Yes Bank’s Retail AT-1 Bondholders Plan To Take Their Battle To Court

Nearly three months after a reconstruction plan was finalised for Yes Bank Ltd., a crucial part of the scheme continues to be under dispute. The decision to write-down additional tier-1 bonds, worth over Rs 8,000 crore, has attracted opposition not just from institutional investors but also retail buyers, who claim the securities were mis-sold to them.A group of 500-odd investors, with investments of about Rs 250 crore, have come together to try and fight the decision. A Telegram group has been formed, legal representation is being sought, and a plan is being discussed to file a legal petition against Yes Bank and even the Reserve Bank of India, according to five such investors who BloombergQuint spoke to.A petition on behalf of institutional investors has already been filed by Axis Trustee Services, the bond trustee. That petition, too, includes claims of misselling, the Economic Times reported earlier this week. But the group of retail investors intend to file their own petition as well, the investors said.An email sent to the Reserve Bank of India on Wednesday didn’t elicit a response.A Yes Bank spokesperson declined to comment on queries sent by BloombergQuint. However, in response to an Economic Times article which said Axis Trustee Services alleged misselling by Yes Bank relationship managers, the bank said it wouldn’t like to comment. “Further, please note that Axis Trustee Service Limited on behalf of AT-1 bondholders, has filed a writ petition before the Hon’ble Bombay High Court inter alia against the bank, challenging the decision of write off of AT-1 bonds by the Bank and that the matter is sub-judice,” Yes Bank said in its statement to exchanges.Misselling AllegationsAT-1 bonds are perpetual bonds issued by lenders to shore up their capital base. They are unsecured in nature. They are also “loss absorbing” instruments. These securities, unlike other bonds, include two special features: a bank can skip a coupon payment under certain conditions; the bank can also permanently write down these securities under a specified set of circumstances.It’s to compensate for these additional risks, that investors seek a higher rate of return or coupon on these bonds. Retail bond holders claim that Yes Bank relationship managers did not communicate these risks to retail investors. Instead they pitched these investments as superior to fixed deposits, with little inkling of the additional risks involved.Misselling Allegation 1: Comparison To FDsOne allegation made by retail bond holders is that AT-1 bonds were compared to fixed deposits.An email dated March 16, 2018 sent by a Yes Bank relationship manager to one retail bond holder said: “If you compare this product TODAY with 1-5 Year Bank FD at an interest rate of say 6.75% (Annual Yield of ~ 7.0%) - this product offers incremental comparable Yield close to 1.75%.”A second email dated March 12, 2018 carried a similar message. “If you compare this TODAY with 1-5 Year Bank FD at an interest rate of say 6.8% (Annual Yield of ~ 7.0%) - this product offers incremental comparable Yield close to 1.75%.”Another such email dated June 7, 2017 said: “If you compare this TODAY with 1-5 Year Bank FD at an interest rate of say 6.8% (Annual Yield of ~ 7.0%) - this product offers incremental comparable Yield close to 2.1%.”BloombergQuint has reviewed copies of four emails received by four different bondholders.To be sure, comparing returns across bond investments and fixed deposits is not a unique pitch. Mutual fund managers are often heard comparing returns on fund bonds to fixed deposits, despite the inherent difference in these products.Is this different?According to Pankaj Mathpal, a certified financial planner, comparing a debt instrument with a fixed deposit rate is common practice among investment advisers. “The only difference between the two instruments is that you need a demat account to purchase bonds. Other than that, an investor or a depositor is extending funds to a financial institution to earn returns on it,” Mathpal said.Misselling Allegation 2: No Detailing Of RisksNimish Goyal, an IT consultant whose parents had invested in the bonds on the advice of a relationship manager employed by Yes Bank, said the communication received by investors mentioned returns linked with the AT-1 bonds and pitched their “superior” quality. However, there was no mention of investments being written down.As per four different emails reviewed by BloombergQuint, while the bank had informed investors about the higher returns, there was no specific note about the risks involved in the product brief. However, the emails did have a detailed investor memorandum and pricing sheet attached.“When you’re telling an average investor that a bank has issued a financial instrument and that they will earn at least 100 basis points more than a fixed deposit, without explaining the risks, no investor is going to say no,” Mathpal said. “It’s the advisor’s responsibility to tell the investor that such instruments can either be written down or can be converted to equity in case the bank goes through significant stress.”JN Gupta, managing director at Stakeholders Empowerment Services, said advisers will often try and highlight only the benefits of an investment plan, but will downplay the risks. Unless the investors were never issued a prospectus, which would explain the risks, one cannot classify a sale as misselling, he said, adding that he is personally not aware of the way Yes Bank sold the AT-1 bonds.A Wider DisputeThe fight being fought by retail investors of Yes Bank’s AT-1 bonds is part of a wider debate on whether the Reserve Bank of India was justified in its decision to write-down these securities as part of Yes Bank’s reconstruction plan.Investors questioned the RBI’s decision to write down these securities even though existing equity holders had not been fully written down. This raised questions over credit hierarchy.However, the RBI’s guidelines are clear on the conditions under which these securities can be written down.The rules say: “The terms and conditions of all non-equity capital instruments (i.e. both Additional Tier 1 and Tier 2) issued by banks must have a provision that requires such instruments, at the option of the Reserve Bank of India, to either be permanently written off or converted into common shares upon the occurrence of the ‘Point of Non-Viability (PONV)’ trigger event.”As per the norms, a PONV trigger event is considered to have occurred when either the RBI decides that unless the instruments are written down fully, the bank would become non-viable or without external capital infusion by public sector entities the bank would become non-viable.“The write-off of any common equity-tier 1 capital shall not be required before the write-off of any non-equity (Additional Tier 1 and Tier 2) regulatory capital instrument,” the RBI norms add.Ajay Shaw, partner at DSK Legal, explained that in the absence of a dedicated resolution process for stressed banks, the RBI used options available with it. “In a bank you are dealing with the interests of deposit holders which is a large class of stakeholders,” he said. “In such a situation the welfare of a large class of stakeholders will outweigh the impact such a move could have on some smaller stakeholders such as AT-1 bondholders.”Legal Battle AheadThe RBI and Yes Bank’s new management will now need to fight out these issues in court.The petition filed by Axis Trustee questions the decision to fully write down the AT-1 bonds, by stating that such a write down would unduly benefit the promoters of Yes Bank, because of whom investors have faced significant losses. Axis Trustee has claimed that a complete write down of these instruments before writing down equity value is only possible if Yes Bank goes under liquidation. Earlier this month, Axis Trustee also added a misselling component in its petition, claiming that the bank had sold these instruments to retail investors by claiming that they are “Super FDs”.Retail investors, however, want to fight their own independent battle.According to the bondholders cited earlier, the retail investors don’t believe that their needs will be fully served by Axis Trustee’s petition, as larger institutional investors are willing to take a large haircut on their investment. The retail bondholders are seeking full restitution of their principal amount through their own petition, they said.Gupta said the retail investors can approach the courts or seek redressal of their complaints via the banking ombudsman.“In case of a dispute an investor can go to either the RBI’s ombudsman or the court, depending on whatever they feel is right. If it is a case of misselling by the bank, the ombudsman has the power to take action in the matter,” Gupta said.Yes Bank’s New CEO Sees Replenishing Deposits as Top Priority

Yes Bank’s Retail AT-1 Bondholders Plan To Take Their Battle To Court

Along with institutional investors, retail investors, who claim they were missold Yes Bank AT-1 bonds, are approaching courts.

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