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Axis Trustee includes ‘misselling’ of Yes Bank AT1 bonds in petition at Bombay HC

On May 7, Moneycontrol first reported that alleged ‘misselling’ of these bonds to retail bond holders by Yes Bank’s executives was likely to be made part of an existing petition in the High Court of Bombay filed by Axis Trustee. Retail AT1 bond holders allege that Yes Bank executive sold these bonds to retail customers as ‘Super FDs’ offering safety and relatively high return compared with regular fixed deposits.

May 25, 2020 / 10:38 AM IST
 
 
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Axis Trustee, which represents the Additional Tier 1 (AT1) bond holders of Yes Bank who lost their investments in the written down perpetual bonds, has made misselling of bonds to retail investors as a part of the petition filed at the Bombay High Court, said a senior official at the Axis Trustee on condition of anonymity.

“We have shared all documents to our legal team for adding the misselling of bonds in the petition that is already there in the Bombay High Court. This (revised petition) will be filed as soon,” said the official. This is significant since several retail investors, including many senior citizens, have lost their life savings in these bonds.

On May 7, Moneycontrol first reported that alleged ‘misselling’ of these bonds to retail bond holders by Yes Bank’s executives was likely to be made part of an existing petition. Retail AT1 bond holders allege that Yes Bank executives sold these bonds to retail customers as ‘Super FDs’ offering safety and relatively high return compared with regular fixed deposits.

The AT1 case was slated to be heard on March 25 in the Bombay High Court but, due to COVID-19, this has been postponed. During the course of the hearing, the HC had told the parties that any further action on the AT1 bond issue will be subject to further orders of the court.

‘Super FDs’

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According to at least three such investors that Moneycontrol spoke to, Yes Bank’s executives pitched these bonds as ‘super FDs’, which will offer consistent returns and safety of a regular fixed deposit. In most cases, these investors had existing regular fixed deposits in Yes Bank that fetched them a rate of interest of around 8 percent.

Yes Bank executives offered 9-9.5 percent return on these bonds and made them transfer substantially high amounts (in some cases Rs 1 crore to Rs 1.5 crore) to these instruments. “This was done without explaining the high risk associated with these bonds, especially the provision that says these bonds will be extinguished and capital foregone in the event of a financial failure of the bank,” said another investor requesting anonymity.

After the bail-out of Yes Bank, some of these retail investors approached the bank only to receive a response that the matter is sub judice. Yes Bank was bailed out by a ban consortium early this year after the Reserve Bank of India (RBI) prepared a reconstruction scheme for the rescue of the bank. Yes Bank collapsed on account of alleged financial irregularities conducted by former management.

According to experts, prevailing Reserve Bank of India (RBI) regulations do not bar banks from selling perpetual bonds to retailers, but the rules clearly say that these instruments should not be pitched with fixed deposits as a benchmark. Also, the risks involved in these instruments must be clearly explained to investors, the rules stated.

Yes Bank’s retail AT1 bond holders allege that these norms were not followed by Yes Bank executives while selling these instruments. Bondholders have invested nearly Rs 94,000 crore in AT1 bonds issued by Indian banks, according to rating agency ICRA. AT1 bonds, also called perpetual bonds, are considered quasi-equity instruments and are riskier than Tier 1 bonds.

After the Yes Bank reconstruction scheme was notified by the government, there was a confusion in the market on March 14 on whether these bonds will be honoured or extinguished as said in the draft reconstruction scheme made public by RBI. But, Yes Bank’s RBI-appointed administrator, Prashant Kumar later clarified that these bonds will be written down fully, as per the agreed reconstruction scheme.

This is because the reconstruction scheme was formed after the RBI invoked Section 45 of the Banking Regulation Act, 1949, which arises when the bank is deemed to be non-viable or approaching non-viability, enabling the write-down of certain Basel III AT1 Bonds.

“In light of the above provisions of the Basel III circular, the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the bank for an amount of Rs 3,000 crore on December 23, 2016 and the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds issued by the bank for an amount of Rs. 5,415 crore on October 18, 2017 have been fully written down and stand extinguished with immediate effect,” Kumar informed exchanges.

(This is an updated version of the earlier story)
Dinesh Unnikrishnan
first published: May 25, 2020 10:38 am

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