SEBI Imposes Rs25 Crore Penalty on Yes Bank in AT-1 Bonds Case; Bank To Appeal
Moneylife Digital Team 14 April 2021
The Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs25 crore on Yes Bank Ltd for perpetrating fraudulent acts on its customers by influencing them to alter their investment positions from fixed deposits (FD) to risky additional tier-1 (AT-1) bonds. Three former senior executives of Yes Bank who were part of the private wealth management group in the bank were also fined Rs50 lakh to Rs1 crore by SEBI. 
SEBI’s investigation found that Yes Bank had misrepresented the AT-1 bond product as a ‘Super FD’ and ‘as safe as an FD’. The term sheet was also not shared with many investors and no confirmation was taken from the customers on their understanding of the product’s features and the risks associated with the bond.
The SEBI order, by adjudicating officer Soma Majumder, says that Yes Bank, being a company, acted through its employees to "perpetrate such fraudulent acts on its hapless and unsuspecting customers, some of whom were influenced to even alter their investment positions from FDs to these risky AT-1 bonds."
The market regulator also imposed a penalty of Rs1 crore on Vivek Kanwar, head of private wealth management, and Rs50 lakh each on Ashish Nasa and Jasjit Singh Banga. 
The SEBI order says the penalty of Rs25 crore has been imposed due to misrepresentation and fraud perpetrated on the Bank's own customers, who were lured and induced to buy risky AT-1 bonds. Some of these customers were even induced to alter their position from FDs to these AT-1 bonds. SEBI says the penalty is justified as it is commensurate with the violations and will also have a deterrent effect. 
SEBI had received several complaints from investors in AT-1 bonds issued by Yes Bank. It conducted an investigation and found that AT-1 bonds of Yes Bank were sold to retail investors between 1 December 2016 and 29 February 2020.
SEBI noted that 1,346 individual investors had invested about Rs679 crore in the AT-1 bonds. Out of the total investors, 1,311 were existing customers of Yes Bank, and invested around Rs663 crore in these AT1 bonds.
As many as 277 customers had existing FDs with Yes Bank and they prematurely closed them and reinvested about Rs80 crore in these AT-1 bonds which were subsequently written down.
SEBI pointed out that Yes Bank had also failed to conduct risk-profiling of individual clients, especially senior citizens aged 70, 80 and 90 years. It added that there was a push from the chief executive officer (CEO) of the Bank to down sell AT-1 bonds, which led the private wealth management team to recklessly sell the bonds to individual investors. 
The order says the facts and circumstances of the case clearly indicate that in order to make the institutional investors subscribe to more capital of Yes Bank, the employees devised the plan to down-sell the AT-1 bonds, held by the institutional investors, to individual investors including their customers.
“SEBI observed that the noticees had facilitated selling of AT-1 bonds of Yes Bank from institutional investors to individual investors. It was alleged that during the process of selling bonds, individual investors weren’t informed about all the risks involved in subscription of AT-1 bonds," the order says. 
In order to do that, the bank highlighted the AT-1 bonds as earning high interest vis-a-vis the FDs. The omission on the part of the bank to forward relevant documentary information to the investors/customers indicates suppression of material facts to create a misleading appearance of the AT-1 bonds in order to lure the investors and customers to invest in them.
The misrepresentation perpetrated by the bank and its employees influenced the investors and customers of Yes Bank and they were lured into purchasing the bonds. Some of the customers also closed the FDs and used the money to buy the AT-1 bonds. All these actions amount to fraud perpetrated by the bank on the investors, the SEBI stated.
The former executives contended that they were not decision-makers or key management personnel. They also submitted that the whole direction and decision of facilitating the sell down of AT-1 bonds to retail investors came from Rana Kapoor who was the then MD and CEO and in charge of all activities of Yes Bank including decision making.
Bondholders had moved the Court in February under the banner of the AT1 Bondholders Association, and alleged that the sale of bonds was fraudulent and pressed the Court to direct Yes Bank to deposit Rs160 crore in the Court, pending a decision in the case. Besides retail investors, institutional investors such as Indiabulls and 63moons technologies have also moved courts.
Last month, the Bombay High Court had granted time to the Reserve Bank of India (RBI) and SEBI to file their responses to a petition filed by individual holders of Yes Bank AT-1 bonds. The next date of hearing is 26 April 2021.
