Blatant Mis-Selling of Bank AT1 Bonds Continues
In a supreme irony, the State Bank of India (SBI) AT1 bonds, which yield more than SBI’s fixed deposits, are being hawked in a manner similar to the way those of Yes Bank were mis-sold. India’s largest State-owned bank SBI which is on a massive fund raising spree, is currently on a roll, issuing large volumes of Basel-compliant additional tier 1 (AT1) bonds at record-low coupon rates. 
 
Several distributors and agents are wrongly advertising these bonds with claims that SBI AT1 bonds are better than fixed deposits. One of them, Ahmedabad-based Tipsons (which runs the portal  https://www.thefixedincome.com  and claims to be registered with Securities and Exchange Board of India—SEBI—as a category I merchant banker), is even going to the extent of saying “FD like features with higher attractive yield, stability of principal, generate a regular flow of income, better option that debt MF.”
 
 
This amounts to mis-selling because while fixed deposit (FD) is guaranteed to the extent of Rs5 lakh, AT1 bonds are not. Also, while in FD, the principal is protected, in AT1 bonds, it is not. There is also no mention of the associated risks. Nobody is saying that these AT1 bonds are unsafe. But if the interest rates rise, your FD value will not go down, but AT1 bond value will. The issue is not whether AT1 bonds are safe or not safe but they are not similar to FDs, which is what many distributors are wrongly claiming. Both the SEBI and the Reserve Bank of India (RBI) are turning a blind eye to this menace of blatant mis-selling. Ironically, it is this same SBI management, which is running Yes Bank, which had wiped out the Yes Bank AT1 bonds (earlier this year in March 2020) without a second thought. Surely the Bank is big enough to come down heavily on such mischief.
 
AT1 bonds are issued by banks to shore up their core capital base to meet the Basel III norms. These bonds are unsecured, perpetual in nature and so pay a higher coupon rate. But they are high risk and can be written down if the bank’s capital dips below threshold limits. RBI can also ask a bank that is dangerously on the edge to cancel its outstanding AT1 bonds without consulting its investors, which is what happened in the case of the AT1 bonds Yes Bank was holding when SBI bought a 48% stake in the Bank to save it.
 
A large number of these high-risk products were sold to Yes Bank customers by its own relationship managers with the promise of high returns and FD-like safety of capital. In many cases, this was done without explaining the risks or conducting risk profiling and suitability checks with the customers.
 
Many retail investors were goaded by their relationship managers to pick up these bonds from the secondary market (these bonds are not meant for retail investors and, hence, primary issuance is not available for them). When a product is being sold by highlighting or exaggerating the positive aspects and the suitability of the product for the customer while suppressing the limitations or risk factors, it can be construed as mis-selling. This culture of mis-selling financial products is pervasive, even as the regulators are increasingly tightening the regulations on all market intermediaries.
 
When Yes Bank collapsed in early March this year and the RBI wrote off the entire value (Rs8,415 crore) of the AT1 bonds as a part of the hurriedly-put-together rescue package for the cash strapped lender, all investors lost their money. Many of these investors were retired individuals who had parked a sizeable chunk of their life savings in these bonds at the behest of their relationship managers. 
 
Many investors have dragged the lender to court demanding that they be compensated. RBI has said that risks to these bonds were well known to the investors and that the rules allow writing off the bonds if capital falls below the regulatory minimum. Several direct and indirect retail bondholders through mutual funds, insurance firms, and provident funds have filed a case in Bombay High Court against the mis-selling of these bonds but unfortunately it seems to be a long haul for them. The write-down was done as per the globally accepted Basel-III norms that mandate writing down of such bonds in the wake of an emergency.
 
In the recent past, several news reports came out detailing how Yes Bank executives had sold Yes Bank AT1 bonds with 5-year tenors at an interest rate of 9.5%pa (per annum) claiming that the “instrument is as safe as bank fixed deposit having no linkage to the riskier equity market.” Bank executives sold these instruments to investors pitching these perpetual bonds as ‘super FDs’ offering safety and relatively high return compared with regular fixed deposits. While prevailing RBI regulations do not bar banks from selling perpetual bonds to retailers, the rules clearly say that these instruments should not be pitched with fixed deposits as a benchmark. As per rules, the risks involved in these instruments must be clearly explained to investors.
 
