TMI Blog2021 (5) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for R1 : Mr. Karthik Seshadri for R3 O R D E R SENTHILKUMAR RAMAMOORTHY J., THE PREFACE Capital adequacy has long been considered of paramount importance to the stability of the financial system, both global and Indian, in general, and, in particular, to the financial health of the principal actor in the financial system, banks. The Basel Committee on Banking Standards (the BCBS), which we will discuss at greater length later, has been at the forefront of global efforts in this direction. The Reserve Bank of India (the RBI) is India's representative on the BCBS. The BCBS prepared a report titled Based III: A Global Regulatory Framework for Resilient Banks and Banking Systems (the Basel III Report), which is regarded as the Basel III Capital Regulations, and its members agreed to implement it in their respective domestic jurisdictions in a phased manner. The Basel III Capital Regulations set out the elements of capital for capital adequacy purposes and specify the different types of equity, preferred capital or debt instruments that would be reckoned and, in what manner, for such purpose. The RBI initiated action to implement the Basel III capital Regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdictions within the pre-defined time frame established by the Committee; and to promote the interests of global financial stability and not solely national interests, while participating in BCBS work and decision making. As stated earlier, the RBI is one of the institutional representatives on the BCBS. THE BASEL III REPORT/BASEL III CAPITAL REGULATIONS 4. In December 2010, BCBS released a report titled Based III: A Global Regulatory Framework for Resilient Banks and Banking Systems (the Basel III Report). Part I of the Report dealt with minimum capital requirements and buffers and set out the components of capital. The standards prescribed in the Basel III Report are referred to as the Basel III Capital Regulations. As per the Basel III Report, the elements of capital that would be taken into consideration for purposes of capital adequacy are set out, and the term used to describe such capital is regulatory capital. They are broadly: Tier 1 (going-concern) capital and Tier 2 (gone-concern) capital. Tier 1 capital, in turn, consists of the sum of Common Equity Tier 1(CET 1) and Additional Tier 1 (AT 1) capital. CET 1 comprises, as its most important elements, the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culars which were consolidated in the Master Circular. THE MASTER CIRCULAR 6. Given that the Basel III Capital Regulations are intended to augment the regulatory capital of banks so as to enhance their financial stability and that of the global financial system, the Master Circular contains measures to achieve this objective by carrying forward and incorporating the elements of CET 1 and AT 1 (collectively Tier 1), and Tier 2 from the Basel III Capital Regulations. Towards fulfilment of the above objective, paragraph 4.1 of the Master Circular stipulates that banks are required to maintain a minimum Pillar 1 of Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis. In order to calculate CRAR, the eligible total capital would consist of CET 1 and AT I capital and this would constitute the numerator for calculation of CRAR. The denominator would consist of Credit Risk Risk Weighted Assets (RWA) + Market Risk RWA + Operational Risk RWA. 7. Paragraph 2.1 of the Master Circular sets out the components of capital and specifies that the total regulatory capital will consist of the sum of the following categories: (1) Tier 1 Capital (going-concern capital) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket. From the documents on record, it appears that each of these trades was carried out on 23.04.2018. The sale appears to have been made by ECL Finance Ltd. to the Petitioners, acting individually or on behalf of HUFs, through the Indian Clearing Corporation Ltd. Because the transaction took place on the secondary market, the consideration was higher than the face value of these AT 1 bonds. The deal confirmation records the coupon rate of 9%, the accrued interest, and the next interest date as 18.10.2018. Aditya Birla Money Ltd. was the depositary participant (DP) of the Central Depository Services Ltd. (the Depository) as regards these transactions and the Petitioners were the beneficial owners of the AT 1 bonds upon consummation of the respective transaction. 