Last year on 13th March, the government had approved a rescue plan for Yes Bank, backed by the SBI, ICICI Bank, HDFC, Kotak Mahindra Bank, Bandhan Bank, Federal Bank and IDFC First Bank, which infused Rs10,000 crore in Yes Bank. The bailout was effected following a reconstruction scheme formulated by RBI, with the support of the finance ministry. As per the framework of the bank’s reconstruction scheme, Yes Bank wrote off Rs8,415 crore of AT-1 bonds. 
It is interesting to note that while RBI (banking regulator with responsibility to protect customers’ interests) and Yes Bank have refused to accept the charges of mis-selling in the case, SEBI has imposed a penalty on the Bank and its former employees. 
While the order clearly confirms and establishes the charge of mis-selling of perpetual bonds to retail investors by Yes Bank executives, it is disturbing to see that RBI is still playing blind and mute to the blatant mis-selling of AT-1 bonds which happened in the case of Yes Bank. The SEBI order effectively contradicts RBI’s stance that there is no merit in the petitioners’ contentions.
In fact, last year, in its reply to the petition filed by 63 moons technologies in Madras High Court, the banking regulator affirmed that the action for writing off the bonds has been rightly taken under the provisions of the contract between Yes Bank and AT-1 bondholders, and, hence, there is no merit in the petitioners’ contentions. 
The RBI had said “The whole purpose of writing off the bonds is to ensure that the capital infused by the public sector i.e., SBI and other investors should not be diluted. The AT-1 bonds are a liability, and, hence, the same should be written off for the effective implementation of the Notified Scheme, which is made in the interest of the general public and to regain the confidence of the depositors”.
However, now with SEBI order slapping the bank and its officials with a penalty and acknowledging that there was indeed enough evidence of mis-selling, will RBI sit up and acknowledge that it goofed up?
Yes Bank is now said to be preparing to appeal against the SEBI order and there might be a long legal battle ahead for the hapless investors.  
Moneylife has been writing about how the government and the banking regulator threw AT-1 bond-holders of Yes Bank to the wolves on the ground that they were savvy investors who ought to have known the risks involved. This was a false assumption on so many counts.
We also wrote in the immediate aftermath of the rescue plan last year about the shocked outrage on social media which revealed that even bankers and financial experts were unaware that AT-1 bonds were riskier than equity because of coupon discretion and loss absorption clauses 
5 months ago
Yes means Mamu banaya Bank ne Public Ko Written down MBA with corrupt mindset More deeper rut of Values Ethics need to be probed? Which shall never happen. Enjoy more NPA's IBC's Karmas Collected SBI has written down ?Mahesh Bhatt Kirticorp
Kamal Garg
5 months ago
SEBI has rightly delivered a well placed and reasoned judgment where RBI has completely failed and even allegedly was hands-in-glove with erstwhile Yes Bank management in protecting them for their failure in discharging their fiduciary duty and responsibility.
Even RBI is/was not clear how to deal with AT1 bonds. While in case of Yes Bank, RBI promptly wrote-off/extinguished the AT1 bonds completely, whereas, in case of LVB it wrote off the equity only "first" and left the AT1 bonds in tact, and it is only after a huge public outcry and uproar over differential treatment to AT1 bond holders in case of Yes Bank and LVB, if finally, two days later, also ordered to write-off/extinguish the AT1 bonds of LVB also.
All people including MoneyLife Magazine/Forum should fight it out to protect the legitimate rights and dues of AT1 bondholders.
5 months ago
SEBI has rightly observed that AT1 BONDS were missold than when the genuine complaints of affected investors to pay their due will be met. Who is going to decide it ? A lot of confusion has been happening.
5 months ago
Will the retail investors who were duped into buying AT1 bonds receive any compensation and when will justice be done to them? Those who conspired and mis-sold these bonds should be charged under IPC420
5 months ago
This shows how two regulators takes contradictory stand which is always against common public who is depositors in present case,this is why foreign firms like to be away from India.
5 months ago
Once again it is Proved that RBI -Regulator has Failed Miserably in its duties and responsibilities to Senior citizens, even in Case of SCSS, where, both, the government and the regulator (banking ombudsman) are protecting SBI/OFFICIALS
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