Mis-selling by banks has been flagged, caught and proven multiple times in the past decade, but nothing other than half-hearted circulars have emerged from the Reserve Bank of India (RBI). For a regulator, that is also the central bank for a $3 trillion economy, busy with large issues like monetary policy and government debt, the consumer protection department is where staff is sent to be sidelined.
When the Yes Bank AT1 Bonds were extinguished, retail investors who had been sold these as FDs with a higher rate of interest, had thought that the RBI will do something about it and protect their interest. RBI, according to news reports, took the view that the risks were explained and there was no mis-selling. Investors wrote to Sebi as well and some of them have gone to court over being mis-sold. Curiously, it is the capital market regulator that has come to the aid of retail investors. Sebi took the complaints seriously, did a full investigation and found Yes Bank and three of its officials guilty of mis-selling in a 12 April 2021 order. It has fined Yes Bank Rs 25 crore, and Vivek Kanwar (managing director of the private wealth management team) Rs 1 crore. His team members Ashish Nasa and Jasjit Singh Banga have been fined Rs 50 lakh each. The case against Rana Kapoor will be taken on a parallel track since he is already in jail and unable to join the investigation fully.
Sebi found the following:
- Yes Bank showcased the bond as a ‘Super FD’ and ‘as safe as FD’
- The term sheet was not shared with all the investors
- No sign off was taken from investors on their understanding of the features and risks of the product
- Risk profiling of customers was not done, specially those who were more than 70/80/90 years of age
- In the ‘verbal pitch’ shared by the private wealth management team with the Relationship Managers, the AT1 bonds were compared with fixed deposits on rate differential only, but omitted the risk differentials
- There was a push from the MD & CEO of Yes Bank to down sell the AT1 bonds which led the private wealth management team to recklessly sell the bonds to individual investors
- 97% of the 1,311 individual investors who were sold these bonds were existing customers of Yes Bank
- 277 of these closed their FDs prematurely to invest in these bonds
- Yes Bank and its officials had a fiduciary responsibility towards their customers and that was broken by selling them high risk bonds without explaining the full risk
- Yes Bank did not have a system in place to ensure that a term sheet would be shared with retail investors nor was there any provision for taking a confirmation from investors with respect to their understanding of the risks
Policymakers, regulators and others working the space of consumer protection along with financialisation of Indian household savings must read the entire 61-page order carefully to see how an investigation must be done when dealing with disaggregated retail investors who do not have the ability to fight large corporations. In fact, I wrote a paper along with the team at Dvara Research that found retail investors were wary of buying AT1 bonds if the risk factors were clearly marked out. It seems that even this basic hygiene of just writing down the risk in the same manner that the returns were marked, was missing in the Yes Bank case.
Sebi has used RBI’s own regulations to find that Yes Bank was guilty of mis-selling. The order says that while initially RBI only allowed AT1 bonds to be sold to institutions, in a September 2014 order, it allowed them to be sold to retail as well, but with disclosures on the risks that such bonds carry. A specific sign off was required from retail investors saying that they understood the risks. RBI rules mandate that “all the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how a subordinated bond is different from fixed deposit, highlighting that it is not covered by deposit insurance.” In addition, Sebi has used its own powers under the Sebi Act and under the Prevention of Fraudulent and Unfair Trade Practices Regulations and the fact that Sebi has oversight of listed bonds to carry out the investigation and pass this order.
The Sebi order has several non-linear take-aways. One, the naming of specific wealth managers and finding them guilty, rather than penalizing the lower staff should worry bank boards and managements that the long hand of Sebi can now reach them under the various regulations in place. I have always maintained that catching one junior bank employee will not solve the systemic problem of bank mis-selling in India. This has to be a board driven initiative.
Two, for Yes Bank this is an opportunity to transform the way banks in India treat their customers. Post the Rana Kapoor regime, the management has now been taken over by a bank consortium and there is a professional board in place. This crisis is a great opportunity for the bank to set a standard in customer protection by putting in place protocols that reinforce the fiduciary responsibility of a bank towards its customers.
Three, this may not end well for Sebi if the past is any indication of future events. Steps taken in earlier years with a view to protect retail investors have usually ended badly for those taking bold steps. In 2009 CB Bhave, the then chairman of Sebi did two big things in investor interest. One, he removed the front load in a mutual fund. Two, he went to court against the insurance regulator (IRDAI) saying that the Ulip was actually a mutual fund masquerading as an insurance since 90% of the premium was in a mutual fund like product. The government in 2010 issued an ordinance to rule that IRDAI controls the Ulips. Bhave was then moved out soon after. I fear that the investor-first team lead by Sebi chairman Ajay Tyagi is at risk in a similar fashion.
In fact, the recent Ministry of Finance intervention over the valuation of AT1 bonds that Sebi was putting in place in retail investor interest points to the road ahead. Bank lobbying derailed the move to provide safe spaces for pure retail investors to put their money to work.
Finance Minister Nirmala Sitharaman must look at the story from the point of view of retail investors and not from the lobbying by firms, other regulators and bureaucrats who have caused an open loot of retail money through regulated entities like banks and insurance companies over the years.
Monika Halan is India’s trusted personal finance writer, speaker and author who helps families get their money decisions right.