Several retail investors invested money in the AT1 bonds because they were led to believe that their investment is earning a guaranteed 9.5% interest every year and their principal would be returned at the end of five years.
 
Thousands of gullible investors invested in the now defunct AT1 bonds of Yes Bank. It was soon discovered that e-mail trails clearly show that nowhere there was a mention about the risks involved with AT1 bonds that are more in the nature of an equity product with in-built risk factors. 
 
The same modus operandi seems to be at play even now, luring gullible retail investors by comparing AT1 bonds with fixed deposits, debt funds while there is no mention of the risks involved in buying these. Retail investors need to be informed that AT1 bonds, issued by banks bearing a fixed rate of interest payable at regular periods, are not risk-free and the banks also have the ability to permanently write down such bonds with no obligation to repay the principal amount. 
 
Many retail investors do not understand the problems lurking in the fine print of a financial product since the product they are buying is intangible. They see the product through the words and material shared by the seller. The buyer understands the features of a financial product based on how the seller describes its features, which is called an ‘agency problem’. The regulators have absolved themselves by insisting on disclosures. However, most average retail investors are simply not geared with adequate knowledge of finance to understand what really the disclosure means in layman terms, while high-net worth individuals (HNIs) have their own financial advisors.
 
No Redress
 
One would think that the banking ombudsman is the right authority to complain to against a relationship manager if one has been mis-sold a product. However, the ombudsman already has a track record of rejecting a high number of 'mis-selling' complaints. In the case of Yes Bank’s AT1 bond-holders, whose value was written down during the crisis at the bank, the ombudsman rebuffed complaints saying the matter is sub-judice. 
 
In fact, in one complaint, the ombudsman even rejected the complaint as not falling under any of the grounds of complaints under the ombudsman scheme. However, mis-selling is indeed one of the grounds for complaints under Section 8(1)(w)(i) of the Banking Ombudsman Scheme, 2006, which lists “improper, unsuitable sale of third party financial products." Complaints to SEBI were also returned on the ground that the matter is sub-judice. 
 
The complainants had made it clear that their grievances were against mis-selling and not for legal rights and seniority of creditors (bond-holders against shareholders), which is being examined by the Bombay High Court. Mis-selling of financial products is widely prevalent in India. With RBI and SEBI unwilling to help, the consumer courts seem like the last remaining alternative for these individuals.
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    COMMENTS

    Ramesh Popat

    4 weeks ago

    OMG! great ML!

    Newme

    4 weeks ago

    I hate even going to Bank branches just to avoid sales pitch by Bank managers.

    REPLY

    Nasreen Rustomfram

    In Reply to Newme 4 weeks ago

    True. When RMs want to sell, they find time to call you. But when some issue is to be resolved, it has to be done through 'proper channels' and takes its own time.

    SEBI releases further guidelines for investment advisors on client segregation, fees and record-keeping
    After making substantial changes to regulations governing investment advisors (IA), in July, market regulator SEBI (Securities and Exchange Board of India) has come out with further detailed guidelines on September 23rd.
     
    This follows the new regulations which were first proposed in January 2020 and which were finalised in July 2020 through its notification regarding the segregation of advisory and distribution activities at the client level to avoid conflict of interest. The additional guidelines will come into force with effect from 30 September 2020 but IAs have been given time till April 2021 for compliance.
     
    Fees: SEBI has said the IA can charge fees from the clients through assets under advice (AUA) mode or fixed fee mode. Under AUA option, the maximum fees chargeable will not exceed 2.5% of AUA per annum per client across all services offered by IA, and any portion of AUA held by the client under any pre-existing distribution arrangement with any entity will be deducted from AUA for the purpose of such fees. Under the fixed fee option, the maximum fees will be capped at Rs125,000 per annum per client across all services offered by the IA. 
     
    The IA will charge fees from a client under any one mode on an annual basis and the change of mode will be effected only after 12 months of on-boarding/last change of mode. If agreed by the client, IA may charge fees in advance. However, such advance will not exceed fees for two quarters.
     
