Yes Bank AT-1 bonds: Who will examine administrator's role?

Supreme Court's Oct 15 judgment in the Yes Bank AT-1 bond case raises a question beyond the fate of Rs 8,415 cr of investors' money: when an administrator's decision is held unlawful, who examines the decision-maker's conduct, and under what legal framework? The court upheld Bombay High Court's decision setting aside the permanent write-down of the bonds. Appeals by Yes Bank, RBI and Union of India were dismissed.

The judgment settles the legality of the write-down. But institutional accountability requires examining not only the decision but also the circumstances in which it was made.

Yes Bank issued AT-1 bonds worth Rs 3,000 cr in December 2016, and Rs 5,415 cr in October 2017. On March 5, 2020, following the imposition of a moratorium, RBI superseded the bank's board and appointed Prashant Kumar as administrator under Section 36ACA of Banking Regulation Act 1949.

The draft reconstruction scheme, published on March 6, included a permanent write-down provision. Following objections from investors and the trustee, the final scheme notified on March 13 omitted it. A proposal to convert the bonds into equity was also not incorporated. Nevertheless, on March 14, the administrator ordered the permanent write-down.

The top court found that the omission of the write-down provision from the final scheme to be deliberate. It concluded that the administrator acted under the mistaken belief that he retained the authority to write down the bonds. His action was impermissible and 'ultra vires' - beyond the powers of - the applicable master circular read with the final scheme.

The apex court also distinguished between the bank's own contractual trigger and RBI's regulatory point-of-non-viability trigger. The administrator could not assume RBI's regulatory role.

The court described the handling of the matter by RBI, the administrator and Yes Bank as 'questionable', observing that the avoidable risk to investors could have been prevented. It also noted that Yes Bank had directly sold AT-1 instruments to individual investors, contrary to the applicable regulatory framework.

Section 36ACA provides for RBI to appoint an administrator in consultation with GoI. It also empowers RBI to issue directions that the administrator must follow. The latter assumes the powers, functions and duties of the bank's board until its reconstitution.

The provision does not itself prescribe a comprehensive disciplinary procedure or penalty scale for an administrator who acts beyond his authority. The applicable framework - including terms of appointment and relevant statutory, contractual or service provisions - therefore, requires examination by RBI.

Having appointed the administrator and being empowered to issue directions under Section 36ACA, RBI is well placed to establish what legal framework governs his conduct, and whether circumstances warrant further action. This does not presume either that misconduct has been established, or that RBI necessarily has exclusive disciplinary jurisdiction.

In 'Disciplinary Authority-cum-Regional Manager v. Nikunja Bihari Patnaik' (1996), Supreme Court considered disciplinary action against a Scale-I officer of Central Bank of India who, as branch manager of its Paradeep branch in Odisha, repeatedly sanctioned advances, and permitted overdrafts beyond his delegated authority.

The high court had set aside his dismissal. But the top court restored it, holding that exceeding delegated authority could constitute misconduct under the applicable service regulations, even without proof of ulterior motive or loss in every transaction.

The legal framework and facts differ from those of the Yes Bank administrator. Nevertheless, the case illustrates an important principle: authority must be exercised within prescribed limits, and conduct must be assessed under the rules governing the office. RBI's review should consider asking the following questions:

Did the administrator understand that the final scheme omitted the write-down provision?

What legal advice or verification of authority preceded the order?

Why was the order issued a day after notification of the final scheme?

What legal or disciplinary framework applies when an administrator's decision is found to exceed his authority?

These questions do not prejudge answers. They identify matters deserving scrutiny considering the court's findings. RBI should examine circumstances surrounding the write-down, the terms governing the administrator's appointment, and the legal framework applicable to his conduct. It should then determine, on evidence and under applicable law, whether further action is warranted and through what process.

Financial rescues may require swift and extraordinary decisions. But urgency cannot substitute for legal authority. Correcting an unlawful decision is necessary. Examining how it occurred and whether accountability is warranted is an equally important institutional responsibility.