During the week, SEBI imposed penalty of Rs.25 crore on Yes Bank for selling the AT-1 bonds to the wrong customers, or mis-selling as it is better known. Even as Yes Bank goes on appeal, this order may find it hard to hold water.
AT-1 bonds in the limelight
Additional Tier-1 or AT-1 bonds were permitted by the Basel Committee in the aftermath of the global financial crisis of 2008. This allowed banks to raise equity tier-1 capital by the issue of AT-1 bonds. These were perpetual debt with only interest payment and even that could be cancelled in tough times. Worse still, these bonds could be written off fully at the time of restructuring of a bank on account of losses. That is exactly what happened in the case of Yes Bank. But how were these AT-1 bonds mis-sold to the public? That remains the key issue.
How AT-1 bonds were mis-sold
While AT-1 bonds were always high-risk investments, the issue in the case of Yes Bank was that eager officials mis-sold these bonds to unsuspecting investors. There were cases of senior citizens who were advised by the sales persons to liquidate bank FDs and invest in AT-1 bonds for higher yields. This was done by creating an image that AT-1 bonds were safe products like FDs, which they were obviously not. The penalty was put on Yes Bank as a deterrent measure to avoid such gross mis-selling in future.
Yes Bank; part of the problem
While Yes Bank was surely part of the problem, the real problem was bigger. The biggest investors in these AT-1 bonds were Indian mutual funds, and they are not naïve investors by any stretch of imagination. AT-1 bonds were being sold and bought by sophisticated investors under the tacit impression that a scheduled bank would never default on these AT-1 bonds. The decision by Yes Bank was taken in consultation with RBI and it is under a new leadership. While there is no doubt that the bonds were mis-sold, it was just the tip of the iceberg. The issue was that investment rules for AT-1 bonds came much later.
What happens to the penalty?
For now, Yes Bank has decided to go to the SAT against the SEBI order. From here on, the process could take a long time. The argument of Yes Bank would be that this repudiation was done after consultation with the RBI. Also, the so-called mis-selling pertained to the old management of Yes Bank, which has been superseded anyways. Again, Yes Bank was not the only one to mis-sell the AT-1 bonds because the same was done by others also. Just as there were enthusiastic sellers, there were also a lot of enthusiastic institutional buyers for AT-1 bonds. Yes Bank may look like the fall guy in this case but the point is that RBI has done a great job rescuing Yes Bank. It is now time to move on!