11. The financial position of Yes Bank deteriorated considerably over a period of time and, consequently, the gross and net non-performing assets and the provisions in respect thereof increased dramatically. Hence, a moratorium notice dated 05.03.2020 (the Moratorium Notice) was issued by the Reserve Bank of India. In terms of the Moratorium Notice, the RBI informed the public at large that the RBI had applied to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. In light of the above provisions of the Basel III Circular, the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the Bank for an amount of ₹ 3,000 crores on December 23, 2016 and the Perpetual Subordinated Basel III Compliant Additional Tier 1 Bonds issued by the Bank for an amount of ₹ 5,415 crores on October 18, 2017 have been fully written down and stand extinguished with immediate effect. The present litigation was initiated pursuant to the said communication dated 14.03.2020. We are informed that separate but related proceedings are pending at the instance of other investors wherein, inter alia, the validity of the communication dated 14.03.2020 is impugned. 12. We heard Mr.Nithyaesh Natraj, the learned counsel for the Petitioners; Mr.P.Giridharan, the learned counsel for the RBI; and Mr. Karthik Seshadri, the learned counsel for Yes Bank. THE CONTENTIONS 13. The contentions of Mr. Nithyaesh Natraj and Mr.P.Giridharan were heard on 11.9.2020 and 14.09.2020 and these submissions were captured in orders of even date. They made further submissions thereafter on 21.09.2020 and 23.09.2020, when we also heard the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, which had not been enacted by Parliament, the Jabalpur Bench of the Madhya Pradesh High Court held that international treaties and conventions cannot be implemented in India unless Parliament enacts a law for such purpose. (e) Attorney General of Canada v. Attorney General of Ontario, AIR 1937 PC 82 , wherein, at paragraphs 6,7 and 12, the Privy Council held that the performance of obligations under international treaties entail legislative action in the relevant domestic jurisdiction. (f) Walker v. Baird(1892), wherein the Privy Council held that obligations under a treaty cannot be enforced if it involves invasion of private rights unless there is parliamentary sanction. (g) Republic of Italy v. Hambros Bank, 1950 CH 314, where the Chancery Division held that a financial agreement between the Government of the UK and the Government of Italy is not justiciable or cognizable in the courts of the United Kingdom unless the same forms part of municipal or domestic law. (h) In re Berubari Union, 1960 3 SCR 250 (Berubari Union), wherein, in the context of an agreement between India and Pakistan on the partition of Berubari Union between them, at paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 SCC 401, where, at paragraph 27, the Supreme Court held that if a discretionary power is exercised for an unauthorized purpose, it cannot be sustained on the basis of good faith. Accordingly, RBI cannot justify the Master Circular by contending that it furthers public interest. (g) Internet and Mobile Association v. RBI 2020 SCC online SC 275 (the Cryptocurrency case), wherein, at paragraphs 224-228, the Supreme Court held that a Master Circular may be struck down on the basis of the doctrine of proportionality. Mr. Nithyaesh contended that this judgment cannot be relied upon to sustain the issuance of AT 1 Bonds under the Master Circular inasmuch as it deals with cryptocurrency, which is within the core currency regulation and management function of RBI. For the principle that a judgment is only a precedent for what it decides and not what may be inferred therefrom, he relied on paragraph 9 of Padmasundara Rao v. State of Tamil Nadu (2002) 3 SCC 533. (h) Magabhai Ishwarbhai Patel v. Union of India (1970) 3 SCC 400 (Maganbhai Patel), at paragraph 81, wherein the Supreme Court held that an exercise of legislative power whereby a citizen's right to property is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e eviction of persons from Dharamsala land, at paragraphs 12,16 and 17, the Supreme Court held that property rights cannot be divested by executive fiat. (c) Lachham Das v. Jagat Ram (2007) 10 SCC 448 (Lachham Das), wherein, in the context of the Punjab Pre-emption Act, 1913, the Supreme Court held that a person cannot be deprived of property except in accordance with the provisions of a statute. (d) K.T. Plantations v. State of Karnataka, (2011) 9 SCC 1 (K.T.Plantations), wherein, in the context of Roerich and Devikarni Estate (Acquisition and Transfer) Act, 1966, at paragraphs 168,180-182, 190-192 and 212221, the Supreme Court held that deprivation of property should be in accordance with law, fair, equitable and reasonable to pass muster under Article 300 A of the Constitution. (e) Mukesh Singh v. Benaras State Bank 2002 SCC online All 330 , at paragraphs 5-10, wherein, the Allahabad High Court held that deprivation of property should be through a non-arbitrary law to pass the test of Article 300 A of the Constitution. vi) The Master Circular violates CA 2013 which defines a debenture in Section 2(30) in an inclusive manner so as to include debentures, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h v. Managing Society, Goswami, (1996) 7 SCC 