is in conflict with the Master Circular. Making determinations and taking actions prescribed under the Basel III Capital Regulations is a matter within the exclusive domain of the "relevant authorities". The phrase "relevant authorities", though not defined, refers to the Reserve Bank of India in consultation with the Central Government, referred to in section 45 of the Act of 1949. Clause 2.15 also lays down the methods in which the power of the relevant authorities has to be exercised, and such writing-down of the AT-1 bonds cannot be effected in any manner or by any other person than that prescribed by the statute/Master Circular. 13. The final scheme as sanctioned and notified neither provides for conversion nor for write off. Therefore, there was no power in the Administrator or the Yes Bank to write off the bonds in purported "implementation of the scheme". Mere extension of moratorium for 3 days after the commencement of the scheme cannot be rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, notwithstanding anything to the contrary contained in any other provision of this Act or in any other law or any agreement, award or other instrument for the time being in force. Therefore, no decision could have been taken and/or no right under any instrument could have been exercised which was contrary to the Final Scheme itself. 17. The learned advocate for the petitioner submits that the impugned decision is in violation of the Final Scheme of Reconstruction, as the RBI directions contained in Clause 6 of the Final Scheme dated March 13, 2020 expressly saves the AT-1 bonds and deletes the provision for writing down of the said AT-1 bonds as appearing in the Draft Scheme. The Final Reconstruction Scheme was notified after the Union of India in exercise of its powers u/s 45(7) of the Act of 1949 which removed the clause regarding the write-off of the AT-1 bonds from the draft scheme and replaced it with Clause 6.1 which states that all bonds of any kind shall subsist in the same manner as they did prior to the Scheme coming into force. Clause 6(3) of the said scheme provides that unless "expressly" provided for in the FRS, all the deposits and liabilities of the reconstructe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Central Government. Therefore, he is bound by the decision of the RBI and the Central Government to save and keep alive the AT-1 Bonds which was a direction issued u/s 36ACA r/w S. 45. 21. The learned advocate for the petitioners further submits that the writing down of the AT-1 bonds was in pursuance of statutory powers and not in exercise of purported contractual rights. They contend that the write down was under contractual documents i.e the Information Memorandums is not sustainable. Annexure-16 of the Master Circular deals with Minimum requirement of Loss Absorbency of AT-1 Instruments (Bonds) in Section 2 thereof. Section 5 is divided into 5 parts. There are two routes/methods of writing down AT-1 Bonds. One is by the bank, which is a contractual route covered by Part II and the other is the statutory route covered by Part III of Section of the Master Circular. These two methods are mutually exclusive. Part II of Section 2 deals with level of pre-specified trigger and amount of equity to be created by conversion/write-down, which applies when the bank itself proposed to write down or convert to common shared the AT-1 Bonds; Part III of Section 2 deals with treatment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trigger events are deemed to exist. 25. They submit that the deeming provision or legal fiction created under Clause 2.15 of the Master Circular is only for the purposes of section 45 of the Act of 1949. This provision merely deems that the bank is non-viable and thereby legal fiction activates the prespecified trigger. They contend that the Yes Bank claims to have written down under the contractual documents, for them this legal fiction is not available. The petitioners rely on the judgment in the case of Apollo Tyres Ltd. vs Commissioner Of Income Tax, Kochi along with connected matters (2002) 9 SCC 1 to state that the deeming provision or legal fiction applies only to the purpose of which the same was created and cannot be extended to any other purpose. 26. The party in person submits that as per Clause 2.15 of the Master Circular the write down has to be done before the construction. The reconstruction came into force on March 13, 2020 but the write down happened on March 14, 2020. A similar write down was done in the case of Laxmi Vilas Bank in November 2020, wherein the write down was done before the amalgamation scheme came into force. 27. But, the learned advocates f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the public interest. The petitioners also relied on the judgment of Anuradha Bhasin v. Union of India and Ors.