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RBI examines misselling complaints of Yes Bank’s AT1 bondholders; seeks details

Several investors have received emails from the central bank’s Consumer education and protection department in the last one month seeking details of documents related to bond purchase

August 27, 2020 / 05:17 PM IST
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Banking regulator, Reserve Bank of India (RBI) has sought details of investments from Yes Bank’s Additional Tier 1 (AT1) bondholders to examine their complaints about misselling of these instruments by Yes Bank’s executives.

AT1 bonds or perpetual bonds are quasi debt instruments that carry relatively high risk. Yes Bank wrote down AT1 Bonds worth Rs 8,415 crore as part of the reconstruction scheme formulated by the RBI in March this year. Following this, AT1 bondholders approached the court alleging that there has been gross misselling of these instruments.

Several investors have received emails from the central bank’s consumer education and protection department in the last one month seeking details of documents related to the bond purchase, copy of signed bond application form submitted to Indian Clearing Corporation Limited (ICCL) and details of depository participant.

Besides, the RBI has also sought details of brokerage firm from whom the bond was purchased, value/date of bond purchase, details of bank branch and relationship Manager, details of fixed deposit prematurely closed. The regulator has also asked investors if FD premature closure penalty was imposed by the bank.

Moneycontrol has seen one such email sent by RBI’s Consumer Education and Protection Department. An RBI official, who didn't want to be named, too confirmed that the emails have been sent from the central bank.

The RBI’s move follows several complaints made by Yes Bank’s retail investors to RBI, Securities and exchange board of India and government on alleged misselling of these bonds by Yes Bank’s executives.

“Many of us have received emails from the RBI in the last 15-20 days,” said one of the retail investors on the condition of anonymity.

Yes Bank investigates allegations

In an exclusive interview with Moneycontrol on Wednesday, Yes Bank’s managing director and CEO, Prashant Kumar had said that the bank is investigating the allegations on misselling of AT1 Bonds.

“The allegations are being investigated by the Bank,” said Kumar.

Yes Bank’s retail bondholders alleged that bank executives sold these instruments to them pitching these perpetual bonds as ‘super FDs’ offering safety and relatively high return compared with regular fixed deposits.

Early this year, Axis Trustee, which represents Yes bank investors, had made misselling part of its petition in the Bombay High Court.

Legal battle

Earlier, in a counter-affidavit filed in the Madras High Court recently, Yes Bank had denied allegations of misselling and said that investors purchased these perpetual bonds with “eyes open”.

“The claim of violation of natural justice is denied. The petitioner had purchased the AT1 bonds with eyes open, knowing all the risks attached with the purchase,” the bank had said. The petition was filed by one of the investors, 63 Moons Technologies. The firm, founded by Jignesh Shah, who invested Rs 300 crore in 3,000 bond units.

Denying allegations of manipulation, Yes Bank said the petitioner’s claim is a matter that requires “some enquiry”. The petitioner alleges that officials of Respondent No. 3 (Yes Bank) had misled investors to peddle the AT-I perpetual bonds and were misled into buying these bonds based on misrepresentations. These statements are very vague and without any particulars, the affidavit said.

“Who are these officials, when were these statements/ misrepresentations made, and what kind of promises were made are all absent. I am not in a position to deal with any of these vague allegations except to deny them,” Kumar said in the affidavit.

Further, the affidavit says that none of the bank officials would have had any occasion to deal with the petitioner as the petitioner had purchased the bonds from the secondary market and not subscribed to them.

In its petition, 63 Moons had alleged that Yes Bank officials misled investors to peddle the bonds. “The investors were given the impression that the AT-I bonds were not only risk-free but also offered a higher return than fixed deposits. The bonds were marked as ‘Super Fixed Deposits” by the relationship managers of Yes Bank,” the company alleged. Describing the bonds as ‘Super FDs’ is a gross misrepresentation as it hides the risks inherent in the product, the petition said.

RBI’s version

Earlier, in its counter-affidavit, the RBI too had said that the action for writing-off has been rightly taken under the provisions of the contract between Yes Bank and AT-I bondholders, and, hence, there is no merit in the petitioner’s contentions.

“The whole purpose of writing-off the AT-I bonds is to ensure that the capital infused by the public sector i.e., SBI, and other investors should not be diluted. The 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 that 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-I 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 failure, shift the onus of loss upon RBI.”

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Aug 27, 2020 05:17 pm