[Bhargavi Zaveri-Shah is the co-founder and CEO of The Professeer and Harsh Vardhan is a management consultant and researcher based in Mumbai]
On 19 October 2026, we wrote in ThePrint about the Supreme Court’s recent judgment in Yes Bank Limited v Axis Trustee Services Limited 2026 INSC 1132 setting aside the write-down of Yes Bank’s Additional Tier 1 (AT-1) bonds. We argued that the judgment is legally sound and underscores, once again, significant gaps in India’s framework for resolving distressed financial institutions.
The judgment also brings us back to two posts we published on this Blog in 2023, when the litigation was at an earlier stage. In our first post, we had welcomed the Bombay High Court’s decision similarly setting aside the write-down, but we also criticised its reluctance to examine the fairness of writing down AT-1 bonds while sparing equity shareholders. We argued that the doctrine of legitimate expectations provided an additional basis for scrutinising the administrator’s decision. In our second post, we considered the implications of the Credit Suisse rescue, in which Swiss authorities similarly wrote down AT-1 bonds while preserving some value for shareholders. We noted that banking authorities in the United Kingdom and European Union had publicly reaffirmed the conventional creditor hierarchy, and wondered whether these developments might influence the Indian Supreme Court’s approach.
The Supreme Court has now decided the Yes Bank dispute. The bondholders have prevailed, but not principally on the grounds we had advocated in 2023.
In this post, we examine the Court’s reasoning more closely than was possible in our newspaper column. It is tempting to view the Supreme Court’s judgment as one largely based on technical and procedural grounds. In fact, the Court’s decision is consequential for regulatory governance, particularly the governance of distressed financial institutions in India. The doctrine of legitimate expectations, as we argued earlier, remains important in defining the limits of regulatory discretion when dealing with distressed financial firms.
A Recap of the AT-1 Bonds Write-Down
The dispute arose from Yes Bank’s reconstruction in March 2020. Following the imposition of a moratorium, the Reserve Bank of India (RBI) superseded the bank’s board and appointed an administrator under the Banking Regulation Act, 1949. The Central Government notified a reconstruction scheme on 13 March 2020. The following day, the RBI-appointed administrator ordered the complete write-down of two tranches of AT-1 bonds aggregating ₹8,415 crore. That is, the value of the AT-1 bonds was driven down to zero, while the equity shares were left intact.
The AT-1 bondholders challenged this write-down before the Bombay High Court, which ruled in their favour in January 2023. Yes Bank and the RBI appealed to the Supreme Court. Nearly four years, twenty three hearings and six bench changes later, the Supreme Court dismissed the appeals on 15 October 2026.
Judgment
The Supreme Court’s reasoning rests on three closely connected questions: what the reconstruction scheme authorised, who possessed the power to write down the bonds, and when that power could lawfully be exercised. A major part of its ruling is underpinned by legitimate expectations.
The missing provision in Yes Bank’s reconstruction scheme
While the draft reconstruction scheme explicitly contemplated the permanent write-down of the AT-1 bonds, this provision was conspicuously dropped from the final scheme notified by the Central Government. This omission was significant.
To discern the import of this omission, the Supreme Court scrutinised the representations submitted by the bond trustees, regulatory proposals from the RBI, and inter-departmental correspondence between the RBI and the Department of Financial Services. This record revealed that the bondholders had actively protested the total write-down, offering instead to convert their bonds into equity shares of Yes Bank.
Evaluating the deletion in this backdrop, the Supreme Court held that the proposition to write down or convert the bonds had been consciously abandoned by the Central Government. It set aside the Administrator’s decision on this basis:
“39. For the Administrator to then turn volte-face the decision of the Central Government by writing down the AT-1 Bonds entirely, did away with the deliberative process that occurred between the Draft Scheme and the Reconstruction Scheme….[I]t would be unreasonable to infer that the RBI and the Central Government would undertake the entirety of a long-drawn process of crafting the Reconstruction Scheme and seemingly leave out the crucial part concerning the AT-1 Bonds.”
The significance of this finding extends beyond the Yes Bank restructuring. Where the state follows a formal process of consultation, deliberation and notification, the resulting instrument must mean something. This is a profound departure from the earlier deferential approach generally adopted by the judiciary towards regulatory consultations, which are often held to have no ‘binding effect’ on the final notification of regulations or regulatory actions.
Residuary powers cannot supply missing authority
Next, the RBI and Yes Bank contended that even in the absence of specific provisions, the general residuary provisions of the reconstruction scheme empowered the administrator to effectuate a write-down of the AT-1 bonds. The Supreme Court rejected this reliance on residuary authority.
A general residuary clause cannot implicitly confer the authority to write down AT-1 debt following reconstruction:
“41. While it is true that the Administrator’s residuary powers are preserved under the aforementioned clause, such a general savings provision does not, by itself, confer the specific authority to write down the AT-1 Bonds after YES BANK came to be reconstructed…[I]t is a settled legal principle that a power not specifically conferred cannot be implicitly vested through a general, omnibus savings clause. To that extent, we rule against YES BANK and the Administrator.”