665, wherein, at paragraph 4, the Supreme Court held that a contract in violation of mandatory provisions of law can be read and enforced only in terms of law and an equitable estoppel cannot be set up against law. (b) Director of Elementary Education v. Promod Kumar Sahoo (2019) 10 SCC 674 , wherein, at paragraph 11, the Supreme Court reiterated that there can be no estoppel against law. (c) Balakrishna S. v. Vithalbai C. (2010) 13 SCC 291 , wherein, at paragraph 10, the Supreme Court held that the terms of a contract can be read and enforced only in accordance with law. ix) The Draft Scheme of Reconstruction dated 06.03.2020 was recommended by the RBI to the Central Government. In paragraph 6, this draft scheme contained an express provision for the permanent write-down of the AT 1 capital issued by Yes Bank Limited. However, in the final Scheme of Reconstruction dated 13.03.2020, the clause enabling permanent write-down is conspicuously absent. Therefore, it is clear that the Central Government rejected the request for a permanent write-down of the AT 1 bonds. THE RESPONDENTS' CONTENTIONS 15. The content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Scheme. Therefore, the contractual right to permanently write-down the AT 1 bonds remained in force notwithstanding the deletion of the clause regarding permanent write-down of the AT 1 Bonds under the Reconstruction Scheme 2020. (viii) CA 2013 applies to banking companies only to the extent the provisions are not inconsistent with the provisions of the BR Act, and this is expressly stipulated in Section 1(4)(c) thereof. As regards PDI, the RBI issued the Master Circular under Section 35 A of the BR Act in respect thereof and enabled banking companies to issue PDI with the features and characteristics described in Annex 4 and 16 of the Master Circular. To the extent that Section 2(30) read with Section 71 of CA 2013 is inconsistent therewith, the Master Circular would prevail. (ix) With regard to the power of the RBI, he referred to Internet and Mobile Association of India v. Reserve Bank of India 2020 SCC online SC 275 (the Cryptocurrency case), and, in particular, to paragraphs 17,167, 207 and 209 thereof, where the Supreme Court considered the membership of the RBI in the BIS, its power under the BR Act, including under Section 35 A, and held at paragraph 167 that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gra and it is sufficient to refer to Berubari Union and Kesoram Industries. Nonetheless, from Clause 3 of the Basel Committee Charter, it is clear that the Charter does not create binding legal obligations on the members. However, the members, including the RBI, agreed to implement and apply the decisions of BCBS in the domestic jurisdiction within the predefined time frame established by BCBS. When the Master Circular is examined carefully to ascertain if it is a measure aimed at implementing a treaty or convention to which India is a party, we find that there is a reference therein to the G20 Pittsburg Summit and the decision by the G20 leaders to strengthen the regulatory system of banks. The Pittsburg Summit took place in September 2009. The Master Circular also draws reference to the BCBS report dated December 2010 entitled Basel III: A global regulatory framework for more resilient banks and banking systems and, significantly, refers to this as the Basel III Capital Regulations. Article 2(1)(a) of the Vienna Convention on the Law of Treaties, 1969 (the Treaties Convention), defines a treaty as under: (a) treaty means an international agreement concluded between States i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect. The scope and import of Section 35 A was considered in several judgments of the Hon'ble Supreme Court and reference may be made to some of them. In Dharani Sugars, the Supreme Court considered the scope of Section 35 A in paragraph 39, wherein it was held as under: 39.A cursory reading of Section 35-A makes it clear that there is nothing in the aforesaid provision which would indicate that the power of RBI to give directions, when it comes to the Insolvency Code, cannot be so given. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf. In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, this court followed the decisions in State of U.P. v. Babu Ram Upadhya and D.K.V. Prasada Rao v. Govt. of A.P. to hold that Rules made under a statute must be treated as if they were contained in the Act and that therefore they must be governed by the same principles as the statute itself. Useful reference can also be made in this regard to the following observations in ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd: 40. When a delegate is empowered by Parliament to enact a policy and to issue directions which have a statutory force and when the delegatee (RBI) issues such guidelines (policy) having statutory force, such guidelines have got to be read as supplement