In a relief for Yes Bank Ltd in the AT-1 (additional tier-1) bonds case, the Securities Appellate Tribunal (SAT) has imposed an interim stay on an order passed by Securities and Exchange Board of India (SEBI), which had imposed a penalty of Rs25 crore on Yes Bank, and three of its executives: Rs1 crore on Vivek Kanwar and Rs50 lakh each on Ashish Nasa and Jasjit Singh Banga.
This is a setback for the hapless AT-1 bond-holders, who include retail investors, institutional investors like Indiabulls and 63 moons technologies, who had taken the legal route and complained to SEBI. The investors alleged that they were sold these bonds by the Bank on false assurances and, hence, they need to be compensated by the Bank. The case is ongoing in Bombay High Court but both YES Bank and the Reserve Bank of India (RBI) have so far maintained that the AT-1 bond write-off is as per the Basel-III rules.
While explaining the rationale for the interim stay, the SAT said, "We also find that the relationship manager have not been booked. Prima facie, the question as to whether the buyers were informed of the risk factor with regard to the AT-1 bonds can be best explained by the relationship managers who were part of the investigation but were not noticees in these proceedings. On the other hand, the members of the Private Wealth Management Team have been made noticees and they have been penalized by the impugned order.”
“We also prima facie find that the risk factor was already existing on the website, and it was in the knowledge of everyone. Considering the aforesaid, prima facie a case is made out for grant of an interim order," SAT added.
The Tribunal has asked SEBI to file a reply within four weeks and file a rejoinder within three weeks thereafter. The matter is to be listed for admission and for final disposal on 30th July as per the SAT order.
The interim stay order by SAT is, however, subject to an undertaking by Yes Bank that in the event of failure of the appeal, it would pay the penalty amount within two weeks from the date of the order.
The SAT order starts off by saying “We find that under the Banking Regulation Act, 1949 the central government had declared a moratorium in March 2020 and thereafter propounded a scheme pursuant to which an administrator has been appointed. The bank is under a rehabilitation scheme and lots of monies are being pumped in order to revive the bank.”
After receiving multiple complaints from investors of AT-1 bonds raising questions about the selling of these instruments, SEBI investigated the matter to ascertain whether there was any violation of its rules.
found that Yes Bank had misrepresented the AT-1 bond product as a ‘Super fixed deposit (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.
On 12 April 2021, SEBI issued an order penalising Yes Bank and three of its executives for allegedly not informing investors of risk factors while facilitating the sale of the AT-1 bonds in the secondary market.
“The investigation also observed that the down-sell of AT1 bonds were not negotiated between buyers and sellers individually. The same as facilitated by YES Bank for around 1300 individual investors most of which were existing customers of YES Bank,” SEBI had noted in its order last month.
The investigation noted that it was the push from the managing director and chief executive (MD & CEO) of Yes Bank to down-sell the AT-1 bonds, which led the private wealth management team to recklessly sell the bonds to individual investors.
In its order, SEBI had alleged misrepresentation and fraud by Yes Bank by not informing investors of risk factors while facilitating the sale of the AT-1 bonds in the secondary market.
“AT-1 Bonds were sold to the customers of YBL without adopting adequate safeguards to protect their interests and without sufficient due diligence,” SEBI order said and added that the allegations that YES Bank sold AT-1 bonds to investors by misrepresenting the bonds as Super FDs, is established.
YES Bank, which was bailed out in March 2020 by a bank consortium led by State Bank of India (SBI), wrote off Rs8,415 crore of AT-1 bonds as per the framework of the YES Bank reconstruction scheme. AT-1 Bond are a type of perpetual bonds banks use to raise funds.