TaxTMI 
TaxTMI 
2021 (5) TMI 359
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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 Regulations in 2012. By Master Circular dated 01.07.2015 (the Master Circular), the circulars issued earlier on the subject were consolidated. The Master Circular is the focal point of the present writ petition wherein it is challenged insofar as it permits banks, under its supervisory control, to issue and write-off a form of regulatory capital, which is referred to as Additional Tier 1 (AT1) Capital Bonds. The Master Circular is challenged on the ground that it violates Articles 14, 19, 21, 253 and 300-A of the Constitution of India. In addition, it is challenged on the ground that it is contrary to the provisions of the Comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 of the equity shares issued by a bank, its reserves and surplus. AT 1 includes instruments, other than common equity, which meet the criteria for inclusion as AT 1. Paragraph 55 of the Basel III Report sets out the criteria for inclusion in AT 1 capital. There are 14 criteria out of which the important criteria are: * Subordinated to depositors, general creditors and subordinated debt of the bank. * Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-a-vis bank creditors. * Is perp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ired 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) consisting of: (a) Common Equity Tier 1 (b) AT 1 Capital (2) Tier 2 Capital (gone-concern capital) The footnote with regard to going-concern capital specifies that from a regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation of the bank. 8. Paragraph 4.2.4 of the Master Circular deals with AT 1 capital and specifies the elements or types thereof. These elements, inter a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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 Central Government for imposing a moratorium under Section 45 of the BR Act and that the Central Government had imposed a moratorium with effect from 05.03.2020. On the same date, by exercising power under Section 36 ACA of the BR Act, the RBI, in consultation with the Central Government, superseded the Board of Directors of Yes Bank Ltd. for a period of 30 days and appointed an Administrator to take over the assets and affairs of the Bank. Thereafter, a draft scheme of reconstruction was placed in the public domain on 06.03.2020. This draft scheme of reconstructi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....med 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 submissions of Mr.Karhik Seshadri, and posted the case on 28.09.2020 for pronouncing the order. A petition to re-open for further hearing was filed by the Petitioners and, on that basis, we re-opened proceedings and heard the parties again on 28.09.2020 and, once again, posted the case on 30.09.2020 for pronouncing the order. PETITIONERS' CONTENTIONS 14. The contentions of Mr. Nithyaesh Natraj are as under: (i) The Master Circular dated 01.07.2015 has been issued without authority or jurisdiction inasmuch as the Basel III Capital Regu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ein 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 paragraphs 17,18,32,35,46 and 49, the Supreme Court negatived the contention of the Attorney General and held that the implementation of a treaty can only be effected through Parliamentary legislation and, if it entails an amendment to Part I of the Constitution, Article 368 should be complied with. (ii) The Master Circular is liable to be struck down because it is ultra vires the BR Act and there is clear lack of legislative competence. It is also a manifestly arbitrary and unreasonable exercise of subordinate or delegated legisl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ionality. 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 infringed should be supported by legislation. (iii) The BR Act confers power on the RBI as regards the issuance of capital under Section 12. Section 12 does not confer the power to issue the AT 1 Capital Bonds and such power cannot be exercised by taking recourse to Section 35 A of the BR Act. In support of this proposition, the following judgment was relied upon: Dharani Sugars v. Union of India (2019) 5 SCC 220 (Dharani Sugars), wherein, in the context of a challenge to the constitutional vali....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n, 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, bonds and other securities evidencing a debt. As per Section 71(8), a company shall pay interest and redeem the debentures and, as per sub-section (10) and (12) thereof, a debenture holder is entitled to approach the National Company Law Tribunal [NCLT] or sue for specific performance, respectively, if a company fails to redeem the debentures on the date of their maturity. In addition, CA 2013 does not recognize the concept of irredeemable debentures whereas the AT 1 bonds are perpetual i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ithalbai 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 contentions of Mr.Giridharan, in reply, were as under: (i) The RBI is empowered under Section 35 A of the BR Act to issue directions in respect of banking companies and the power to issue the Master Circular dated 01.07.2015 is traceable to Section 35 A. (ii) In exercise of executive power under Article 53 read with Article 73, the RBI's powers are co-extensive with that of Parliament. (iii) The RBI Master Circular enables the issuance of both P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds 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 the RBI's directives have statutory force and should be read as supplementing the BR Act. 16. Mr. Karthik Seshadri pointed out that the Board of Directors of Yes Bank was reconstituted after the Reconstruction Scheme came into effect and that he represents the Bank under authorization from the Board. He contended that the Petitioners are market players who voluntarily assumed the risk of investing in instruments which may be pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation; Although India has not ratified the Treaties Convention, on account of its widespread acceptance, as regards the fundamental concepts and principles contained therein, such as the definition of treaty, it has the status of customary international ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (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. The width of the language used in the provision which only uses general words such as "public interest" and "banking policy", etc. makes it clear that if otherwise available, we cannot interdict the use of Section 35-A as a source of power for the impugned RBI circular on the ground that the Insolvency Code, 2016 could not be said to have been in the contemplation of Parliament....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tute 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 1987, it is also important to note that Reserve Bank of India which is bankers' bank is a creature of statute. It has large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the impugned directions of 1987. The Reserve Bank plays an important ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot 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 case, the moratorium was imposed by the Central Government as recommended by the RBI on 05.03.2020. Therefore, there is no 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 resulti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 BONDS CONSTITUTE DEBENTURES PER CA 2013? 