Piyush Bokaria Vs RBI (Madras High Court)
Facts-
The RBI’s master circular dated 01.07.2015 is challenged on the ground that it violates Article 14, 19, 21, 253 and 300-A of the constitution. Further, it is also challenged to be contrary to the provisions of the Companies Act, 2013, the Indian Contract Act, 1872, the Transfer of Property Act, 1882 and the Banking Regulation Act, 1949.
Conclusion-
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.
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 substantially economize the rights of the investors in AI Tier Bonds. The potential nature of the instrument had its inherent risks. It was a composite package that simultaneously offered a substantial rate of interest, but at the same time a status of uncertainty of the principal capital in the event of non-viability. The instrument of offer itself contains clear recitals that the Reserve Bank of India would have the authority to write-off. This is evident from the extracts that have been quoted above. Thus, to raise the argument to the level of the Reserve Bank of India not being possessed of legal authority stands curtailed by the recitals contained in the offer of instrument itself that were accepted by the petitioners without demur.
The principal amount invested itself is capable of losing its value on its own even if the Master Circular is not applied. Thus, the challenge to the Master Circular on constitutional grounds is a challenge in vain.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
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 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 Companies Act, 2013 (CA 2013), the Indian Contract Act, 1872 (the Contract Act), the Transfer of Property Act, 1882 (the TP Act) and the Banking Regulation Act,1949 (the BR Act).
2. The provenance of the Bank of International Settlements (BIS) and consequently, of the Basel III Capital Regulations is traceable to the aftermath of World War-I. On 17.05.1930, several countries, including India, entered into the Hague Agreement. The Hague Agreement stipulated that various functions relating to but not limited to the complete and final settlement of reparations by Germany and other named Axis powers would be transferred to the BIS which was to be established in terms of the aforesaid Hague Agreement. Shortly thereafter, the Reserve Bank of India (the RBI) was constituted under the Reserve Bank of India Act, 1934 (the RBI Act). Under the RBI Act, the Government of India transferred the functions relating to currency management and entrusted the carrying on of banking business, as specified in Section 3 of the RBI Act, to the RBI. Thereafter, the RBI stepped into the shoes of the Government of India as regards the BIS. The BIS constituted various committees for the exercise of its functions. One of these committees is the BCBS. Section 3 of the Basel Committee Charter, which deals with its legal status, is as under:
“The BCBS does not possess any formal supranational authority. Its decisions do not have legal force. Rather, the BCBS relies on its members’ commitments, as described in Section 5, to achieve its mandate.”
3. Section 5 specifies the responsibilities of BCBS members and these responsibilities include, inter alia, working together to achieve the mandate of the BCBS; implementing and applying BCBS standards in their W.P No.12586 of 2020 domestic 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 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:
