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Last Updated : Jul 09, 2020 07:05 PM IST | Source: Moneycontrol.com

Exclusive | Yes Bank AT1 bond write-down: RBI says investors can’t blame regulator after enjoying high returns in good times

In an affidavit filed in Madras High Court, RBI said writing off Yes Bank AT-1 Bonds to ensure that the capital infused by SBI and other investors, should not be diluted.

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The battle between bond investors and Yes Bank on the issue of the writedown of Additional Tier 1 (AT1) bonds has intensified with more and more investors seeking legal intervention to get their money back.

Several investors have launched lawsuits across the country against the Reserve Bank of India’s (RBI) to write down the bonds as part of a rescue plan of the lender. One of the petitioners happens to be 63 Moons Technologies, formerly known as Financial Technologies (India). The company, founded by Jignesh Shah, filed a petition against RBI, the RBI-appointed administrator of Yes Bank and Yes Bank itself in the Madras High Court.

Also Read: Yes Bank’s AT1 bonds | Jignesh Shah’s 63 moons technologies files court petition against write down

Now, the RBI has filed a counter-affidavit in response to the petition by 63 Moons Technologies.

AT1 bonds, also called perpetual bonds, are considered quasi-equity instruments and are riskier than Tier 1 bonds. Investors are usually lured by the high interest they offer.

AT1 write-off to ensure capital isn’t diluted

In the counter affidavit, RBI has used strong words discarding the claims by the petitioner.

The RBI has said the action for writing off has been rightly taken under the provisions of the contract between Yes Bank and AT-1 Bondholders and hence, there is no merit in the Petitioners contentions. “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 said.

The RBI affidavit also said the 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 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 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”.

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

Misselling part of the petition in Bombay HC

Recently, Axis Trustee, which represents the AT1 bondholders 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. Bombay High Court last month extended its interim orders on the matter till July 15.

“We have included the alleged misselling of AT1 bonds (by Yes Bank executives) in the complaint. This will be part of the petition when the case comes up next,” said Sanjay Sinha, MD of Axis Trustee to Moneycontrol.

On May 7, Moneycontrol first reported that alleged ‘misselling’ of these bonds to retail bondholders by Yes Bank’s executives was likely to be made part of an existing petition. Retail AT1 bondholders 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.

‘Super FDs’

According to at least three such investors that Moneycontrol spoke to, Yes Bank’s executives pitched these bonds as ‘super FDs’ which 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 the 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 RBI prepared a reconstruction scheme for the rescue of the bank.

Yes Bank collapsed due to alleged financial irregularities done by former management. According to experts, prevailing 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 bondholders allege that these norms were not followed by Yes Bank executives while selling these instruments.

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.

The petitioners have argued that the total write-down of AT1 bonds, treating these instruments below equity is not fair. Bondholders have invested a total of nearly Rs 94,000 crore in AT1 bonds issued by Indian banks, according to rating agency ICRA.

First Published on Jul 9, 2020 06:29 pm