25. Having concluded that it is not share capital for purposes of CA 2013, is it a debt instrument? In our opinion, it is clear from the Master Circular that PDI are debt instruments. Indeed, they are required to be reflected as borrowings for accounting purposes. Mr.Giridharan contended that Section 129 of CA 2013 d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....56 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 features, it is clear that the only reason instruments such as the AT 1 bonds are permitted to be included in Tier I capital is because they are treated like and equated with equity share capital or CET 1 inasmuch as the holders of such AT 1 instruments cannot demand repayment of their investment in the same manner as the CET 1 shareholders cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ially 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/debt instrument which, inter alia, may be extinguished upon the occurrence of a pre-specified trigger event or a point of non-viability. THE CONSTITUTIONAL CHALLENGE 30. Given the nature and characteristics of AT 1 bonds, it should be examined whether the Master Circular that enables the issuance of such instruments violates the Constitution. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....secured 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 principle, it is sufficient to set out excerpts from R.K. Garg and Swiss Ribbons. Paragraph 8 of R.K. Garg is set out below: 8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l 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 any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues. Paragraphs 51 and 120 of Swiss Ribbon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ebt 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 violates public policy (section 23 of the Contract Act) and it must be borne in mind that these AT 1 bonds play an important role in ensuring that banks satisfy CRAR requirements. Indeed, from a public interest perspective, the higher the CRAR, the greater the safety and the lower the risk as regards depositors of a bank. 33. From th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 direct retail participation in instruments that carry such high risk. In addition, in co-ordination with the Securities and Exchange Board of India, measures may be taken to avert retail participation when the terms of issue do not permit the same. While making these observations, we are conscious that ultimately it is for the RBI to take....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 -à-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 of bonds/debentures by the Bank specifies that the claims of such existing and subsequent bond holders are senior or subordinate to the Bonds issued under this Disclosure Document or unless the RBI specifies otherwise in its guidelines; (v) rank pari passu without preference amongst themselves. Notwithstanding anything to the contrary stipulated herein, the claims of the Bondholders shall be subject to the provisions of "Coupon Discretion", "Loss Absorbency" & "Other Events" mentio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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; and (ii) the decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable, as determined by the relevant authority. The amount of non-equity capital to be converted/ written-off will be determined by RBI. The Write-off of any Common Equity Tier 1 capital shall not be required before the write-off of any Non-equity (Additional Tier 1 and Tier 2) regulatory capital instrument. The order of writeoff of the Bonds shall be as specified in the order of seniority as per this Information Memorandum and any other regulatory norms as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 measures including augmentation of equity capital through write off of Bonds/conversion/ public sector injection of funds are likely to: a. Restore depositors' /investors' confidence; b. Improve rating /creditworthiness of the Bank and thereby improve its borrowing capacity and liquidity and reduce cost of funds; and c. Augment the resource base to fund balance sheet growth in the case of fresh injection of funds. The trigger at PONV will be evaluated both at consolidated and solo level and breach at eithe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cy 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 power under Section 35A of the Banking Regulation Act, 1949, nor any action taken in terms of Section 45 of the 1949 Act. 14. Learned counsel for the petitioners has advanced oral arguments and has also submitted three sets of the summary of arguments dated9.2020, 21.9.2020 and 24.9.2020. 15. The contention which I propose to deal with is that in order to enforce a Convention/International Agreement, the same can be done only by framing a law as envisaged under Article 253 of the Constitution of Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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.' (emphasis supplied) 168. In his treatise on Administrative Law, Durga Das Basu, Ch.4, Page 121, 6th Edition, 2004, states: 'The scope of judicial review is narrowed down when a statute confers discretionary power upon an executive authority to make such rules or regulations or orders 'as appear to him to be necessary' or 'expedient', for carrying out the purposes of the statute or any other specified purpose. In such a case, the check of ultra vires vanishes for all practical ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 it is addressed. While persons who suffer a collateral damage can certainly challenge the action, such challenge will be a very weak challenge qua the availability of power." 18. Thereafter, the Apex Court in paragraphs 200 to 209 of the said report has opined as under: "VI. Different types of VCs require different treatments 200. Drawing our attention to a Report by the European Parliament under the caption 'Cryptocurrencies and Blockchain', relea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 operate the monetary policy framework in the country (ii) under Section 3(1), to take over the management of the currency from the central government (iii) under Section 20, to undertake to accept monies for account of the central government, to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ong 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 to issue bank notes in India, conferred by Section 22(1) cannot also be taken away and conferred upon any other bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the central government and conferred upon any other authority. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, 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, the Master Circular cannot survive, as it cannot take away legal rights of the petitioners, which otherwise can be sustained in law. 21. In the opinion of the Court, 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-exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 the aforesaid proposition, but applying the said law on the facts of the present case, in view of what has been said above and in the judgment of my esteemed colleague, does not arise at all. 27. A challenge has been raised on the ground that subordinate legislation can be questioned on several grounds, including manifest arbitrariness and unreasonableness, apart from being invalid on account of being unsupported in 28. In the ....