(2020) 3 SCC 637 along with connected matters where the Hon'ble Supreme Court held that the doctrine of proportionality necessitates an enquiry into the possible goal sought to be achieved by the imposition of restrictions by the State and whether such restriction is legitimate and in public interest. There was a stress on the need to balance competing interests and to investigate into viable alternatives which are equally efficacious and less restrictive. The decision to write down the AT-1 bonds was disproportionate as various recommendations and objections were received by RBI providing material justifying conversion of the AT-1 Bonds as opposed to writing down the same. This was also relied upon by the RBI in their note to the Central Government u/s 45(7) of the Act of 1949, where RBI had proposed to balance the interests of all stakeholders and in fact proposed conversion of the said AT-1 Bonds and a decision was taken to write-down the same. The decision of the Administrator fails to demonstrate why the option to convert the AT-1 bonds into common shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners further stipulate that pursuant to the complaints preferred by certain customers of the banks, SEBI conducted an enquiry and vide its order dated April 12, 2021 held that the Yes Bank indulges in illegal and fraudulent selling of AT-1 bonds to its otherwise ineligible individual customers. Apparently, SEBI has passed another order dated September 7, 2022 holding that the sale of AT-1 Bonds to the individuals were in fact illegal. This order has not been appealed by the Yes Bank. The petitioners in their additional affidavit submit that the Investment in the AT-1 bonds by vulnerable and ineligible investors was at the insistence and misrepresentation by the officials of Respondent no.4 which is negated by fraud and misrepresentation. That the Yes Bank and its shareholders continue to make profits at the cost of them. 34. The party in person submits that the Yes Bank equated these bonds with FD and lured the customers by mis-selling. The risks were not explained to the retail investors. For a secondary market transaction between the seller and the buyer, the bank is actively involved in these trades by coordinating the purchase/sale. 35. The learned advocates for the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Reserve Bank of India. Section 36 ACA(2) expressly states that the administrator is not an officer of the Government. The administrator exercises and discharges all powers, functions and duties that are discharged by the Board of Directors, or by a resolution passed in a general meeting of the banking company, until the reconstitution of the Board of Directors of the bank. The action of the administrator as a representative of the Yes bank, therefore, in accordance with the terms of Information memorandums and Debenture Trust Deeds and purely contractual. They rely upon the judgment of the Apex Court in the case of Federal Bank Ltd v. Sagar Thomas and others (2003) 10 SCC 733. It is further contended that National Securities Depository Limited (NSDL) is a depository as defined in Depository Act, 1996 and is regulated by the SEBI as per section 11 of the Securities and Exchange Board of India Act, 1993. It is not a government company or a public sector undertaking. It does not qualify as a State or as an instrumentality of State under Article 12 of the Constitution. It merely provides the infrastructure that facilitates holding and securities in dematerialised form in the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned advocate for the respondent, Reserve Bank of India submit that though under section 36 ACA, the RBI may issue such directions to the Administrator as it may deem appropriate, but RBI has not issued any directions to the administrator to write down the AT-1 bonds. The impugned decision taken by the Administrator is in a fair, unbiased and reasonable manner. 41. The learned advocates for the respondents further submit that per se there is no challenge to the decision of the writing down off by the Administrator as the petitioners are challenging the letter dated March 14, 2020, which is merely a communication to the stock exchanges of a corporate action that had already taken place viz. writing down of the AT-1 bonds. The AT-1 bonds were written down and stood extinguished with immediate effect upon the Order dated March 14, 2020 being made by the erstwhile Respondent no.3. The intimation to the stock exchanges is merely a procedural formality. The AT-1 bonds were written down and stood extinguished prior to the implementation of the Notified Scheme of reconstruction and have already been effected in the Bank's books of accounts. 42. The learned advocates for the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Therefore, the AT-1 instruments are required to be and have been written down fully. According to the final scheme, the bonds are to remain subject to all extant laws, rights and obligations, the terms of the Information Memorandums, Debenture Trust Deeds, and Master Circular. Hence, de hors the scheme, the AT-1 bonds are required to be written off by the respondents. This position has been contractually accepted by the petitioners. The decision for reconstitution u/s 45 of the Act of 1949 has not been challenged, the bank is deemed to be non-viable or approaching non-viability. The pre-specified trigger and the trigger at the point of non-viability are activated, and the bank is entitled wither fully convert/write down permanently. 45. They further submit that the decision to reconstitute a bank is deemed to be a PONV trigger. No separate action is required on behalf of RBI to write off the AT-1 bonds after the decision to reconstitute Respondent no.4 u/s.45 of the Act of 1949 was taken. The decision to reconstitute is the trigger and consequently the AT-1 bonds have been written off by Yes Bank. It is denied that the decision to write-off AT-1 bonds can only be taken when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This posits that the write-off is required to occur after the trigger event (i.e the reconstitution of the bank) and before the public injection of capital which was to take place within two days of the Notified Scheme. 