On May 6, the fully written down AT1 (Additional Tier 1) bonds, worth Rs 8,415 crore, helped Yes Bank post a surprise profit of Rs 2,629 crore in the January-March quarter (a loss of Rs3,668 crore if one excludes this component).
But the case, which also involves scores of retail bond holders who lost money in these instruments on account of alleged mis-selling, is likely to return to haunt Yes 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.
Alleged ‘mis-selling’ of these bonds to retail bond holders by Yes Bank’s executives is likely to be made part of an existing petition in the High Court of Bombay filed by Axis Trustee, said one of its senior officials, which is representing the AT1 bond holders of Yes Bank.
Yes Bank’s retail bond holders 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.
“We have received phone calls and emails from retail bond holders alleging mis-selling of these bonds,” said the official who spoke on condition of anonymity. “We have forwarded these details to our legal team who will make this part of the petition when the next hearing happens,” the official added.
The AT1 case was slated to be heard on March 25 in High Court of Bombay but due to COVID-19, this has been postponed. During the course of the hearing, the HC had told the parties that any further action on the AT1 bond issue will be subject to further orders of the court.
But some of the retail bond holders, Moneycontrol spoke with, said they aren’t very confident of getting a fair representation in the case. “It was after sending several emails that they responded to our concerns. There has been major mis-selling of these bonds to many retail investors, including senior citizens, whose life savings vanished with the write down of these bonds,” said one of the investors. The person didn’t want to be named.
Retail bonders are also exploring options to separately seek legal recourse since they feel that Axis Trustee is not adequately representing concerns of retail investors. This is also because of a proposal from the Trustee to take a significant haircut on bond holdings and convert part of the holdings to equity. Retail investors feel that this plan will leave nothing much for them at the end of the exercise.
According to at least three such investors that Moneycontrol spoke to Yes Bank’s executives pitched these bonds as ‘super FDs’, which will 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 a 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. An email sent to Yes Bank seeking response on charge of mis-selling and the actions taken so far remained unanswered till the time of filing this story.
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 informed exchanges.