6 min read.Updated: 11 May 2020, 10:39 PM ISTNeil Borate
The banking ombudsman denies relief as the case is being heard in court right now
One complainant was rebuffed on the grounds that mis-selling did not fall under the specified grounds of complaint
You would think that the banking ombudsman is the right authority to complain to against your relationship manager if you have been mis-sold a product. The ombudsman already has a track record of rejecting a high number of complaints on mis-selling, and in the case of retail holders of Yes Bank’s additional tier-1 (AT1) bonds, whose value was written down during the crisis at the bank, the authority has turned them away because the matter is sub judice.
In the past month, the Reserve Bank of India-appointed banking ombudsman has denied relief to Yes Bank AT1 retail investors in at least two mis-selling complaints. In the first, it simply forwarded the complaint to Yes Bank, which denied the allegations and claimed the matter was sub judice. In the second, the ombudsman rejected the complaint as not falling under one of the grounds of complaints under the ombudsman scheme. Mint spoke to the two complainants—Gurugram-based Rahul Kumar and Chandigarh-based Nimish (he did not want to reveal his second name)—and has copies of the responses of the ombudsman and Yes Bank, respectively (the complaints were submitted online). Complaints to the Securities and Exchange Board of India (Sebi) were also returned on the ground that the matter is sub judice, said Nimish. Mint could not independently verify the Sebi reply.
It may be noted that the complainants had made it clear that their grievances were against mis-selling and not for legal rights and seniority of creditors (bondholders against shareholders), which are being examined by the Bombay high court. It’s not just a regulatory wall these retail investors have hit, but a legal one too. “The legal machinery is not geared up for class-action suits," said Renuka Sane, associate professor at the National Institute of Public Finance and Policy (NIPFP), and former visiting fellow at IDFC Institute, in a blog post.
The story so far
AT1 bonds are issued by banks to shore up capital. These bonds are perpetual in nature and pay high coupons or interest rates. However, they can be written down if the bank’s capital dips below predefined limits, which is what happened in the case of the AT1 bonds Yes Bank was holding. A large number of these high-risk products were sold to Yes Bank customers by its own relationship managers with the promise of high returns and fixed deposit (FD)-like safety of capital. In many cases, this was done without explaining the risks or conducting risk profiling and suitability checks with the customers (read that story).
When the bank collapsed in early March 2020, a rescue plan spearheaded by RBI initially wrote down the value of AT1 bonds. The final scheme was silent on their status but the bank’s interpretation of their legal status brought the write-down into effect, causing many retail investors to lose their money. Some of these investors were retired individuals who had parked a sizeable chunk of their life savings in these bonds at the behest of relationship managers. Mint was part of a WhatsApp group of aggrieved customers, many of whom were senior citizens.
Although the exact number cannot be ascertained, institutional investors (including mutual funds) accounted for about 90% of the write-down and they decided to challenge it on grounds of seniority of AT1 bondholders compared with shareholders who were not completely written down, according to reports. But for retail investors, who are but a small fraction and were goaded by their relationship managers to pick up these bonds from the secondary market (these bonds are not meant for retail investors and, hence, primary issuance is not available for them), the real issue is that of mis-selling. But, so far, the regulators have not helped.
Kumar was sold AT1 bonds in 2017 after he withdrew money from his Employees’ Provident Fund (EPF) account. He had built up the EPF corpus over an 18-year-long career. Kumar initially placed the EPF money in an FD, but was soon persuaded by his relationship manager to shift a part of it to AT1 bonds based on their slightly higher coupon (interest rate).
Kumar complained against the mis-selling to the ombudsman after the bonds were written down in March, only to be rebuffed on the grounds that it did not fall under one of the specified grounds in the ombudsman scheme. However, mis-selling is indeed one of the grounds for complaints under Section 8(1)(w)(i) of the Banking Ombudsman Scheme, 2006, which lists “improper, unsuitable sale of third party financial products". “The ombudsman order does not provide any reasoning as to how Section 8 would not apply. All the subsections of Section 8 of the scheme ought to have been considered before dismissing it," said advocate Srijan Sinha, a lawyer practising in the Supreme Court.
Of the 195,901 complaints received by it in 2018-19, only 98 resulted in an award by the ombudsman against the concerned bank. Around half the complaints were rejected as “non maintainable", which includes the reason that complaint is not on the grounds specified under the ombudsman scheme.
“My complaint on Sebi SCORES platform was closed citing the matter is sub judice," said Nimish, 34. Nimish’s family had invested in AT1 bonds.
In the fourth quarter of FY20, Yes Bank reported a net profit of ₹2,629 crore. However, this profit came on the back of AT1 bond write-down of ₹6,296 crore. “The profit is twice the money the bank owes to AT1 retail investors who were mis-sold the bonds. There’s every reason for us to feel short-changed," said Harish Mehta 65, another retail investor whose family based in New Delhi had invested in the bonds. Mehta has also complained against mis-selling of AT1 bonds.
Even when it comes to legal recourse, investors have a long battle ahead of them. “There is an argument that the write-down decision was that of the bank and not RBI and this makes it more susceptible to challenge on the grounds of seniority of bondholders to shareholders. However, the courts will take a long time to decide this. At best, retail bondholders can go back to the ombudsman after the courts rule on this matter or raise the mis-selling argument in the high court itself," said Deepak Shenoy, founder and CEO, Capitalmind, a financial research firm. For now, like their institutional counterparts, some of the Yes Bank AT1 retail bond investors are in the early stages of forming an association to challenge the write-down decision on grounds of seniority. However, they may also raise the issue of mis-selling in the court, Mehta said.
The experience of the retail bondholders exposes the regulatory gaps in redressal. “India’s weak redressal mechanism for financial services stems from its lack of class-action suits," wrote Sane. According to her, this is because Indian law doesn’t clearly provide for such suits and it does not allow them to be financed properly. “A class-action with a high claim is likely to be argued by a senior member of the bar. Appearance costs may be to the tune of ₹1.2 million," wrote Sane. “With an average of one hearing every two months, this would be ₹64.8 million for nine years (the average time for a civil case in India)," she added.
Sane suggested that retail AT1 bondholders can take up their case of mis-selling under the Consumer Protection Act at the District Consumer Grievance Redressal Forum or the State Consumer Grievance Redressal Commission depending on the size of the claims. “The AT1 retail bondholders can file as a class in the district consumer forum in Mumbai. If the judge finds sufficient numbers in the case to consider them a representative class, he may accept the case and even allow external financing to meet the costs of the case," she said. Third-party financing is, typically, either equity or debt financing from someone who is paid back from the money recovered in the suit.
The case of the mis-selling of AT1 bonds is wholly separate from that of the one on the seniority of creditors of the bond write-down. The former is exclusively about the retail investors who were mis-sold the bonds by relationship managers, while the latter affects all investors, both institutional and retail. With little redressal from either RBI or Sebi, the consumer courts seem like the last remaining alternative for these individuals.