The Madras High Court has supported the legal validity of the Reserve Bank of India’s (RBI) circular on additional Tier 1 Capital bonds while it was dismissing an appeal made by investors of Yes Bank.

In the month of March 2020, the Central Government approved a restructuring plan for the Yes bank which resulted in the bank’s AT1 bonds of value Rs.8415 Crores downfall to zero. The AT1 bonds write-down was based on Basel III norms which allowed banks to extinguish these instruments in an emergency. In respect to this issue, some of the banks’ investors had challenged this write down in courts.

According to the latest norms, banks can issue these bonds on electronic platforms only and, the institutional investors could subscribe to them. Minimum allotment price for these bonds is fixed at Rs.1 crore.

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The investors have requested to the High Court to declare the Master Circular-Basel III Capital Regulations issued by Reserve Bank of India dated July 1, 2015, insofar as it relates to issuance and write off of Additional Tier 1 Capital Bonds, as ultra-vires, without the authority of law, unconstitutional, void, invalid in law being violative of Articles 14,19,21, 253 and 300-A of Constitution of India, 1949, so to consequently declare all proceedings issued by RBI in so far as it relates to issuance and write off of Additional Tier 1 Capital Bonds as null and void.

Chief Justice A.P. Sahi headed the division judge bench of Madras High Court and discerned that the investors already knew about the risks associated with the instrument when they were investing in it so now they cannot challenge the decisions of the regulator.

The High court while bracing about the RBI’s circular restated the central bank’s autonomy in creating and enforcing the regulation.

The two-judge bench has said about the RBI that it operates the currency, credit and monetary policy framework in the country and noted that RBI is not just like any other statutory body created by an act of the legislature. It is a creature, created with a mandate to get liberated even from its creator.

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The bench recognised that if the argument of the petitioners about the legal incapacity of the RBI to issue the master circular is accepted, then the entire investment through the offer of the instrument would be without authority of law.

The division-bench has said in its judgement, “This argument would amount to something like dismembering the same branch of a tree on which one is sitting. The entire edifice of the transaction from its very inception will fall through.”

The judgement given by Madras High Court was a blow to the investors who were seeking to recover their money invested in these securities. Also, a similar type of case’s hearing is going on in the Bombay High Court, the next hearing date for which is still not out. It remains to be seen if this judgement impacts that case also or not.

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With Warm Regards,

CL Bureau.

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