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Opinion | RBI is right and wrong on Yes Bank AT1 bonds’ mis-selling

RBI needs to be responsible for sale of other products, such as Yes Bank’s AT1 bonds, too

The holders of Yes Bank AT1 bonds who saw their entire investment vanish a few months back were hoping for redress from the central bank, the regulator they thought should be looking after their interests. But they were bitterly disappointed when the Reserve Bank of India (RBI) said that the contract investors signed on clearly lays out the risks of investing in such products. RBI also said that investors should not reap higher returns when times are good and then complain about their losses when the risk comes home. Read about this here.

Some investors have gone to court saying that Yes Bank sold high-risk AT1 bonds to depositors without explicitly stating that the high interest came with the risk of wiping out the investment.

RBI is both right and wrong to bounce the ball back at the investors. RBI is right when it asks high net-worth investors (HNIs) and corporations to not blame the regulator when their high-risk-high-return bets turn sour. They have the ability and the resources to judge the risk and then take a considered decision. They cannot enjoy the higher return when times are good but then blame the regulator when the risk kicks in. But RBI is wrong when it washes its hands of the mis-selling of these bonds to retail investors who were sold these very high-risk bonds as FDs with a slightly higher return by the banking staff. In the communication I have seen from Yes Bank selling these bonds to retail investors, there is no mention of the risk of a total capital loss.

In the past three months, we have seen two instances of HNI and corporate investors, in the Yes Bank AT1 bond case and the Franklin Templeton Mutual Fund’s scheme freeze case (the fund house froze six schemes with a view to protect the small investor and prevent HNIs from exiting the illiquid funds), approaching courts to get redress on what they saw as a breach of contract. In both these cases, retail investors too were hurt badly, but while HNI and corporate investors have the ability to approach courts, retail investors have limited options and ability to do so. India needs the option of a viable class-action suit mechanism to allow disparate investors to band together to get redress.

Additionally, regulators need to differentiate protections available to small-ticket retail investors and ultra HNI and corporate investors. Most retail investors do not understand the fine print of a financial deal since the product they are buying is invisible. They see the product through the words and material given by the seller. When a seller describes a financial product, a buyer understands its features. Therefore, disclosures are such a big part of the buyer-beware market we operate in—the buyers must do their due diligence before they buy a product. But RBI refusing to address the retail investor mis-selling issue is a regulatory cop-out. RBI must understand that the retail investor simply does not have the required knowledge of law, finance and maths to figure out what really the disclosure is saying. Corporations and HNIs have lawyers, treasury managers and financial advisers to guide them, but the 65-year-old retired government schoolteacher does not.

The answer could be better disclosures mandated by the central bank. RBI needs to take a leaf out of Sebi’s one-and-a-half decades of work on making mutual funds less and less prone to mis-selling. The work done in the last three years by a smart team that has used data, big data and machine learning to do evidence-based regulatory changes in the interests of investors is especially exemplary. RBI’s disclosure rules are fuzzy and are easily gamed by banks. RBI’s charter of consumer rights is a joke among bankers.

I have two suggestions for RBI if it is serious about its role as a protector of the rights of retail investors. One, colour code financial products sold by the banks according to the risk they carry. Any product that has the potential of a full capital loss is red, a bank deposit is green since there is a high degree of safety on the payment of interest and return of principal, and so on. Two, devise a food label kind of disclosure matrix that spells out in layman language the chance of losing your entire capital, among other risks, if things go wrong. It should not be difficult to construct a set of disclosures that can be understood by an average person who uses a mobile phone to communicate the risk of a financial product. This is RBI’s greatest failure. It has been unwilling to protect retail investors from products other than bank deposits that are mis-sold though the banking channel. Banks are today still selling endowment policies as FDs with higher returns.

Investors also need to understand that there is no free lunch. Any product offering a higher return will come with higher risk. When the bank officer offers a higher return, write down what you understand of the product and then get her to sign on it with her bank’s stamp. If she is unwilling to do it, walk away. Till the time RBI understands that it’s role is not just protecting depositors’ money, but it is also responsible for the sales of other products through banks, you will be right to suspect every deal offered by banks.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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