AT 1 capital regulation upheld: RBI's Basel III framework and loss-absorbent bond structure were found lawful.

Directions issued by RBI under Section 35A of the Banking Regulation Act, 1949 for banking policy and capital adequacy were treated as a valid basis for the Basel III Master Circular, not as an impermissible implementation of international standards under Article 253. AT 1 bonds were described as regulatory capital with perpetual tenor, subordination and loss-absorbency, and were held not to be share capital or debentures under the Companies Act, 2013. The write-down structure was upheld as rationally connected to financial stability and capital adequacy, with no violation of Articles 14, 19, 21 or 300-A. The Master Circular and AT 1 framework were therefore sustained as intra vires and lawful.

---

---

Issues: (i) Whether the Master Circular governing Basel III capital regulations was issued without jurisdiction and whether it could be challenged as an attempt to implement international standards without Parliamentary legislation under Article 253 of the Constitution of India; (ii) whether AT 1 bonds are capital instruments or debt instruments and whether they constitute share capital or debentures under the Companies Act, 2013; (iii) whether the Master Circular and the AT 1 bond structure violate the Constitution, including Articles 14, 19, 21 and 300-A; (iv) whether the AT 1 bonds violate the Companies Act, 2013, the Banking Regulation Act, 1949 or the Indian Contract Act, 1872; and (v) whether the Master Circular is ultra vires, void or invalid.

Issue (i): Whether the Master Circular governing Basel III capital regulations was issued without jurisdiction and whether it could be challenged as an attempt to implement international standards without Parliamentary legislation under Article 253 of the Constitution of India.

Analysis: The regulatory framework was traced to the Basel Committee standards and not to a treaty or convention enforceable as such under domestic law. The directions issued by the Reserve Bank of India were treated as an implementation of banking standards within the statutory powers conferred by the Banking Regulation Act, 1949. The power under Section 35A was held wide enough to support directions issued in the public interest and for banking policy, and the Master Circular was found to be a valid exercise of that power rather than an impermissible invocation of Article 253.

Conclusion: The Master Circular was held to be within jurisdiction and not invalid on the ground of want of Parliamentary legislation under Article 253.

Issue (ii): Whether AT 1 bonds are capital instruments or debt instruments and whether they constitute share capital or debentures under the Companies Act, 2013.

Analysis: AT 1 bonds were held to be regulatory capital for capital adequacy purposes, but not share capital under company law. Their defining attributes were perpetual tenor, subordination, loss absorbency and the absence of a lender's right to demand repayment of principal. On that basis, they were also held not to answer the statutory concept of debentures under Section 2(30) and Section 71 of the Companies Act, 2013 in any manner inconsistent with the regulatory regime under the Master Circular.

Conclusion: AT 1 bonds were held to be a sui generis borrowing and regulatory capital instrument, not share capital and not debentures under the Companies Act, 2013.

Issue (iii): Whether the Master Circular and the AT 1 bond structure violate the Constitution, including Articles 14, 19, 21 and 300-A.

Analysis: The Court treated the subject as economic regulation and applied a deferential standard of review. The differential treatment of AT 1 instruments was held to have a rational nexus with the objective of maintaining capital adequacy and financial stability. The permanent write-down mechanism was not treated as expropriation of property, since the instrument itself was structured to permit loss absorption on specified triggers. The challenge under Article 300-A therefore failed, and the classification challenge under Article 14 likewise failed.

Conclusion: No violation of Articles 14, 19, 21 or 300-A was found.

Issue (iv): Whether the AT 1 bonds violate the Companies Act, 2013, the Banking Regulation Act, 1949 or the Indian Contract Act, 1872.

Analysis: The contractual and statutory structure of AT 1 instruments showed that investors accepted the risk of permanent write-down and loss absorbency. The instruments were not treated as void for lack of consideration, nor as offending public policy. The Court also held that the banking regulation framework prevailed to the extent of inconsistency with ordinary company law treatment of debentures, and the contractual terms could not be disregarded merely because the petitioners later objected to the consequences of the bargain.

Conclusion: The AT 1 bonds were held not to violate the Companies Act, 2013, the Banking Regulation Act, 1949, the Indian Contract Act, 1872 or any other law.

Issue (v): Whether the Master Circular is ultra vires, void or invalid.

Analysis: Since the Reserve Bank of India was held competent to issue directions on banking policy and capital adequacy, and since the AT 1 framework was found consistent with the regulatory objective and not unconstitutional, the challenge to the validity of the Master Circular necessarily failed.

Conclusion: The Master Circular was upheld as valid and intra vires.

Final Conclusion: The writ challenge to the Basel III Master Circular failed in full, and the regulatory framework governing AT 1 instruments was sustained as a lawful exercise of banking regulation in the public interest.

Ratio Decidendi: Directions issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949, for banking policy and capital adequacy, can validly regulate AT 1 instruments as regulatory capital, and such instruments may be structured with loss absorbency and permanent write-down features without offending the Constitution or ordinary company-law treatment of debentures.

---