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Yes Bank's Rana Kapoor fined Rs 2 crore in AT1 bonds case. Are AT1 bonds safe to invest in?

Akshata Kamath
Akshata KamathSep 08, 2022 | 17:50

Yes Bank's Rana Kapoor fined Rs 2 crore in AT1 bonds case. Are AT1 bonds safe to invest in?

AT1 Bonds are risky and you need to understand it before investing in it. (Photo: Getty Images)

    While SEBI imposed a fine of Rs 2 crore on Yes Bank's Rana Kapoor for selling Rs 8,415 crore of risky AT1 bonds as ''safe fixed deposits'', SBI and Bank of Maharashtra raised Rs 7,500 crore through the same AT1 bonds. But are they really safe?

    Additional Tier 1 or AT1 bonds have been in the financial news now more than ever. First Bank of Baroda raised Rs 2,500 crore in August 2022 by issuing AT1 bonds at 7.88%. Then banks like 'Bank of Maharashtra' and 'State Bank of India' collectively raised about Rs 7,500 crore by issuing AT1 bonds at 8.74% and 7.75% respectively in September 2022. Meanwhile, SEBI has levied a fine of Rs 2 crore on Yes Bank's Rana Kapoor for selling risky AT1 bonds as ''safe fixed deposits'' from 2016 to 2019. So, are AT1 bonds really safe for investors? 

    1. First, what are AT1 bonds? Say you are an old man in town and want to invest your money in a bank but don't know what kind of products to invest in. Say the bank gives you three choices and you have to choose one: a mutual fund, a fixed deposit, or an AT1 bond (a new exciting type of deposit). 

    • If you opt for mutual fund investments, you invest a fixed sum every month which is then invested into some stocks. This gives good returns and you mostly receive more money than your initial investment. 
    • If you opt for fixed deposits, you can deposit a big amount for a fixed number of years and receive a fixed rate of interest. Here too, you receive principal and interest at the end, which is more money than what you invested. 
    • But if you opt for AT1 bonds, you deposit a sum of money in the bank and for the rest of your life, you will only receive interest. You may or may not get your principal amount back. Here, your bank has a choice- if they want to repay you, they can. Else, they can keep paying you interest all your life. (But you can't break this like an FD and withdraw the amount whenever you want)  

    So why would you invest in AT1 bonds? AT1 Bonds give higher interest rates as compared to other bank products. Banks normally want you to opt for them since they can use your large investments and invest them for better returns while only giving you a fraction amount every year as interest. Since the bank has an option to repay your money after 5 years, they are legally free to do what they want with your money.

    Why are AT1 bonds risky? AT1 bonds are high-risk instruments and can be written down by banks. This means that if the institution fails or the capital ratios of the issuer bank fall below a certain level, the issuer bank can legally stop paying interest and write down these bonds. Just like Yes Bank did. When banks fail and write down these AT1 bonds, AT1 bond investors may not really receive any compensation. So they can lose both- the interest and the principal amount.

    So why do people invest in AT1 bonds? People either invest in AT1 bonds consciously if they want to receive regular interest amounts. Or they are misled, just like Yes Bank folks did. 

    2. What happened in the Yes Bank case? Yes Bank's executives sold risky AT1 bonds between 2016 and 2019 under the guise of ''Super FDs''. Investors were promised higher returns and the safety of a typical bank FD through AT1 bonds. But when Yes Bank crashed in 2020 due to bad loans, financial deterioration, and governance issues, SBI, and a few other banks decided to save Yes Bank.

    Since closing down a listed company like Yes bank would cause a lot of hefty issues, the RBI and the Finance Ministry decided to opt for the internal reconstruction of the bank. (While implementing the internal reconstruction, officials can settle a company's liabilities as per their ranking. While equity investors don't need to be paid, debt investors have to be paid off. But AT1 bond investors are the last of the debt investors to be paid off and can be legally cancelled entirely)

    So officials wrote off Rs 8,415 crores of AT1 bonds, with the intention of reducing Yes Bank's interest payment burden. 

    But this led investors (ie many senior citizen investors) to move courts and demand the repayment of their AT1 bonds that were apparently 'safe as FDs'. When the SEBI probed the issue, it then came to light that Yes Bank made false promises about the AT1 bonds. 

    • 1346 individual investors had invested about Rs 679 crore in the AT1 bonds. Of this, 1311 individual investors were existing customers of Yes Bank who invested about Rs 663 crore. 
    • 277 customers had existing fixed deposits with Yes Bank and they prematurely closed their existing fixed deposits and reinvested Rs 80 crore in these AT1 bonds. This Rs 80 crore debt was written down. 
    • Yes Bank did not follow proper procedures while selling these bonds
    • No confirmation was taken from investors regarding their understanding of the features and risks associated with the bond.
    • The MD & CEO of Yes Bank had pushed the private wealth management team to down-sell the AT1 bonds as FDs.

    3. What now? Yes Bank has already paid a fine of Rs 25 crore while its private wealth management team has paid a fine of Rs 2 crore to date. Now, the SEBI has imposed a fine of Rs 2 crore under Section 15HA of the Sebi Act on Rana Kapoor. Kapoor, the former Managing Director and Chief Executive Officer of Yes Bank Ltd has to pay this in the next 45 days. But 

    • the RBI has not yet accepted the charges against Yes Bank. (So it supports Yes Bank even though customers have complained that Yes Bank did not follow the recommended process) 
    • Yes Bank's deposit holders are yet to receive justice and have no clue where their 'safe' investments are.

    4. Are these safe? While the RBI supports the bank, for now, it seems like investors have to look out for themselves for the safety of their money.

    Last updated: September 09, 2022 | 20:32
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