The Supreme Court’s October 15 judgement, upholding the quashing of Yes Bank’s ₹8,415 crore Additional Tier 1 (AT1) bond write-off, raises a fundamental question of regulatory accountability: how did India’s financial watchdogs allow a banking crisis to culminate in the unauthorised extinguishment of investors’ securities?

The RBI may have had legitimate reasons to rescue Yes Bank in March 2020 to protect depositors and financial stability. But the need for a rescue does not absolve it of responsibility for the circumstances that brought the bank to the brink of collapse.

The draft reconstruction scheme contained a provision to write off the bonds. That provision was omitted from the final scheme in 2020. Yet, the administrator proceeded with the write-off the following day. The Supreme Court upheld the Bombay High Court’s decision to set it aside. Clearly, financial stability cannot be pursued by disregarding the law.

The larger problem is that banks pay premiums for deposit insurance, yet troubled banks are repeatedly rescued through takeovers by other institutions, even when their failure may not pose a systemic threat. The fear of contagion may sometimes be genuine, but a bank’s failure also reflects on the quality of regulation. Bailouts are consequently managed through decisions taken at the highest levels, beyond the market’s reach.

The RBI must explain why the write-off proceeded without authority under the final scheme and whether losses were allocated between shareholders and AT1 bondholders in accordance with the rules and contractual terms. Bypassing prescribed safeguards could undermine confidence in Indian bank........

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