    Record-keeping: IAs will have to maintain records of interactions with all clients, including prospective clients (prior to on-boarding), where any conversation related to advice has taken place in the form of physical record, SMS, email or telephonic conversation, among others. Such records will start from the first interaction with the client and will continue till the completion of advisory services to the client. They will need to maintain these records for a period of five years. 
     
    Agreement: IAs are required to enter into an investment advisory agreement with its clients including existing clients latest by 1 April 2021 and submit a report, confirming the same to SEBI latest by 30 June 2021. The agreement has to incorporate the following clauses. IA cannot offer any investment advice nor charge a fee until the client has signed the agreement and gets a signed copy. The agreement should have a minimum of 26 clauses specified by SEBI, ranging from scope of services, to functions of IA, investment objective and guidelines, terms of fees and billing, validity, termination, death and disability of IA or client and a host of representations and warranties.
     
    Distribution: As per the new rules, a new client will be eligible to avail either advisory or distribution services within the group or family of the investment advisor. The option to avail either advisory services or distribution services will have to be made available to clients at the time of onboarding.
     
    Existing clients will have to choose between distribution or advisory services of the IA at the group or family level. However, the rules clarify that clients should not be forced to redeem existing assets under advisory or distribution due to this choice.
     
    Existing clients who wish to take advisory services, will not be eligible for availing distribution services within the group/family of IA, and vice versa for those availing advisory services so as to ensure client level segregation at IA’s group/family level. 
     
    In case of individual clients, the family of the client will be considered as a single client and PAN of all members in the family will jointly and severally be the control record. SEBI guidelines have specified that the term ‘client’ includes the dependent family of the client. The guidelines have further clarified that ‘dependent’ means members whose assets on which the advisory is sought to be provided originate from a single income.
     
    Others conditions: 
     
    Individual IAs with more than 150 clients will need to register as corporate IAs or stop accepting new clients.  
     
    IAs to advise only direct plans (non-commission based) of mutual funds.
     
    IAs would be required to ensure that annual audit in compliance with the SEBI regulations is completed within six months from the end of every financial year. 
     
    Existing individual IAs above 50 years of age as on 30 September 2020 will not be required to comply with the new qualification and experience requirements specified under the amended IA Regulations such as professional qualification or a post-graduate degree. But such IAs will be required to hold NISM accredited certification.
     
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    COMMENTS

    kk.lalam

    1 month ago

    Good to see standardization , advisors and clients will have clarity now ...

    adityag

    1 month ago

    Finally! Phew!

    Moneylife EXCLUSIVE: 'No Sealed Cover', Bombay HC Tells Anugrah Stock & Broking
    The Bombay High Court (HC) has appointed a court receiver for all fixed assets of Anugrah Stock & Broking Pvt Ltd, while asking directors of the brokerage firm, as well its sub-broker Teji Mandi Analytics Pvt Ltd, not to leave the HC jurisdiction or country without permission.
     
    Justice Gautam Patel of the Bombay HC also came down heavily on Anugrah for submitting additional material in a sealed cover and not filing a clean copy of its affidavit. The Court also directed all petitioners to include Teji Mandi Analytics as respondent in the case, if not already done, through amended petitions. 
     
    The bench clarified that it will not accept any submission in sealed cover saying "Anything that I can see, all parties before me are entitled to see." Justice Patel says, "I am told that Mr Rohan Cama’s clients (Anugrah) have put some additional material in a sealed cover. Of course, that has not been made available to me because these hearings are conducted online. In any case, I am making it abundantly clear that at least in my Court there is no question—and there will be never be a question—of anything being done ‘in sealed cover’." 
     
    "Anything that I can see, all parties before me are entitled to see. That is all there is to it. This is the only method that I know of to ensure an open and transparent decision-making process. Those details will, therefore, need to be set on affidavit. I am also making it clear that it is not possible for any party to unilaterally decide to put material into a sealed cover.
     
    "Since I have made it clear that I am not permitting any sealed cover submissions there is no question of any party arrogating to itself any such right or privilege of any such nature in any circumstances," the judge says.
     