to the provisions of the BR Act, 1949. The banking policy is enunciated by RBI. Such policy cannot be said to be ultra vires the Act. (emphasis supplied) Likewise, in Peerless General Finance and Investment Co. Ltd. v. RBI (1992)2 SCC 343 , it was held, inter alia, as follows in paragraph 30: 30. Before examining the scope and effect of the impugned paragraphs (6) and (12) of the directions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of PNCPS, which satisfy the requirements of Annex 3; and debt capital instruments, which satisfy the requirements of Annex-4 and Annex-16. As stated earlier, Annex-4 and 16 stipulate that debt capital instruments should be perpetual, and therefore the terminology perpetual debt instruments (PDI); they should not have a put option; the call option should not be exercisable before at least five years and even thereafter only with the prior approval of the RBI. The PDI should have principal loss absorption either through conversion to common shares or write down mechanism which allocates losses at a pre-specified trigger point. 22. Thus, 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. 23. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowing, and not share capital, in the balance sheet of Yes Bank and this is in consonance with the Master Circular. If these instruments qualify as share capital, they would also have to fall within the scope of Section 43 of CA 2013 or Section 12 of the BR Act which provide for only two forms of share capital, namely, equity and preference. Moreover, the permanent write-down would have to comply with reduction of share capital requirements under Section 66 of CA 2013. Mr.Giridharan contended that it qualifies as a non-common equity capital instrument, which is another way of saying that it is not part of CET 1 but a part of Tier 1 capital. For reasons aforesaid, in our view, 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. DO THE AT 1 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013. 26. In light of the admitted position that a debenture redemption reserve is not necessary, the other aspect to be considered, in this regard, is the contention that CA 2013 does not provide for issuance of perpetual debentures. Mr.Giridharan contended that perpetual debentures were provided for under Section 120 of CA 1956 and that CA 1956 was in force when the first circular on AT 1 bonds was issued. He also pointed out that CA 2013 applies to banking companies only to the extent that it is not inconsistent with the BR Act. Because the Master Circular was issued in terms of Section 35 A of the BR Act, he contended that in case of inconsistency between the two laws, CA 2013 would not apply. We find that CA 2013 does not deal with or proscribe the issuance of perpetual debentures, in its substantive provisions. 27. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the option to demand repayment of the principal, albeit it may be repaid by the issuer by exercising the call option after not less than 5 years subject to conditions, including the prior approval of the RBI. Another defining characteristic of this form of borrowing is that it can either be converted into equity shares or written-down fully or partially upon occurrence of a point of non-viability trigger. 29. Therefore, the AT 1 bonds are borrowings in which the investor/lender does not have a put option or an actionable right to the repayment of the principal. The indebtedness of the issuer is confined to the liability to discharge coupon/interest rate payment obligations until write down or conversion. As regards the liability to repay the principal, it is a contingent indebtedness actionable subject to conditions by the borrower but not by the lender. In light of the above discussion, we are of the view that the judgments in Jeevan Lal Acharya and Madhumitha Constructions with regard to the nature of bonds and the repayment obligation that characterizes such instruments are inapplicable to AT 1 bonds. Hence, we conclude that the AT 1 bonds constitute a sui generis borrowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dilating further on this theme, we note that the law recognizes many forms of lending and borrowing. For example, the Insolvency and Bankruptcy Code, 2016, classifies lenders into operational and financial creditors and their rights in insolvency resolution vary markedly. Even under CA 2013, in case of liquidation, the rights of secured creditors, unsecured creditors and crown debts all stand on a different footing under the waterfall mechanism. We previously concluded that AT 1 bonds constitute a distinct class, which is sui generis, and therefore cannot be compared with standard forms of debt. On this issue, it is pertinent to bear in mind that the Master Circular is a form of subordinate economic legislation by an expert statutory body for the purpose of ensuring capital adequacy and, in such