Supreme Court Criticizes RBI's Inaction on YES Bank's Financial Irregularities
The Supreme Court has ruled that investors should not suffer due to the Reserve Bank of India's oversight in YES Bank's operations.
The Supreme Court found RBI's inaction allowed YES Bank's CET1 ratio to plummet to 0.6%.
The court overturned a write-down of ₹8,415 crore in AT-1 bonds, deeming it unfair to investors.
Concerns were raised over YES Bank's sale of high-risk AT-1 bonds to individual investors against regulatory guidelines.
In a significant ruling on October 15, 2026, the Supreme Court of India criticized the Reserve Bank of India (RBI) for its passive role in monitoring YES Bank's operations, which led to a drastic decline in the bank's Common Equity Tier 1 (CET1) ratio to a mere 0.6%. The court emphasized that it would be unjust to hold investors accountable for the administrative failures of the RBI and YES Bank. This ruling came as the court set aside a controversial write-down of ₹8,415 crore in Additional Tier 1 (AT-1) bonds, which had been enacted by the bank's administrator.
The court's decision was rooted in the observation that the RBI had failed to act on evident irregularities in YES Bank's functioning, which had been apparent for some time. The bench, comprising Justice Dipankar Datta and Justice Augustine George Masih, noted that criminal proceedings had already been initiated against certain bank officials for their involvement in these irregularities. The ruling underscored that the administrator's actions in writing down the bonds were beyond the scope of his authority, as established by the Bombay High Court's earlier ruling.
The Supreme Court further clarified that while the draft reconstruction scheme included provisions for a permanent write-down of AT-1 bonds, this clause was omitted from the final scheme. Despite this, the administrator proceeded with the write-down, effectively nullifying investors' claims. The court highlighted that any conversion or write-down of bonds should occur before the reconstruction scheme took effect, in accordance with the RBI's Master Circular on Basel III Capital Regulations.
Additionally, the court raised alarms regarding YES Bank's practice of selling AT-1 bonds to individual investors, which contravened the RBI's guidelines that these high-risk securities should only be marketed to institutional investors. The court noted that YES Bank had actively promoted these bonds to individuals, despite the risks involved, and pointed out that regulatory bodies like the Securities and Exchange Board of India (SEBI) had previously imposed penalties for similar infractions.
Looking ahead, this ruling may prompt a reevaluation of regulatory practices concerning the sale of high-risk financial instruments to individual investors. The Supreme Court's decision not only protects investors from undue losses but also calls for stricter oversight of banking operations to prevent similar occurrences in the future. The implications of this ruling could lead to significant changes in how banks operate and how they are regulated in India.