    Mr Cama, representing Anugrah, expressed apprehension that the additional material if not submitted in a sealed cover will find its way to the press. Justice Patel, however, said it was not his concern.
     
    "The fourth estate will do its job and I will do mine. I decide matters before me on the basis of the papers filed in Court, not newspapers delivered to my doorstep. The press exists for a reason. It has a purpose, one that it serves. I cannot and will not curtail the rights of the free press at the instance of this or that party. I refuse to proceed on the basis that the press is always irresponsible. There will be no gag orders here," the judge said. 
     
    Justice Patel, in his order says, "The choice before Anugrah is, therefore, clear. It may choose not to file whatever it has said in sealed cover and then take the consequences that follow, or it will file whatever it has said in that sealed cover on affidavit and serve this on all parties." 
     
    Fixed assets worth Rs32 crore was disclosed by Anugrah Stock and Broking including its offices at Ahmedabad, two adjoining flats in Mumbai, two office premises at Jogeshwari’s Lotus Corporate Park. In addition, there were two BMWs, including one sports model (bought at Rs91 lakh), one Mercedes-Benz (Rs61 lakh). "Anugrah will need to explain the provenance of this funds, especially in light of its showing in the same affidavit that it has negligible liquidity today," the HC said.
     
    The list of assets was submitted by Paresh Kariya, director of Anugrah Broking to the HC. It also lists other items including office furniture and equipment, as well as air-conditioners, computers, and printers. 
     
    Anugrah has also disclosed certain financial assets, such as shares of a few companies and over 60 bank accounts. However, after reviewing the submission, Justice Patel observed "Curiously the financial securities said to be held by Anugrah are almost worthless. There are seven scrips enumerated. Four are delisted. One holding of 48,000 shares trades at Rs9.15 per share, probably below par; another holding of 168 shares is trading at Rs4.9 per share; and third holding of 48,000 shares trades at Rs0.56 per share. I am not persuaded that this is an accurate listing at all. It seems to me unreasonable to accept that a company that was doing such a high volume of business, and acquiring so many expensive assets, would have itself keep so very little in such financial investments."
     
    Commenting on the list of bank accounts submitted by Mr Kariya, the HC pointed out that "Most of these today have a nominal balance. There is one account with Yes Bank that had a balance of merely Rs1.20 crores in August.
     
    "Another account with HDFC had Rs79 lakh (roughly). But the major holding seems to be in the last three accounts listed at page 14. One is with IndusInd Bank and two are with Bank of India. Again, there has been some depletion in one of the Bank of India accounts, dropping from Rs9.99 crore to Rs4.98 crore in the period from April 2019 to September 2020."
     
    While observing that the assets listed by Anugrah are way too below than the claims submitted by petitioners, which would be about Rs100 crore, the Bombay HC says, the court receiver will take symbolic possession of all assets listed by the brokerage. While the directors of Anugrah may use the flat and cars, they cannot do any transaction related with these assets as listed, the court clarified. 
     
    Senior advocate Birendra Saraf, advocate Ravi Hegde and other associates from Parinam Law Associates are representing many investors; advocate Kamal Bulchandani, who has his own money stuck, is appearing in person and representing certain investors as well, and advocate Aditya Mehta appearing for a few petitioners sought an injunction from the court on all the assets mentioned in the affidavit. Anugraha is represented by Advocate Rohaan Cama and others and Teji Mandi by Advocate Ativ Patel. 
     
    During the hearing, Dr Saraf submitted before the court that it is not a question of only wealthy investors being duped and there are pensioners who have lost their life savings and others of modest means who were promised high returns but are today left with nothing at all. 
     
    "The disclosures so far made do not even begin to address of fraction of the entirety of the aggregate claims that lie against Anugrah," the court noted.
     
    In its affidavit, Teji Mandi Analytics disclosed "an agreement between itself and Anugrah and also pointed out that all trades and transactions were being done by Teji Mandi on behalf of Anugrah. The holding statements, contract notes if any, and the margin money statements were all issued in Anugrah’s name."
     
