Yes Bank’s Additional Tier 1 (AT1) bondholders have filed a petition in Bombay High Court seeking interim relief of Rs 160 crore from the bank. AT1 securities are a type of contingent convertible bonds designed after the financial crisis to try to ensure that investors would be on the hook if a bank runs into financial stress.
Yes Bank AT1 Bondholders Association, which has approximately 400 members, filed the petition in Bombay High Court in February seeking the interim relief. The case was heard on March 25. These members, together, have an approximate exposure of Rs 160 crore to Yes Bank AT1 Bonds. This does not include the interest amont accrued on these bonds since the day of write-off. The court has asked all respondents to give a response on April 26.
Petitioners have requested the court to direct the lender to deposit Rs 160 crore with the court to safeguard the interest of the petitioners. Investors had moved court seeking relief after Yes Bank extinguished AT1 Bonds as part of the State Bank of India-led bail-out in March last year.
“We have sought an interim relief from the High Court. The court has asked the respondents to file a reply by April 26,” said Nimish Goyal, whose family has investment in Yes Bank’s AT1 bonds.
Yes Bank wrote off AT1 bonds worth Rs 8,415 crore as part of the bailout in March last year. This irked Yes Bank’s AT1 bondholders who moved the court challenging the decision and get their money back.
The petitioners have also added Axis Trustee as a respondent in the case alleging failure on the Trustee’s part in preventing AT1 bond sales to ineligible class of investors. When contacted, Axis Trustee Managing Director and CEO Sanjay Sinha declined to comment on the development saying that matter is subjudice.
In the latest petition, AT1 bond holders have submitted that around 63 percent of the total number of individual investors in AT1 bonds are above the age of 50. Also, majority of these investors have put in their whole life savings in these instruments, the petitioners have said.
A case of misselling?
The petitioners have been arguing that Yes Bank executives misrepresented the risks the AT1 bonds carry and sold these instruments as ‘Super FDs’ to existing FD holders promising higher return and safety of a deposit.
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. Retail investors allege that 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.
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 be 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 had informed exchanges in March 2020.