On March 5, 2020, the Central Government placed YES Bank under a moratorium, and the Reserve Bank of India superseded its board and appointed an administrator. The RBI’s draft reconstruction scheme of March 6 said the bank’s Additional Tier 1, or AT-1 bonds would be written down permanently, in full. The final scheme, notified on March 13, dropped that line.

A day later, the administrator nevertheless wrote off ₹84.15 billion of these bonds. Deposits were not affected; bondholders lost their entire investment.

The Bombay High Court set the write-off aside on January 20, 2023, and on October 15, 2026, the Supreme Court dismissed the appeals against that order. The episode says as much about how rules are drafted and read as about how the bonds were sold.

AT-1 bonds count as bank capital under Basel III and pay more than deposits because they carry more risk: YES Bank’s two issues paid 9.5% and 9.0% a year. They have no maturity date, interest can be skipped, and they can be written down to zero if the bank’s capital falls below a specified level or it is judged no longer viable.

Disputed Write-Off
The draft scheme said the AT-1 instruments “shall stand written down permanently, in full, with effect from the Appointed date”. The notified scheme removed that sentence; clause 6 kept only the general provision that existing contracts would continue unless the scheme provided otherwise.

The administrator relied on clause 2.15 of Annex 16 of the RBI’s Basel III Master Circular, under which, if the authorities decide to reconstitute a bank, AT-1 instruments “will be fully converted / written-down permanently before amalgamation / reconstitution”. The dispute centred on the word “before”. The Bombay High Court held that the bank stood reconstructed on March 13, 2020, when the scheme came into force. The Supreme Court held that “before” can only mean before the scheme takes effect, and that a general savings provision does not, by itself, confer the specific authority to write down the bonds.

The Supreme Court called the omission a conscious decision by the Central Government, which “thought it fit not to tinker with the bonds at all”. The bonds allowed the RBI, at its option, to order a write-down at the point of non-viability; that was for the RBI to do, and the administrator could not assume its regulatory role. The court noted that the bank’s core equity capital ratio stood at 0.6% on December 31, 2019, against the required 7.375%.

Investor Losses
Institutions — mutual funds, provident funds, insurers and companies — held most of these bonds. According to SEBI, 1,346 individual investors held about ₹6.79 billion between them; 1,311 were YES Bank’s own customers.

SBI and other banks put in fresh capital, and Japan’s Sumitomo Mitsui Banking Corporation (SMBC), which bought a 20% stake in 2025, is now the largest shareholder with 24.22%. YES Bank has said it is evaluating all available legal options. It said reinstating the bonds would lower its core equity ratio by about 250 basis points, while its Tier 1 ratio would “remain unimpacted at 14.0%”.

Sales Practices
Banks sell insurance, mutual funds and bonds alongside deposits and loans, and the RBI’s new conduct directions treat compulsory bundling as mis-selling. Complaints are rising. The RBI’s ombudsman system received about 1.33 million complaints in 2024–25, 13.55% more than the year before, about 296,000 of them at its Ombudsman offices. The annual report classifies these complaints by product, such as loans and advances, credit cards and para-banking; mis-selling does not form a separate element. On October 15, 2026, Deputy Governor Swaminathan J was reported as warning of cases where the “pressure to complete a transaction becomes stronger than the obligation to assess whether it serves the customer’s needs”.

IRDAI recorded 26,667 complaints of “unfair business practices” against life insurers that year, up about 14% and more than a fifth of all their grievances. In the YES Bank case, the record is more complicated. SEBI’s adjudication order of April 12, 2021, found that the bank’s customers had been induced to invest in these bonds, some moving out of fixed deposits, without adequate safeguards, and treated this as “fraud” on them. Yet the same order notes that an RBI circular of September 1, 2014, allowed banks to issue AT-1 bonds to individuals, subject to Board approval and disclosure of risks. The Supreme Court observed that, according to the RBI, such bonds “must be offered only to institutional investors”, and that bonds offered directly by the bank to individuals were “beyond the purview of SEBI Regulations”.

