Yes Bank and three members of its private wealth management team misled and manipulated investors to buy their risky additional tier-1 bonds, the market regulator said in its order on Monday. The regulator has imposed a penalty of Rs25 crore on the bank and Rs50 lakh to Rs1 crore on three individuals.

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The case pertains to the reconstruction scheme, proposed by the government, for Yes Bank in March last year. Under the plan, notified by the Reserve Bank of India, AT-1 bonds worth over Rs8,000 crore were written off. Several investors later approached the Bombay and Madras High Courts arguing against the banking regulator’s decision. Additionally, several retail customers of the bank had approached market regulator saying Yes Bank had engaged in manipulative, fraudulent and unfair trade practices

In its order, the Securities and Exchange Board of India has agreed with the complaints. SEBI examined the complaints under its Prohibition of Fraudulent and Unfair Trade Practices regulations. It stated that these bonds were sold to retail customers as “super FDs” and they were compared with fixed deposit on interest rate differential, while omitting the risk differential.

“More than 97% of the investors of these AT-1 bonds were existing customers of Notice 1 (Yes Bank). It’s also a matter of record that out of 1,311 customers, 277 customers had prematurely closed their fixed deposit accounts and invested the withdrawn amount in AT-1 bonds.” – SEBI Order.

Pointing to various RBI circulars, it said the banking regulator clearly intended to prevent individual investors from investing in AT-1 bonds without first understanding the instrument and its underlying risks.

But Yes Bank, SEBI said, “down sold” these bonds to retail customers to make “shelf space” for the institutional investors to subscribe to further capital which may be issued by the bank. Out of 1,346 individual investors who had invested in these AT-1 bonds through Yes Bank, 1,311 were its existing customers, the order said.

Yes Bank’s private wealth management team designed a scheme for the sales pitch of AT-1bonds. The “verbal sales pitch” document only highlighted the positive features of the AT-1 bonds but there was no mention of risks associated with this product, SEBI has pointed out.

“The lot size of the AT-1 bonds was substantially reduced to ensure that these bonds could be sold to more retail customers. The term sheet wasn’t shared with all individual customers and necessary steps weren’t taken to appraise all the customers of the inherent risks of the AT-1 Bonds.” – SEBI Order

Pointing to the sales process, the market regulator noted that AT-1 bond application forms—which laid out the risk factors—were signed at the stage of settlement of transactions, after the customers had already been influenced to take the decision to purchase this instrument.

“As a trusted scheduled commercial bank, they were duty bound in their fiduciary role, to adopt all such necessary safeguards to protect the interests of their own customers before marketing these AT-1 bonds to them.” – SEBI Order 

Based on this, the market regulator concluded that the actions of Yes Bank and the three individuals amount to fraud under PFUTP regulations. Specifically, the provisions that prohibit buying, selling or dealing in securities in a fraudulent manner, employing a scheme to defraud and mis-selling of securities.

Interestingly, while the market regulator has concluded that these bonds were fraudulently sold to retail customers, the banking regulator has taken a contrary stance before the Madras High Court.

The RBI has defended its decision to write off Yes Bank’s AT-1 bonds saying it was in keeping with the regulations governing such securities and the information memorandum issued to investors at the time of investment. It was “at best an investment decision gone wrong” for which investors can neither blame the regulator nor seek compensation from the lender, RBI has argued in court.

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