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Yes Bank | Why is a Financial Redressal Agency missing when it is needed most?

One is really surprised how Yes Bank’s AT1 Bonds made way to retail investors. These bonds are highly complex instruments and even financial experts will struggle to explain the mechanics of the bond.

April 27, 2020 / 12:21 PM IST
Representative Image

Representative Image

Amol Agrawal

It is highly unlikely that Elizabeth Warren, who just lost and stepped out of the Democratic race to the United States presidential elections later this year, has any knowledge of ongoing Yes Bank saga. However, the fallout of the bank might interest her — especially the case of selling so-called AT1 (Additional Tier 1) Bonds to retail investors. After all, Warren rose to fame after the 2008 crisis fighting the misselling of financial products to retail investors.

As the US crisis was heating up, in a 2007 article Warren argued how it was difficult to see a bread toaster putting a house on fire, but at the same time there was a strong chance that mortgages could lead to families burning all their income and be made homeless. She pointed how this was not always the case and there was a time when buying a toaster meant risking outing the house on fire, narrating her own experience. Thanks to government regulations, safety standards of toasters improved and made them safer for households to buy toasters without worrying of a fire.

We need similar practices for financial products as well, which, if not putting a house on fire, can create similar experiences of loss of property, being homeless and so on. Warren was a Professor at Harvard at that time and led campaigns to instituting a regulatory agency for protecting the interests of consumers against misseling of financial products. Her efforts led to Consumer Financial Protection Board in 2011.

Given this, it is obvious that if Warren reads what has happened to Yes Bank AT1 bonds, she will say “Told ya”!


One is really surprised how Yes Bank’s AT1 Bonds made way to retail investors. These bonds are quite (if not highly) complex and even financial experts will struggle to explain the mechanics of the bond.

The AT1 Bond are a result of the 2008 crisis (what else?). The crisis showed that what looked like good capital pre-crisis was woefully short post-crisis. There was a need to have additional financial instruments to safeguard banks in case of trouble. Accordingly, Basel-III rules advocated that banks should issue bonds named as Contingent Convertible Capital Bonds (CoCo bonds). The CoCo bonds are like bonds but based upon a contingency trigger, such as heavy losses, can be convertible either to additional equity capital or even written off against losses. Thus, these bonds are hybrid instruments which can work as both bonds and equity capital.

In Yes Bank’s case, the losses were so large that they were used to write off the losses. This has led to heart burn as suddenly several investors in the AT1 bonds were caught off guard. The mutual fund industry, which had large exposure to the bond, has to deal with a complete loss on their investment. The Association of Mutual Funds in India (AMFI) has written to the government for first squaring up the capital, and then use the proceeds of AT1 bonds. However, the rules are clear on this and the Reserve Bank of India (RBI) is acting as per its Basel-III circular.

This leads to the question that if ‘sophisticated’ investors, such as mutual funds, could not understand the risks, what should one expect from retail investors? Given that Yes Bank issued AT1 bonds after 2017, when the bank was in the news for being under trouble, makes the whole investment decision even murkier.

The AT1 bonds made their way to retail portfolio due to high interest rates on the bonds. There are reports that Yes Bank’s branch managers sold these bonds saying they not just have interest rates but are also safe like fixed deposits. Well, the fact is that neither fixed deposits nor AT1 bonds are risk free.

In fact, a 2013 BIS analysis showed that retail investors across the world have shown demand for AT1 bonds due to higher interest rates. The Yes Bank episode should act as a warning for all such retail investors. Unfortunately, experiences from developing countries hardly become learning lessons for the developed world.

Mutual funds still have the AMFI, but what should retail investors do?

The RBI is a regulator of banks and SEBI regulates capital market entities, and both accordingly protect investors in their respective fields. The RBI tries to ensure protection for depositors and SEBI does the same for investors. However, where do investors in AT1 bonds lie? It is not clear whether the RBI or SEBI should be monitoring selling of these bonds.

Why doesn’t India have a consumer protection agency yet?

In 2013, the Financial Sector Legislative Reforms Commission (FSLRC) debated and covered the topic extensively. The FSLRC noted that its work “in the field of consumer protection marks a watershed compared with traditional approaches in Indian financial law.” The commission moved away from the traditional approach of buyers beware (also called as caveat emptor) to making financial firms responsible for selling products. The FSLRC had suggested establishing a unified Financial Redressal Agency (FRA).

Then Union Finance Minister Arun Jaitley in his 2015-16 Budget Speech announced setting up a taskforce to study the need and design for an FRA. The taskforce submitted its report in June 2016 and suggested first setting up a shell FRA and then gradually scale it up to a statutory body. It gave a transition plan as well. In the first three months, the FRA should learn to handle cases against insurance, and then in another year handle capital markets and banks.

Despite much progress in thinking, we did not seen action on an FRA. In Yes Bank’s AT1 case, an FRA would have been useful and could have been challenged as well. An FRA might have been in a better position to handle these cases and would have put less burden on the RBI and SEBI and even courts. However, then as luck would have it, the plan to establish an FRA was delayed and the brunt is being faced by retail investors. Time to relook at the idea of an FRA and introduce the agency as soon as possible.

Amol Agrawal is faculty at Ahmedabad University. Views are personal.
Amol Agrawal
first published: Mar 19, 2020 10:47 am

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