49. They contend that the decision to write off or issuance of any new shares as a result of conversion consequent upon the trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted. The notified scheme required equity shares to be allotted to the investors of the reconstructed Bank within 2 working days, and the Basel III regulations and the Information Memorandums required writing down of AT-1 bonds to take place prior to any capital infusion/reconstitution. Therefore, before the equity shares were allotted and the reconstitution was implemented, the write down of the AT-1 bonds was carried out and given effect to. The write down was effected in the Bank's books of accounts and the stock exchanges were duly informed. Thereafter, the shares were allotted to the investor bank and other banks participating in the reconstruction pursuant to the Notified Scheme. 50. While the learned adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern. Based on the independent auditor's review, the auditors have expressly endorsed the Bank's view that based on the Notified Scheme, the contractual terms and legal assessment, the AT-1 bonds can be utilized to enhance the common equity of the Bank and the capital infusion and consideration of the AT-1 bonds is expected to improve the CET1 ratio of the bank and enable it to meet the minimum requirements of the RBI. Further, the Master Circular provides that the action of writing off the AT-1 bonds is done for equity infusion. The provisions of infusion of equity as set out in the draft scheme as well as the final scheme were with the objective of protection of interests of more than two lakh depositors of Respondent no.4. The advantage of SBI holding a large stake is that being the largest and credible public sector bank, it will instill confidence among all stakeholders, particularly depositors and potential investors, leading to stability for Respondent no.4 but also in the banking and financial system. 53. The learned advocates for the respondent, the Reserve Bank of India submit that the AT-1 bonds are unsecured, perpetual bonds that are issued by banks to shore up their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-off of any of the bonds. There is no right available to the bondholders or any other person claiming for or on behalf of or through such holder to demand or seek that any other regulatory capital be subject to prior or simultaneous write-off or that the treatment offered to holders of such other regulatory capital be also offered to the bondholders. 57. We have considered the erudite submissions of the learned Senior Advocates and the advocates for the Petitioners and Respondents. 58. It appears that the Basel Committee on Banking Supervision (BCBS) formulated Basel III reforms to improve the banking sector's ability to absorb shocks arising from the financial and economic stress to reduce the risk of spill over from the financial sector to the real economy. Basel III reforms strengthen the bank level i.e micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. These new global regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956 and carrying on the business of banking in India. In or around 2016, for the purpose of augmenting its Additional Tier 1 Capital, Yes Bank decided to issue certain Basel III Compliant Additional Tier 1 Capital Bonds in the form of nonconvertible debentures on a private placement basis vide Debenture Trustee Agreement dated December 22, 2016, Axis Bank, the petitioner was appointed as the Debenture trustee to act on behalf of the debenture holders. 64. On December 22, 2016, Yes Bank floated an Information memorandum for the private placement of Basel III Compliant Additional Tier 1 Capital Bonds in the form of non-convertible debentures for an aggregate value of Rs. 2100 crore with a greenshoe option of an additional Rs. 1500 Crore in case of over subscription of the said debentures. 65. Following the floating of this Information memorandum, Yes Bank executed a Debenture Trust Deed with the petitioner, pursuant to which the Yes Bank issued 30,000 listed, perpetual, and unsecured, debentures bearing coupon rate of 9.5% in favour of the debenture holders/beneficial owners. The said debentures were rated as Care AA/Stable (Double A Stable) by CARE and IND AA/Stable (India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation Act, 1940 and applied to the Central Government for imposition of moratorium on the Yes Bank. Accordingly, on March 5, 2020, the Central Government vide notification bearing no. S.O. No. 993 (E) imposed a moratorium on the Yes Bank from 20.00 hrs on March 5, 2020. Along with this the Reserve Bank has also issued further directions to the Yes Bank under Section 35 A of the Act of 1949, wherein the Yes Bank shall not inter alia grant or renew any further loans, make any investment, dispose of any properties or assets, enter into any compromises etc., except as provided under the said directive. 71. The RBI appointed Administrator exercising its powers under section 36ACA of the Act of 1949. The RBI under sub section 3 of section 36ACA may issue such directions to the Administrator as it may deem appropriate and the Administrator is bound to follow such directions. All the powers of the Board of Directors until the Board of Directors of the banking company is reconstituted, can be exercised by the Administrator. 72. On March 6, 2020 the Reserve Bank of India vide its press release placed in public domain a draft scheme for reconstruction of the Yes Bank Ltd. Paragraph 6 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Master Circular: "2.1...The write-down will have the following effects: (a) reduce the claim of the instrument in liquidation; (b) reduce the amount re- paid when a call is exercised; and (c) partially or fully reduce coupon/dividend payments on the instrument." 76. It is this action of the administrator of the Yes Bank in writing down the AT-1 bonds assailed in the present petition. 