The Yes Bank AT1 bond case and lessons for all investors
The contours of the Yes Bank Additional Tier 1 case are now known to all investors. The entire quantum of ₹8,415 crore was written off.
Aggrieved investors moved the Bombay high court, which overturned the decision to write it off. This decision was challenged in the Supreme Court, which upheld the order of the Bombay high court. Now the issue is about the pending coupon (interest).
Measure from Sebi
The Securities and Exchange Board of India (Sebi) took some measures as a fallout of the write-off of Yes Bank’s AT1 bonds in March 2020. On 6 October 2020, Sebi notified that only qualified institutional buyers would be allowed to participate in the issuance of AT1 instruments. The circular stated that the minimum allotment of AT1 instruments should not be less than ₹1 crore and the minimum trading lot size for AT1 instruments should be ₹1 crore.
Effectively, individuals were pushed out of the AT1 market, and rightfully so. There are certain risk aspects of AT1 bonds, which individual investors may or may not comprehend.
Lessons for investors
The issue that the aggrieved investors raised at the Bombay high court was that the product was mis-sold to them. AT1 bonds have certain risk factors that were not communicated to them and are now known, in hindsight.
These were sold as something “similar to fixed deposits” of the same bank but yielding higher returns. From a generic standpoint—not about the AT1 issue in particular—mis-selling is an issue. However, the investor would do well to be careful and adopt the adage of caveat emptor, or buyer beware. Let us look at certain broad thumb rules.
Returns come from risk: If financial investment product A is expected to give returns higher than product B, then there is a higher risk in A. This is not to say you should not invest in product A but do so only after understanding the risks. It should suit your risk appetite.
Bonds are available with yields of 8 percent, 10 percent, 12 percent and 14 percent. You have to pick and choose the one that matches your risk appetite.
When we look at charts of year-wise returns from various investment products, for the highest number of years, the winner has been Bitcoin. This is something that does not have a solid base for investing in it and the investor has to be careful.
Look through the packaging: Since financial investment products do not have a physical look and feel to it, it is packaged and sold with certain features. An actively managed fund may outperform the relevant benchmark, which is the selling plank. But you never know.
If the fund underperforms the benchmark, you will incur the management expenses, anyway. A sectoral or thematic fund may give returns higher than the large cap benchmark, but investors tend to invest at the peak of the cycle.
Unit-linked insurance plans (Ulips) package investment with insurance with a bundle of illiquidity and expenses. The investor should compare standalone investment avenues with the bundled offering of Ulips. Now that the regulator has proposed a reduction in expenses, the industry is fighting back – time for investors to take a stand that they are not mere bystanders.
Ask the right questions: If the question to the financial adviser/product seller is kitna dega (how much return would it yield?) then you will not get the answer to the basic question of why that product is suitable for you. You would have heard the Sebi-mandated tagline umpteen times: past performance may or may not be sustained in the future. However, bonds have a stated yield when you invest in them.
In the context of AT1 bonds, there is no need to brush the entire category with the same brush. There are public sector banks with implied support of the government. There are leading private sector banks, which are flagships of the banking system.
The segment of AT1 bonds is now meant for institutional investors and the minimum ticket size is ₹1 crore. There are high-yielding products available in the market for high net worth individuals, such as portfolio management schemes and alternative investment funds, which come with a minimum ticket size of ₹50 lakh and ₹1 crore, respectively.
There are performing credit or private credit funds that have portfolio yields in double digits. This will be a diversified portfolio, rather than putting ₹1 crore in one bond.
From a broader perspective, the investor has to look through the recent returns and packaging of the product, understand the risks and invest only if it suits their risk appetite.
Joydeep Sen is a corporate trainer (financial markets) and author.