'Misselling' by Yes Bank execs lured thousands to subscribe to risky AT1 bonds

In an email exchange (a copy is which is with IANS) between Yes Bank executive and Shobhit, a retail investor, it is clearly seen that former sells AT1 bonds with 5-year tenor bearing annual interest rate of 9.5 per cent as instrument as safe as bank fixed deposit having no linkage to the riskier equity market.

Convinced, the retail investor agrees to put money in the bonds, suggesting the investment is only being made as it guarantees 9.5 per cent interest every year with principal being returned at the end of five years in December 2021. And most importantly there is no market-related risk in the instrument.

The decision made by Shobhit after getting convinced by Yes Bank executive seems to be the case with thousands of investors who invested in now defunct AT1 bonds. E-mail trails clearly shows that nowhere there is a mention about the risks involved with perpetual tier 1 bonds that are more in the nature of an equity product with inbuilt risk factors.

Under Basel III norms, RBI is within its powers to direct liquidation or writing down of these bonds in case of emergencies. As is the case with Yes Bank, writing down of Rs 8,415 crore worth of AT 1 bonds now seems an exercise that became essential under the restricting plan of debt-ridden private lender.

It's not just retail investors who got attracted towards the bond on misselling to make investment worth Rs 466 crore directly into these now toxic bonds, but indirectly lakhs  of investors also stand to lose on their investment through their participation through mutual funds.

The mutual fund industry as a whole had an exposure of about Rs 2,730 crore (as on February 29) to Yes Bank debt, much of it to AT1 bonds, according to data from RupeeVest, an online mutual funds distributor.

AMFI data also suggest that debt (including liquid) fund investments constituted around 30 per cent of total retail and HNI asset under management (AUM) meaning bigger trouble for this segment in the restructuring plan for the private sector bank.

Yes Bank's additional tier 1 (AT1) bonds worth Rs 8,415 crore is being written down to zero under the cash-strapped private lender restructuring plan that also includes Investment by private banks to the tune of Rs 3,950 crore in Yes Bank's equity and public sector lender SBI picking up to 49 per cent stake with a commitment to invest Rs 6,050 crore.

The writedown is being done as per the globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.

While government and the RBI have assured that all the depositors' money in the bank will be protected and if need be, the banking regulator may provide  additional liquidity support to Yes Bank, bond holders have been left in the lurch.

"The bank (Yes Bank) has decided to write down AT1 bond. This is as per the terms of the contract between the bank and the investor," RBI governor Shaktikanta Das said when mediapersons asked him about steps RBI is taking to maintain liquidity in the financial system and currency market in the wake on coronavirus spread.

"A lot of misselling happened on Yes Bank's AT1 bonds that were projected as a safe investment instrument giving higher returns. This lured a lot of retail investors also to buy these bonds. Government should not leave these investors high and dry and look at some mechanism so that losses to this segment are minimized," said another retail investor of Yes Bank bonds.

What the mutual fund industry fears is that writing down of Yes Bank AT1 bonds may cause panic redemptions, even in situations where it is not warranted. This would severely affect investor's confidence in debt markets and financial institutions.

Mutual funds owned by Nippon, Kotak, Franklin and firms like Reliance Industries, Barclays Bank, Bajaj Allianz including 34 institutions and pension funds have also invested in Yes Bank bonds. Nippon MF is expected to lose Rs 2,500 crore, Franklin MF Rs 590 crore, Barclays Bank Rs 246 crore, Kotak MF Rs 130 crore and RIL Rs 100 crore, documents related to such investment showed.

Other institutions which stand to lose are Reliance Nippon Life Insurance, Larsen and Toubro, UTI MF, and Bharti Axa. Even pension funds like the State Bank of India employees pension fund, the Larsen and Toubro officers and supervisory staff pension fund, the NPS trust fund, Indian Oil Corporation employees provident fund (refineries division), National Hydroelectric Power Corporation Limited (NHPC) employees provident fund also stand to lose crores of pension money.

AT-1 Bonds in India have emerged as an important source of capital for scheduled commercial banks. Banks, both PSU and private, regularly issue AT-1 bonds in the Debt Market to shore up their Tier I Capital. After the Yes Bank writedown, market for such instruments may also dry up.