    The court, taking their submissions into account, and after going through Anugrah’s affidavit, asked why an injunction order should not be passed and court receiver appointed across all its assets, including those bank accounts. Responding to this, Mr Cama, counsel for Anugrah, informed the bench that the brokerage's bank accounts were frozen by the Securities and Exchange Board of India (SEBI). He also assured the court that Anugrah would not transact in any of the bank accounts listed in the affidavit, without prejudice to his rights and contentions.
     
    When asked to deposit passports of directors of Anugrah, Mr Cama informed the bench that the passports are already with the economic offences wing (EOW) of Mumbai police. 
     
    Justice Patel also asked Parinam Law Associates to nominate one person from their firm to serve as a single-point contact person to coordinate all these matters and collate necessary information in tabular form including all claims. 
     
    Here is the order passed by Bombay HC...

     
    Earlier this month, the Bombay HC had barred crisis-hit Anugrah Stock and Broking from using assets worth Rs58 crore that belong to more than 25 investors, who filed a petition after the firm has stopped responding to them and their accounts have become inaccessible. 
     
    Hundreds of investors have lost large sums of money, with one south Mumbai-based family alone having invested over Rs150 crore. So, the number of litigants is likely to swell, unless other investors seek other options.
     
    The bulk of investors in Anugrah have come through an associate firm called Teji Mandi Analytics, which was apparently running a derivatives portfolio of over Rs1,000 crore like a Ponzi scheme with assured monthly returns. 
     
    On 4th September, the National Stock Exchange (NSE) had withdrawn all trading rights of crisis-hit Anugrah Stock and Broking Pvt Ltd. Earlier on 1st September, the exchange had withdrawn Anugrah's trading rights in future & options (F&O), currency derivatives and commodity derivatives segment.
     
    In a circular, NSE says, "On account of the regulatory concerns observed, the relevant authority of Exchange has decided to withdraw the trading rights of the member in all segments of the Exchange with immediate effect. Accordingly, in addition to the aforementioned segments, Anugrah Stock & Broking Pvt Ltd shall also be disabled in all other segments of the Exchange from 4 September 2020 before market hours."
     
    Anugrah Stock and Broking, which won a reprieve from Securities Appellate Tribunal (SAT) on 17th August, was unable to deposit Rs165 crore with the NSE by 1st September. The Exchange then had withdrawn its trading rights and also seized its computers and books, the brokerage firm has told investors thronging to its office. 
     
    Last week, EOW of Mumbai Police has registered a case of cheating against the troubled stock-broking house, Anugrah Stock & Broking Pvt Ltd, for duping an investor of Rs8 crore. As Moneylife has reported in the past, the extent of investor losses in Anugrah could be as high as Rs1,000 crore and investigators have confirmed that more complaints having been subsequently coming to the EOW.
     
    The case was registered by Ashutosh Shah at Juhu police station against the firm’s director Paresh Kariya, and Kalap Shah and Anil Gandhi of Teji Mandi Analytics and others, under criminal breach of trust and criminal conspiracy. However, no arrests have been made yet. 
     
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    COMMENTS

    m.prabhu.shankar

    1 month ago

    Excellent Excellent

    Judge Says "Anything that I can see, all parties before me are entitled to see. That is all there is to it. This is the only method that I know of to ensure an open and transparent decision-making process. "

    Shrikrishna Kachave

    1 month ago

    Justice G.S. Patel once again sets a remarkable example.

    sheoratan

    1 month ago

    Hats off to MONEYLIFE ! I strongly feel, Moneylife , should ,get into Legal Practice ,with its Resource Persons.WHY? Since 1990s, SUCHETA JI has created WAVES and today SHE and Respected DEBASHISH SIR,are the ONLY SAVIOURS of Ordinary Investors.I Request MONEYLIFE to have Centers All Over India,I'm ready and willing to operate Jaipur,Kolkata,and New Jersey Centers to start with.I'm Blessed to be A LOYAL of MONEYLIFE.....

    s5rwav

    1 month ago

    Mr #JudgeGautamPatel the #DaringJudge of #BombayHighCourt Order is #BigSlap on the Face of Judges of #SupremeCourtOfIndia who have been Routinely Indulging in #SealedEnvelope for Decades. I am Babubhai Vaghela from Ahmedabad. Thanks.

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