SEBI held that the bank and its officials had violated its fraud regulations and, for the bank and one official, the provision on “mis-selling”, which has covered such securities only since February 1, 2019. It fined the bank ₹250 million; the Securities Appellate Tribunal stayed the order in May 2021. The Supreme Court did not use the word mis-selling; it decided only whether the administrator had the power to write down the bonds. Whether the episode was mis-selling is therefore debatable: as a regulatory finding, the term rests on SEBI’s order, which the bank has challenged.

Regulatory Gaps and Mis-selling
Precise wording matters. Clause 2.15 of Annex 16 of the Master Circular could pin down the moment — say, “before the date on which a scheme of reconstitution comes into force” — name who decides and in what form, and say whether the power survives a scheme that is silent about it. Future schemes could also state plainly what happens to AT-1 instruments, even when they are left untouched.

The Supreme Court described the Master Circular as specifying the investors to whom AT-1 instruments may be offered, “including, among others”, mutual funds and insurance companies. A closed list, or a plain statement on whether individuals may buy, would have limited conflicting readings of the 2014 circular. SEBI has since, through a circular of October 6, 2020, limited new AT-1 issues to qualified institutional buyers. The episode underscores the need for precise wording, free of ambiguity, in regulatory and other communications from all stakeholders. The RBI’s consolidation, in November 2025, of more than 9,000 circulars into 238 Master Directions is a welcome step. The consolidated texts could make clear what each classification means in law and avoid cross-references that send the reader from one circular to another.

What counts as mis-selling also depends on the regulator. SEBI’s fraud regulations define it for “securities or services relating to securities market”; IRDAI records such complaints under unfair business practices. The RBI’s directions of June 15, 2026, effective January 1, 2027, define it to include the sale of a product “which is neither suitable nor appropriate in view of the customer’s profile”, “notwithstanding her / his explicit consent”. That can mean separate tests and remedies for products sold at the same counter. One definition shared by the RBI, SEBI and IRDAI would apply the same suitability test to every product, put the burden of showing suitability on the seller, classify complaints the same way, and settle which regulator steps in when a bank sells someone else’s product.

Complaint Routes
A customer who believes a product was unsuitable should first approach the regulated entity; under the RBI’s Internal Ombudsman Directions of January 2026, the entity must review any complaint it proposes to reject or has only partly resolved. If it does not reply within 30 days, or the reply is unsatisfactory, the customer can approach the RBI Ombudsman within 90 days under the Integrated Ombudsman Scheme in force since July 1, 2026. There is no ceiling on the amount in dispute; the Ombudsman can award up to ₹3 million for consequential loss and ₹300,000 for loss of time, expenses and harassment.

Yet mis-selling is nowhere fully counted. The quarterly report each entity sends the RBI under the Internal Ombudsman Directions counts complaints only by outcome not by product or ground; only the narrative findings of the internal ombudsman’s root cause analysis reach the RBI. Banks’ annual reports disclose their top five grounds of complaint, and the RBI’s list includes “mis-selling/para-banking”, but mis-selling is combined with para-banking and appears only if it ranks among a bank’s top five.

The Integrated Ombudsman Scheme complaint form lists mis-selling as a category distinct from para-banking, but the customer chooses that tag, and answering is optional. The RBI’s 2024–25 annual report on the scheme showed no mis-selling category at all; para-banking accounted for just 3,322 complaints, about 1.1% of those received by the offices.

Now that mis-selling has been defined and, from 2027, a customer is to be entitled to a full refund where it is established, the RBI could ask regulated entities to report mis-selling complaints as a separate ground and publish them in its annual report, so that we know whether the right is working.

Depositor Protection
Depositors were protected, as Basel III intends. The RBI’s Financial Stability Report of June 2026 recorded a “multi-decadal high” capital adequacy ratio of 17.7% for scheduled commercial banks at end-March 2026, and deposit insurance of ₹500,000 per depositor per bank fully covered about 97.5% of accounts as of September 30, 2025.

What remains is to write rules that leave very little room for different interpretations and define mis-selling clearly enough that the next investor does not have to read between the lines.