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Yes Bank AT1 bonds case: Does Sebi order pits the market regulator against the RBI?

While the RBI and Yes Bank have refused to accept the charges of mis-selling in the case, Sebi has imposed monetary penalty on the bank and some of its officials.

April 14, 2021 / 09:26 AM IST
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On April 12, the stock market regulator, the Securities and Exchange Board of India (Sebi), penalised Yes Bank and three former bank officials in the Additional Tier 1 (AT1) bonds mis-selling case. AT1 bonds are a type of perpetual bonds banks issue to raise core equity.

Sebi imposed a monetary penalty of Rs 25 crore on Yes Bank, Rs 1 crore on Vivek Kanwar and Rs 50 lakh each on Ashish Nasa and Jasjit Singh Banga. Kanwar was the head of Yes Bank’s private wealth management team. The other two were his team members.

The penalty is not significant, considering what is at stake for investors, but Sebi’s decision may have implications in the case. Let's understand how.

What is the case?

The case pertains to Yes Bank executives allegedly selling AT1 bonds to investors under the guise of Super FDs (fixed deposits), promising higher returns and the safety of a typical bank FD.


Yes Bank, which was bailed out in March last year by a bank consortium led by State Bank of India (SBI), wrote off Rs 8,415 crore of AT1 bonds as per the framework of the bank’s reconstruction scheme. The bailout was effected following a reconstruction scheme formulated by the Reserve Bank of India (RBI), with the support of the finance ministry.

Following this, investors moved courts alleging that the bank made false assurances while selling these bonds, and, hence, they need to be compensated by the bank. The case is ongoing in the Bombay High Court. Both Yes Bank and the RBI have so far maintained that the AT1 bond write-off is as per Basel III rules. Besides retail investors, institutional investors such as Indiabulls and  63 Moons Technologies have also moved courts.

The Sebi order, in a way, pits the market regulator against the RBI. How?

A look at the key parts of the Sebi order clearly establishes the charge of mis-selling of perpetual bonds to retail investors by Yes Bank executives.

The Sebi investigation observed that Yes Bank officials didn’t follow proper procedures like sharing the term sheets with individual investors while selling these bonds.

“The investigation also observed that the down-sell of AT1 bonds were not negotiated between buyers and sellers individually. The same was facilitated by Yes Bank for around 1,300 individual investors, most of whom were existing customers of Yes Bank,” the Sebi investigation observed.

Sebi further observed that Yes Bank represented AT1 bonds as Super FD and ‘as safe as FD’. Also, no confirmation was taken from investors with respect to their understanding of the features and risks associated with the bond, the investigation observed.

The investigation also observed that the push from the MD & CEO of Yes Bank to down-sell the bonds led the private wealth management team to recklessly sell the bonds to individual investors.

Further, Sebi observed that “AT1 bonds were sold to the customers of Yes Bank without adequate safeguards to protect their interests and without sufficient due diligence.” The Sebi order said that allegations that Yes Bank sold AT1 bonds to investors, representing as Super FDs, is established.

What is the RBI stance?

The RBI, as the banking regulator, has so far refused to acknowledge the charges of mis-selling in the Yes Bank AT1 bonds case before the courts. In its counter-affidavit in the Madras High Court against the petition filed by 63 Moons Technologies in the middle of last year, the RBI said the action for writing off has been rightly taken under the provisions of the contract between Yes Bank and AT1 bondholders, and, hence, there is no merit in the petitioners’ contentions.

“The whole purpose of writing off the bonds is to ensure that the capital infused by the public sector i.e., SBI and other investors should not be diluted. The AT1 bonds are a liability, and, hence, the same should be written off for the effective implementation of the Notified Scheme, which is made in the interest of the general public and to regain the confidence of the depositors,” the RBI had said.

The affidavit also said: “Prior to the advent of the financial difficulties of Yes Bank, the petitioner and other bondholders of Yes Bank have reaped high financial rewards on the AT-1 bonds. The petitioners cannot, on the one hand, enjoy the benefit of a high interest rate/coupon rate by investing in such high-risk instrument, and, thereafter, in times of such a failure, shift the onus of loss upon RBI”.

The RBI’s comments in the affidavit were significant, considering that AT1 bond investors already have an ongoing case in the Bombay High Court. The investors, all along, has argued that they were not told the real risks involved in these instruments and the total write-down of these bonds is not justifiable.

‘Investors bought the bonds with eyes open’

Not just the RBI, in its counter-affidavit filed in the Madras High Court against the petition of 63 Moons Technologies, Yes Bank’s RBI-appointed managing director and chief executive officer, Prashant Kumar, too submitted that investors purchased these perpetual bonds with “eyes open”.

“The claim of violation of natural justice is denied. The petitioner had purchased the bonds with eyes open, knowing all the risks attached with the purchase,” said Kumar.

So far, these were only allegations by AT1 bond investors before the courts. But now, with Sebi penalising bank officials, acknowledging that there was evidence of mis-selling, the market regulator effectively contradicts the RBI’s stance that there is no merit in the petitioners’ contentions.

Will the Sebi order make any difference in the ongoing case?

It is too early to say. The decision to write-down AT1 bonds was taken by the RBI and it has legal finality, and, hence, it cannot be reversed, said a former key Sebi official. “The Sebi order changes the dynamics of the Yes Bank's AT1 bonds mis-selling case. The Sebi order establishes charges of mis-selling. But the question is where the liability will rest. The present Yes Bank is not the past Yes Bank. Investors (who bailed out the bank) have invested in Yes Bank based on the RBI scheme (sic),” said J N Gupta, former executive director at Sebi.

“If the HC takes cognizance of the Sebi order, the only solution will be restoration of bonds. But who will do that is the question. The answer will depend on the fine print of the RBI reconstruction scheme. It needs to be ascertained if the liability goes to the present Yes Bank management or someone else,” Gupta said.

More clarity will emerge when the Bombay HC takes up the case on April 26 when the next hearing is scheduled. Investors are likely to cite the Sebi order to strengthen their argument on mis-selling. On the other hand, Yes Bank may counter the Sebi order soon, arguing against the charges of mis-selling. There is a long legal battle ahead.
Dinesh Unnikrishnan
first published: Apr 14, 2021 09:26 am

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