context, the case for greater legislative latitude and judicial restraint is compelling as held in several judgments such as State of Gujarat v. Shri Ambika Mills (1974) 4 SCC 656; R.K. Garg v. Union of India (1981)4 SCC 675; Government of Andhra Pradesh v. P. Lakshmi Devi (2008) 4 SCC 720; and Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17. In order to elucidate the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company [94 L Ed 381 : 338 US 604 (1950)] be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be evident from the preceding paragraphs. Thus, Article 14, 19 and 21 of the Constitution are not violated. DO THE AT 1 BONDS VIOLATE ANY OTHER LAW? 32. As regards the contention that the AT 1 bonds violate Section 25 of the the Contract Act, in our view, this contention cannot be countenanced. The AT 1 bonds are perpetual debt instruments that provide for a coupon rate. Accordingly, the investors in the AT 1 bond are entitled to receive interest periodically throughout the perpetual tenure unless writtendown or converted. From the facts on record, it appears that the predecessorsin-title of the Petitioners received interest and the Petitioners may have received interest at least on 18.10.2018. Even if we proceed on the basis that an estoppel does not operate against the Petitioners on account of receiving interest by relying on judgments such as Director of Elementary Education and Union Territory, Chandigarh, it cannot be said that these AT 1 bonds do not carry consideration. For this reason, we also reject the contention that it is a gift and that it violates the requirements of a valid gift under the TP Act. We are also not inclined to accept the contention that it vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, in our view, 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. EPILOGUE 35. Before parting with the case, without prejudice to the conclusions herein, we find ourselves constrained to make a few observations. The Master Circular permits participation by retail investors but the Yes Bank AT 1 bond issue does not appear to permit such participation. Nonetheless, the Petitioners participated in the secondary market and it appears from the documents on record that the trade was duly completed and the names of the Petitioners seem to be reflected in the records of the depository, CDSL. The present imbroglio, in our view, makes out a case for RBI to revisit the Master Circular as regards di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor related entity or other arrangements that legally or economically enhances the seniority of the claim vis-a-vis other creditors of the Bank. Bondholders will not be entitled to receive notice of or attend or vote at any meeting of shareholders of issuer or participate in management of issuer. 4. Seniority/Order of claim of Additional Tier I instruments Security Name The claims of the Bondholders in the Bonds shall: (i) be superior to the claims of investors in equity shares and perpetual non-cumulative preference shares issued by the Bank; (ii) be subordinated to the claims of depositors, general creditors and subordinated debt of the Bank other than any subordinated debt qualifying as Additional Tier 1 Capital (as defined in the Basel III Guidelines); (iii) neither be secured nor covered by a guarantee of the Issuer or its related entity or other arrangement that legally or economically enhances the seniority of the claim vis - -vis creditors of the Bank; (iv) be pari passu with claims of holders of such subsequent debentures /bond issuances of the Bank, unless the terms of any subsequent issuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. There are other terms and conditions that are enlisted in the said offer letter, the contents whereof are not disputed by either of the parties. 6. There is another important feature which is contained in Clause 55 of Loss Absorbency, followed by Point of Non-Viability in Clause 56. For the present purpose, Clause 56 is extracted herein under: 6. There is another important feature which is contained in Clause 55 of Loss Absorbency, followed by Point of Non-Viability in Clause 56. For the present purpose, Clause 56 is extracted herein under: Security Name 56 PONV Without the need of the consent of Bondholders or Trustee, the Bonds (including all claims, demands on the Bonds and interest thereon, whether accrued or contingent), at the option of the RBI, can be permanently written down or converted into common equity, upon the occurrence of the trigger event called Point of Non-Viability Trigger ( PONV Trigger ) The PONV Trigger event is the earlier of: (i) a decision that a permanent write-off without which the Bank would become non-viable, as determined by the Reserve Bank of India; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital 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. For these purposes, the Bank may be considered as