Rana Kapoor (File Image: Reuters)
The Securities and Exchange Board of India (SEBI) on September 7 imposed a penalty of Rs 2 crore on Rana Kapoor, the former Yes Bank managing director and chief executive officer, in the tier-I bond mis-selling or AT-1 case involving the private lender.
AT1 bonds are a type of perpetual bonds banks issue to raise core equity. Kapoor is facing investigations in connection with the alleged financial irregularities in the bank during his stint that led to a near-collapse of the lender, forcing a bail out.
Kapoor needs to pay the amount within 45 days, the regulator said in its order. The order has been passed under the provisions of Section 15HA of SEBI Act. “I am of the view that the said penalty is commensurate with the lapse/omission on the part of noticee,” said Soma Majumder, adjudicating officer in the order.
“Considering the large number of investors impacted and the quantum of sales achieved through this scheme, I am of the opinion that this act of Noticee deserves penalty commensurate with the severity of violation and would be a deterrent,” said Majumder.
This isn’t the first time the market regulator is acting on the case. On April 12, 2021, Sebi, penalised Yes Bank and three former bank officials in the AT1 bonds mis-selling case.
Sebi imposed a monetary penalty of Rs 25 crore on Yes Bank, Rs 1 crore on Vivek Kanwar and Rs 50 lakh each on Ashish Nasa and Jasjit Singh Banga. Kanwar was the head of Yes Bank’s private wealth management team. The other two were his team members.
What is the AT 1 Bond case?
The case pertains to Yes Bank executives allegedly selling AT1 bonds to investors under the guise of Super FDs (fixed deposits), promising higher returns and the safety of a typical bank FD.
Yes Bank, which was bailed out in March last year by a bank consortium led by State Bank of India (SBI), wrote off Rs 8,415 crore of AT1 bonds as per the framework of the bank’s reconstruction scheme. The bailout was effected following a reconstruction scheme formulated by the Reserve Bank of India (RBI), with the support of the finance ministry.
Following this, investors moved courts alleging that the bank made false assurances while selling these bonds, and, hence, they need to be compensated by the bank. The case is ongoing in the Bombay High Court. Both Yes Bank and the RBI have so far maintained that the AT1 bond write-off is as per Basel III rules
Retail investors waiting for justice
The court observed that 1346 Individual Investors had invested approximately Rs 679crores in the AT1 bonds, out of which 1311 individual investors were existing customers of Yes Bank, who invested approximately Rs. 663 crores in these AT1 Bonds.
“Further, I note that 277 customershad existing Fixed Deposits with YBL and they prematurely closed their existing Fixed Deposits and reinvested an amount to the extent of Rs. 80 crores in these AT1 bonds which were subsequently written down,” the adjudicating officer said.
The sale of AT1 bond started in 2016 and continued till 2019. Besides retail investors, institutional investors such as Indiabulls and 63 Moons Technologies had also invested in these instruments.
Sebi probe findings
Earlier, Sebi’s investigation had observed that Yes Bank officials didn’t follow proper procedures like sharing the term sheets with individual investors while selling these bonds.
“The investigation also observed that the down-sell of AT1 bonds were not negotiated between buyers and sellers individually. The same was facilitated by Yes Bank for around 1,300 individual investors, most of whom were existing customers of Yes Bank,” the Sebi investigation observed.
Sebi further observed that Yes Bank represented AT1 bonds as Super FD and ‘as safe as FD’. Also, no confirmation was taken from investors with respect to their understanding of the features and risks associated with the bond, the investigation observed.
The investigation also observed that the push from the MD & CEO of Yes Bank to down-sell the bonds led the private wealth management team to recklessly sell the bonds to individual investors.
Further, Sebi observed that “AT1 bonds were sold to the customers of Yes Bank without adequate safeguards to protect their interests and without sufficient due diligence.” The Sebi order said that allegations that Yes Bank sold AT1 bonds to investors, representing as Super FDs, is established.
The RBI, as the banking regulator, has so far refused to acknowledge the charges of mis-selling in the Yes Bank AT1 bonds case before the courts. In its counter-affidavit in the Madras High Court against the petition filed by 63 Moons Technologies, the RBI said the action for writing off has been rightly taken under the provisions of the contract between Yes Bank and AT1 bondholders, and, hence, there is no merit in the petitioners’ contentions.