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.
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.