non-viable if: The Bank which, owing to its financial and other difficulties, may no longer remain a going concern on its own in the opinion of the RBI unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern. The difficulties faced by the Bank should be such that these are likely to result in financial losses and raising the Common Equity Tier 1 capital of the Bank should be considered as the most appropriate way to prevent the Bank from turning non-viable. Such measures would include write-off / conversion of non-equity regulatory capital into common shares in combination with or without other measures as considered appropriate by the Reserve Bank. The Bank facing financial difficulties and approaching a PONV will be deemed to achieve viability if within a reasonable time in the opinion of RBI, it will be able to come out of the present difficulties if appropriate measures are taken to revive it. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 1, 2014, consolidating therein the prudential guidelines on capital adequacy issued to banks till June 30, 2014. 2. As you are aware, Basel III Capital Regulations are being implemented in India with effect from April 1, 2013 in a phased manner. This Master Circular consolidates instructions on the above matters issued up to June 30, 3. The Basel II guidelines as contained in the Master Circular DBOD.No.BP.BC.4/21.06.001/2015-16 dated July 1, 2015 on Prudential Guidelines on Capital Adequacy and Market Discipline-New Capital Adequacy Framework (NCAF) may, however, be referred to during the Basel III transition period for regulatory adjustments / deductions up to March 31, 12. The enclosure that is relevant for the purpose of the present controversy is Part A thereof containing the guidelines on Minimum Capital Requirement, followed by other provisions that have been appended thereto, but more particularly Annexure 16, which contains Clause 2.15 and other provisions relating to permanent writing-off. 13. The primary ground of attack to the Master Circular is on the ground that it does not have the sanction of law and its issuance is neither traceable to any po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 167. Law is well settled that when RBI exercises the powers conferred upon it, both to frame a policy and to issue directions for its enforcement, such directions become supplemental to the Act itself. In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, (1992) 2 SCC 343 this court followed the decisions in State of U.P. v. Babu Ram Upadhya, AIR 1961 SC 751 and D.K.V. Prasada Rao v. Govt. of A.P., AIR 1984 AP 75, to hold that Rules made under a statute must be treated as if they were contained in the Act and that therefore they must be governed by the same principles as the statute itself. Useful reference can also be made in this regard to the following observations in ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd, (2010) 10 SCC 1: 40. When a delegate is empowered by Parliament to enact a policy and to issue directions which have a statutory force and when the delegatee (RBI) issues such guidelines (policy) having statutory force, such guidelines have got to be read as supplement to the provisions of the BR Act, 1949. The banking policy is enunciated by RBI. Such policy cannot be said to be ultra vires the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kurunwad Ltd. v. Union of India, (2006) 10 SCC 645 where it was held that RBI has a right to take pre-emptive action taking into account the totality of the circumstances. It is not that when there is a run on the bank then only RBI must intervene or that it must intervene only when there are a good number of court proceedings against the bank concerned. RBI has to take into account the totality of the circumstances and has to form its opinion accordingly. 172. The impugned Circular is intended to prohibit banking companies from entering into certain The Circular is actually addressed to entities regulated by RBI and not to those who do not come within the purview of RBI s net. But the exercise of such a power by RBI, over the entities regulated by it, has caused a collateral damage to some establishments like the petitioners , who do not come within the reach of RBI s net. 173. The power of a statutory authority to do something has to be tested normally with reference to the persons/entities qua whom the power is The question to be addressed in such cases is whether the authority had the power to do that act or issue such a directive, qua the person to whom i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the status of an executive action, but is only the exercise of a power conferred by statute upon a statutory body corporate. Therefore, it is his contention that the judicial rule of deference as articulated in K. Garg v. Union of India, (1981) 4 SCC 675, BALCO Employees Union (Regd.) v. Union of India, (2002) 2 SCC 333, and Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 will not apply to the decision taken by a statutory body like RBI. If, a legislation relating to economic matters is placed at the highest pedestal, an executive decision with regard to similar matters will be placed only at a lower pedestal and the decision taken by a statutory body may not even be entitled to any such deference or reverence. 