77. The matter being fiscal in nature, this Court would not dwell into the aspect as to whether the writing off the AT-1 bonds was necessary. We would not enter into a debate as to whether the AT-1 bonds could have been converted into the shares and or whether they could have been proportionately written down. The Court would not possess the necessary expertise of the same. This Court would only consider whether the decision making process has been adhered to and that it was within the competence of the Administrator to write down the AT-1 bonds in the facts and circumstances of the present case. 78. AT-1 bonds are Unsecured, Perpetual, Subordinated, Basel III compliant. The bonds are neither secured nor covered by the guarantee of the Bank nor its related entity or other arrangements that le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in a winding up. (b) If the Bank goes into liquidation after the Bonds have been written-down, the Bondholders will have no claim on the proceeds of liquidation. Amalgamation of a banking company: (Section 44 A of BR Act, 1949) Subject to the provisions Banking Regulation Act 1949 as amended from time to time: (a) If the Bank is amalgamated with any other bank before the Bonds have been written-down, the Bonds will become part of the corresponding categories of regulatory capital of the new bank emerging after the merger. (b) If the Bank is amalgamated with any other bank after the Bonds have been written-down temporarily, the amalgamated entity can write-up the Bonds as per its discretion. (c) If the Bank is amalgamated with any other bank after the Bonds have been written-down permanently, these Bonds cannot be written up by the amalgamated entity. Scheme of reconstitution or amalgamation of a banking company : Subject to the provisions of Banking Regulation Act 1949 as amended from time to time: If the relevant authorities decide to reconstitute the Bank or amalgamate the Bank with any other bank under the Section 45 of BR Act 1949, the Bank will be deemed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming into operation, or as the case may be, the date specified in this behalf, the scheme, the properties and assets of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and vest in, and the liabilities of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and become liabilities of the transferee bank. 85. The date when the scheme came into operation would be relevant. 86. It also is required to be noted that in the draft scheme, provision was made for writing off all the AT-1 bonds. In the final scheme, the said clause was deleted. Final scheme dated March 13, 2020 did not contain the provisions for writing off the AT-1 bonds. The question would be whether the Administrator would be competent to write off the AT-1 bonds on March 14, 2020 i.e. the day after the final Yes Bank Reconstruction Scheme 2020 was notified on March 13, 2020. 87. Clause 57 of the Information Memorandum, according to Respondents is a clause authorizing to write down the AT-1 bonds and contractually agreed by the parties could have been invoked on March 14, 2020. Under clause 55 also, the bonds coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme, the scheme shall be binding on the banking company and all the members, depositors and creditors and employees of each of those companies and the transferee bank and that on and from the date of coming into operation, the date specified in this behalf in, the scheme, the properties and assets of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and vest in, and the liabilities of the banking company shall, by virtue of and to the extent of the scheme, stand transferred to, and become the liabilities of, the transferee bank. 93. As observed above, the draft scheme contained the clause that AT-1 bonds would be written off. Objections were invited from the stake holders purportedly in tune with sub-section 6(a) of Section 49 of the Act of 1949. Section 45(6)(a) provides that a copy of the scheme prepared by the Reserve Bank shall be sent in draft to the Banking Company and also to the transferee bank and other Banking Company concerned in the (Reconstruction or Amalgamation), for suggestion and objection, if any. Pursuant thereto, it appears the Petitioner raised objection to the writing down of AT-1 bonds and even sugges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorize Administrator to write off the AT-1 bonds. It appears that Administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed on March 13, 2020. 98. Reading clause 57 of the Information Memorandum along with the Final Reconstruction Scheme, it would be manifest that the administrator could not have exercised his powers after reconstitution of the bank. 99. Much emphasis has been laid by the Respondents on the maintainability of Writ Petition under Article 226 of the Constitution against the Yes Bank, being a private bank and further the Writ cannot be entertained as a contractual right has been exercised. 100. The clauses in the Information Memorandum which according to the Respondents is a contract between two private parties, is based on the Master Circular. The Master Circular is issued by the Reserve Bank under its statutory powers. The covenant and the terms in the Information Brochure i.e. between the parties is based on statutory Master Circular. Information Memorandum and its clauses refer to Master Circular. The said Information Brochure has a statutory flavour. It is based on the statutory Master Circular. In that event, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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