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Lessons From Yes Bank's Bond Fiasco

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Lessons From Yes Bank's Bond Fiasco
Rajat Mishra - 30 August 2020

Debi Mukherjee, 52, invested Rs 30 lakh in Yes Bank Additional Tier-1 (AT-1) bonds in 2016, thinking she was relieved from any financial crisis. However, she didn’t have a clue that within a few years she will lose the whole amount instead of earning interest from the investment. Debi’s daughter, Twinkle Mukherjee, talking about the investment, says, “My mother wanted to invest the money into some safe avenue. At the time, the bank’s relationship manager dubbed AT-1 bonds as Fixed Deposits (FDs), and lured us into investing the money without letting us know the risks associated with it.”

Another retail investor, Nimish Goyal, whose parents have invested Rs 40 lakhs in AT-1 bonds, has been writing to RBI, SEBI, Ministry of Finance since April this year, with reference to the issue. He says, “There is a uniform pattern of luring close to 600 retail investors into AT-1 bonds, without intimating them about the risk. The relationship managers targeted the most vulnerable section of people, such as retired citizens. So, I see this as a planned act.”

Recently, the RBI sought details of the email they got from Yes Bank, along with details of FD investors with the bank who invested in AT-1 bonds. In March, the bank informed that the bonds worth Rs 8,415 crore will be written down as per globally accepted Basel III norms. In July, the RBI said the bank’s decision was as per regulations governing such securities, and an information memorandum was issued to investors at the time of investment. The apex bank added that it was at “best an investment decision gone wrong” for which investors can neither blame the regulator nor seek compensation from the lender.

The blame game continues between investors and the bank. Financial experts are also of divergent opinion. Some maintain that the RBI’s argument is valid in the case of High Net Worth Individuals (HNIs) who are investing huge amounts of money in AT-1 bonds because they have resources and ability to evaluate risks.

Deepak Jasani, Head (Retail Research), HDFC Securities, says, “When investors were offered a higher interest rate of 9.5 per cent at the time when the bank’s normal FD interest rate was much lower, people should have understood that there is a higher risk. When investors were offered an interest rate of 100-200 bps more than the normal interest rate, people did not realise the risk. If they are saying that these bonds were mis-sold, it was up to them to check the downside risks, because there is no free lunch in this world.”

Karthik Srinivasan, Senior Group Vice-president, ICRA, suggests, “One of the key learning in general, is not to invest a very large proportion in a particular instrument. It has to be a relatively diversified portfolio, evaluating one’s risk appetite. It is important to understand the pros and cons of investing.”

Further, the arguments put forward by the RBI are being contested by the investors. In a letter written by the aggrieved investors to finance minister Nirmala Sitharaman, they said that neither relationship managers nor the bank at any stage, through any medium, explained the risks associated with AT-1 bonds. Now that the matter is sub-judice, investors are optimistic to get back their investment.

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