Yes Bank AT1 bond writedown episode is a major lesson for investors who choose risky financial instruments hoping for higher returns.

A bailout in March this year by an SBI-led consortium has given Yes Bank another chance to get back to business. In the April-June quarter, the bank received the much-needed survival capital through a follow on public offer. In a multi-part series, Moneycontrol will look at the journey of private sector lender so far and the challenges ahead. Read the first two parts here and here. This is the third and concluding part:

One of the scariest parts of Yes Bank bailout story is what happened to Additional Tier 1 (AT1 Bonds) Bond holders of the bank when the reconstruction scheme came into effect in March, 2020.

Rs 8,415 crores worth AT1 Bonds were written off by Yes Bank invoking a rule that is permitted under Basel guidelines. Following this, the shocked bond holders of the bank moved courts seeking help.

These include a petition filed by Axis Trustee in Bombay High Court and a separate petition in Madras High Court by 63 Moons Technologies Ltd, one of the institutional investors which lost Rs 300 crore in AT1 Bonds. There are others who plan to initiate separate legal action.

What are AT1 Bonds? These are perpetual bonds and are considered quasi-equity instruments riskier than Tier 1 bonds. Investors are usually lured by the high interest they offer.

Misselling charges

One of the charges raised by aggrieved AT1 bond holders of Yes Bank was that they were missold these products by Yes Bank’s executives. Several retail investors Moneycontrol spoke to confirmed this allegation. They said AT1 bonds were presented by Yes Bank executives packaging as ‘Super FDs’.

Investors were told that AT1 bonds are products that offer the safety of a fixed deposit but higher returns (around 9%-9.5%) compared to a normal FD product. This was an attractive offer investors couldn’t say no to. Many of these customers had existing fixed deposits in the bank which were converted to AT1 investments.

“In the hindsight, I feel I should have been more careful but Yes Bank was a trusted bank at that point. The executive presented it to my family in an extremely convincing manner. We agreed.,” said one of the Delhi-based retail investor, whose family have over a crore rupees stuck in these bonds. The person didn’t want to be named.

The misselling angle is mentioned in the petition filed by 63 Moons as well. “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.

The Axis Trustee, which represents the investors in the case, has now included the misselling part in its Bombay High Court petition.

“Don’t blame us”

The Reserve Bank of India (RBI) has strongly defended its position in the case. In its counter affidavit to 63 Moons petition, the RBI has used strong words.

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. The investors, all along, has argued that they were not told the real risks involved in these instruments and total write down of these bonds is not justifiable.

Yes Bank’s response

Yes Bank, in a separate counter affidavit, has denied that its executives engaged in misselling of AT1 Bonds. Yes Bank’s RBI-appointed managing director and chief executive officer, Prashant Kumar, submitted 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,” said Prashant Kumar.

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, Kumar said in the affidavit.

“Who are these fficials, 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.

No rule violation

Kumar reiterated that the write-down was in accordance with the law and there are risks associated with this instrument. “Unfortunately, the risk events occurred and loss was occasioned. The petitioner now cannot claim protection from the court in respect of such investment decisions by claiming some special right,” said the Yes Bank counter-affidavit.

Yes Bank was bailed out by a bank consortium led by the State Bank of India (SBI) in March this year after a surge in bad loans and capital erosion. Investigations are on into the alleged corruption and financial irregularities by the former management under Rana Kapoor.

So what are the chances for AT1 Bond holders?  

According to JN Gupta, a former SEBI executive director and founder of proxy advisory firm SES, Yes Bank’s AT1 bond holders are unlikely to get their money back. This is because both the banking regulator and the Yes Bank management (post bailout) acted as per rules. “As far as RBI is concerned, the case filed by AT1 bond holders will not stand. RBI has only followed the Banking Regulation Act,” said Gupta.

“With respect to misselling by Yes Bank executives, there could be a merit in argument. But the present Yes Bank management will not be impacted. There could be possible actions against individuals involved (in misselling). Even there, I do not see much scope for recovery of money,” Gupta said.

Yes Bank AT1 bond write down episode is a major lesson for investors who choose risky financial instruments hoping for higher returns. Also, the outcome of the ongoing legal battle is sure to have an impact on the AT1 Bond market in India.

Source : https://www.moneycontrol.com/news/business/mm-july-tractor-sales-up-27-at-25402-units-5630421.html