Reserve Bank of India's strong comments in the Madras High Court affidavit that no one can blame it for losses in Yes Bank’s AT1 bonds will hurt investor faith in these financial instruments.
The tone and tenor of the language used by the Reserve Bank of India (RBI) in a counter affidavit filed in Madras High Court on June 26 in connection with the Yes Bank Additional Tier 1 (AT1) bonds dispute is unprecedented.
The RBI affidavit was a response to a petition filed by 63 Moons Technologies Ltd, one of the many aggrieved AT1 bond investors that have challenged the bond write down (there is already a case filed by Axis Trustee in Bombay High Court and individual cases across the country).
There are not too many instances when Mint Road loses cool in courtrooms. The RBI typically takes a mild stand, engages with legal disputes in a dispassionate way and restrict its arguments to the rulebook.
But here, that wasn’t the case.
RBI’s outburstThe following are some of the comments in the RBI’s counter affidavit:
- The Petitioners cannot on 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 failure, shift the onus of loss upon RBI”.
- “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.
- “Courts must be slow in interfering and exercising judicial review of the decisions of a private sector bank which are contractual in nature by issuing a writ.”
- “The whole purpose of writing-off the AT-1 Bonds is to ensure that the capital infused by the public sector i.e. SBI and other investors should not be diluted. The AT-1 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 stressed the fact that Yes Bank is not an authority under Article 12 of the Constitution of India. “It performs no public duty.”
For those who don’t remember the case, the context here is the RBI action to write down Yes Bank’s AT1 bonds as part of a rescue plan. A stock exchange clarification from Yes Bank’s RBI-appointed administrator, Prashant Kumar, in March said the AT1 bondholders will get nothing as per the condition of the reconstruction scheme. This, logically, came as a jolt to many investors, both retail and institutional.
Remember, these investors together held Rs 8,415 crore worth of papers. Following this, several investors approached courts arguing why they shouldn’t be treated less than equity investors.
Shortly after, one private bank cancelled its earlier planned AT1 Bond issue for obvious reasons. There was intense speculation in the industry on whether the RBI will do some rethinking considering the larger implications of the AT1 Bond write down among investors in these papers.
The counter-affidavit in Madras High puts ambiguity at rest.
The RBI is technically correct in its argument that AT1 bond writedown is merely a contractual obligation between two private parties. Yes Bank has only utilised a provision of the Basel III circular with respect to the Perpetual Subordinated Basel III Compliant Additional Tier I Bonds. The bank has, thus, clearly established the reason as to why the write down was necessary.
While RBI washes its hands off the AT1 Bond fiasco citing the rule book, the pertinent question is this: What possible recourse is now left for investors, especially retailers who are allegedly victims of misselling by Yes Bank executives who sold these bonds as ‘Super FDs’. When the regulator appeals the court ‘not to interfere’ in the case, where will they go to get justice?
Several retail investors argue that Yes Bank executives forced them to convert existing fixed deposits in the bank promising safety of an FD but returns higher than that of a regular FD. Some of these investors have their entire life savings lost in these bonds. They signed the cheque assuming these are one of the safest instruments available to invest in. The charges of misselling of these papers to gullible investors, if indeed true, is a serious charge.
To be sure, Yes Bank’s AT1 investors should have known the two risks associated with the instruments well before investing their hard earned money. One, if the bank is in losses, it need not pay back the coupon. Two, if the bank faces a financial collapse, the bond holders will have to share the losses.
Nevertheless, the grievances of aggrieved AT1 Bond holders of Yes Bank needs to be heard. The RBI’s strong commentary in the Madras High Court affidavit that no one can blame the regulator for losses in AT1 bonds and the suggestion that courts shouldn’t meddle with a private contract, will most likely have an adverse impact on investor faith in these instruments. As for Yes Bank’s AT1 bondholders, there is a tougher battle ahead.Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.