This part of the ruling is most significant as general residuary powers are ubiquitous in every law conferring powers on the regulators or executive agencies. The Court’s ruling on this specific issue implies that these omnibus residuary provisions do not empower regulators to alter or extinguish contractual rights. Such powers, if at all, must be specifically hard-coded in the law or the executive notification.
Revisiting the Doctrine of Legitimate Expectations
The above parts of the Supreme Court’s judgment speak to the doctrine of legitimate expectations, even while the Court does not specifically refer to this doctrine nor was it pleaded by the parties. The legitimate expectations doctrine is an administrative law principle that holds public authorities accountable when they repudiate a clear promise, representation, or deviate from established practice without reason. The doctrine does not go as far as creating a legal right or guaranteeing a specific outcome to persons whose expectations have been violated by the state. However, it does create space for contestation of state actions that violate ‘legitimate expectations’ set by established practice, past representations or good faith.
Indian courts have applied this doctrine to set aside executive actions of various kinds, such as a government notification that suddenly excluded some areas from a slum clearance scheme, and the suspension of a previously issued license for setting up a school. It recently applied this doctrine to enforce the Jharkhand Government’s promise to grant a 50% exemption from electricity duty for five years to power plants.
Applying the Doctrine to the Write-Down of AT-1 Bonds
In our January 2023 post, we argued that the Bombay High Court should have examined whether the RBI-appointed administrator’s decision violated the legitimate expectations of AT-1 bondholders.
The core judicial concern was not the mere reality of investor loss. AT-1 instruments are inherently speculative debt, and investors cannot claim protection against risks bargain-for under their terms. The true constitutional defect was that the state, through its administrator, imposed targeted losses upon one tier of capital while safeguarding another, failing to offer a rational basis for disturbing the conventional hierarchy of loss absorption. In evaluating this departure, the doctrine of legitimate expectations offers a vital evaluative standard.
The Court’s judgment speaks to this doctrine, although not in the context we had argued. The Court observed that after the consultations between the bondholders and the RBI during the intervening period between the draft reconstruction scheme and the final scheme, the government eventually dropped the AT-1 write-down provisions from the final scheme:
“40. …[W]e have good reasons to infer that the Central Government had taken a conscious decision to exclude the clause permitting writing down of the AT-1 Bonds from the Reconstruction Scheme, based on consideration of the objections lodged. If it were the intention of the Central Government to allow the Administrator to write down the AT-1 Bonds after publication of the Reconstruction Scheme even after exclusion of the relevant clause from the Draft Scheme, that would have made it susceptible to face the criticism of acting clandestinely and the accusation of committing an act amounting to a fraud on public.”
Effectively, the Court found that the dropping of the write-down provisions from the final scheme created a legitimate expectation that the bonds will not be written down by the Administrator.
In our view, therefore, the judgment creates scope – perhaps, for the first time in the history of resolving distressed financial institutions in India – to circumscribe regulatory powers with this doctrine. Where regulators invoke broad residual powers, the doctrine of legitimate expectations supplies a critical yardstick of reasonableness and fairness. Promulgated practices and market expectations cannot be arbitrarily discarded; they constrain the exercise of residual executive power even during stressful times such as financial resolution.
Moving from Case-Specific Solutions to a Modern Financial Resolution Law
Finally, as we have argued earlier, the Yes Bank judgment exposes a deeper deficiency in India’s framework for resolving financial institutions. Banks cannot be resolved under the ordinary insolvency regime applicable to non-financial enterprises: their failure implicates depositors, payment systems, systemic stability and the risk of contagion. A specialised resolution regime is therefore indispensable.
India’s capacity for bank-specific interventions is no substitute for a coherent statutory framework governing the initiation of resolution, the allocation of powers, the hierarchy of claims and procedural safeguards for affected creditors and investors. The Financial Resolution and Deposit Insurance Bill, introduced in 2017 and subsequently withdrawn, was an earlier attempt to address this lacuna. Its political fate does not diminish the legislative imperative.
The challenge is to reconcile regulatory discretion with legal certainty: preserving the capacity for decisive intervention in a crisis while ensuring that its consequences remain reasonably foreseeable. This is not merely a question of investor protection. Where the treatment of claims in resolution is uncertain, investors demand a premium for regulatory risk, ultimately raising banks’ cost of capital and, with it, the cost of financial intermediation.
Conclusion
The Supreme Court’s Yes Bank judgment should not be read as repudiating the loss-absorbing function of AT-1 bonds. What the Court rejected was the exercise of write-down powers by an authority lacking lawful competence, at a time inconsistent with the prescribed framework.
The Court’s judgment finally settles a principle long ignored in matters of financial regulatory governance: The resolution of financial distress demands decisive intervention, not exemption from the rule of law.
– Bhargavi Zaveri-Shah & Harsh Vardhan