207. But given the scheme of the RBI Act, 1934 and the Banking Regulation Act, 1949, the above argument appears only to belittle the role of RBI. RBI is not just like any other statutory body created by an Act of It is a creature, created with a mandate to get liberated even from its creator. This is why it is given a mandate (i) under the Preamble of the RBI Act 1934, to operate the currency and credit system of the country to its advantage and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized by this court in Swiss Ribbons Pvt. Ltd. v. Union of India (supra). In fact, even the learned Counsel for the petitioners is ad idem with the learned Senior Counsel for RBI that economic regulations require due judicial deference. The actual argument of the learned Counsel for the petitioners is that such deference may differ in degree from being very weak in respect of the decision of a statutory authority, to being very strong in respect of a legislative enactment. 209. But as we have pointed out above, RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the central government, cannot be taken away. The sole right t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the petitioners made investments. The petitioners, therefore, by their conduct have acquiesced to the said obligations without demur, and, as a matter of fact, the said contract has been acted upon, as the petitioners from their own documents appear to have received interest for one year. The intention of the petitioners, bereft of the subsequent action taken by the Central Government, and the Bank being now run under a Scheme, cannot have any impact so as to dilute or dissolve the rights and obligations that have been created under a document, which is now sought to be questioned when intimation of writing off has been given to the petitioners by the bank. This Court does not have to opine on the consequential action, as it is under challenge in a separate writ petition, but a challenge to the Master Circular on constitutional grounds may not be possible, as due deference has to be observed in the light of the Apex Court pronouncement referred to above. 20. The argument of the learned counsel for the petitioners is that there cannot be any estoppel against statute, and if there is no law made by the Parliament to backup the issuance of the Master Circular, then, in that event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir own acquiescence in order to achieve higher prospects. 25. The petitioners have urged that a judgment should not be relied on without discussing as to how the factual situation fits in, for which reference has been made to the Constitution Bench judgment in the case of Padma Sundara Rao (Dead) and others v. State of Tamil Nadu and others, (2002) 3 SCC 533. There is no dispute with the said proposition, but the judgment in the case of Internet and Mobile Association of India (supra), in paragraphs extracted herein above, explains the level of deference of judicial review in such matters. The said judgment, therefore, cannot be said to have laid down a ratio that is alien to the issue involved on the facts of the present case. 26. It has then been submitted that a treaty entered into by India cannot become law of land and cannot be implemented unless Parliament passes a law as required under Article 253 of the Constitution of India. Paragraphs 490 to 492 and 494 of the judgment of the Apex Court in the case of State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201, has been relied on. It has already been indicated above that there cannot be a dispute with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the offer instrument and had rather proceeded to reap the dividends therefrom. This Court was desirous on first impressions to be persuaded by the arguments led on behalf of the petitioners, but on closer scrutiny, this Court finds it to be against the conclusions drawn herein above, which this Court considers a better judgment. 31. 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. 32. The nature of A1 Tier Bonds did make an offer which made the petitioners mentally rich, but that was subject to a financial adventurous journey that was subject to risks and hazards that were attached with the nature of the transaction itself. Their desire to be possessed of speculative wealth was circumscribed and hedged by lawful limitations that were not unknown to them or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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