DHFL and Mockery of the Taxpayers

• 2 February 2025 | 214 Views | By Abhimanyu

On 23^rd January 2025 CBI announced closing the case of DHFL and its directors in the “fake home loan”, a vital part of the Bandra Books. The amount misappropriated in this scam is estimated to be above Rs. 14,000 Crores.  While there have been numerous posts, and a lot of common sense spread over the internet, that details  the fraud, it is indeed shocking that CBI failed, again.

Let’s not dig deep into this scam but explore the repercussions on the common people. In a form of a domino effect, the taxpayer pockets suffered deeper than what it looks on the surface.

This news is not under CBI’s press releases, as shown in the image below, plus there is no political outroar, no baffled posts from the media yet!

The quantum that depositors (FDs and NCDs) invested in this NBFC that was once rated AAA by proactive and proud rating agencies, is Rs. 45,000 Crores. After Piramal entered the mess, it was announced that credit and fixed depositors shall get around 46 percent and 23 percent of their initial deposit. It is a sad end for those who invested seeking safety of funds and above-inflation beating interest rates. These people, mostly taxpayers, couldn’t even fetch the principal that they had invested. Long live the blind judiciary, cases shall go till the grave of these people.  The more one invested, the more one lost.

But were these investors were only ones who lost? We now move onto one of the domino effects, the fall of Yes Bank.

“Yes Bank will not be allowed to fail”, the then SBI Chairman Rajneesh Kumar made this statement at WEF 2020, in Davos, Switzerland. Since then, Yes Bank is again trading on the stock exchange, aggressively selling credit cards and convincing us that nothing bad had happened, EVER.  Yes Bank, whose co-founder Rana Kapoor got bail in September 2024, gave around Rs. 4733 crore of loans to DHFL. Of course, kickbacks of Rs. 600 Crores are alleged in the process, but this write-off did cast a havoc on Yes Bank’s capital structure. The Bank reached on the verge of being dissolved and was saved by the RBI. This time RBI ensured that depositors had their money safe, but then who lost? Those investors lost, who had put their hard-earned money into the Tier 3 bonds of Yes Bank.

How governance goes to the trash when money appears like a stand-up comedian. While a consortium of -17- banks were robbed of their capital, as usual, the public sector took the major hit. During it’s period of phenomenal growth, Yes Bank raised capital from as many sources as it could, and when the capital markets dried, it turned its head to the self-proclaimed smart retail investors. A massive sum that is close to Rs.1000 Crores lost by the common investor on the Tier 3 bonds issued by Yes Bank in December 2016, and October 2017.

Investment in tier 3 bonds doesn’t seem like an everyday task for a muggle investor.  Let’s decode the Yes Bank AT3 Bonds write-off. Read about Yes Bank: Collapse Full Case Study | Are banks Safe in India?

The Yes Bank AT1 Bond Write-Off: A Legal and Financial Tempest

• The Yes Bank AT1 bond write-off in 2020 stands as a landmark event in Indian financial history, sparking a legal and financial tempest that continues to reverberate. This article delves into the intricacies of this complex episode, examining its genesis, the legal battles it ignited, and its broader implications for the Indian financial landscape.

Understanding AT1 Bonds:

• At the heart of this controversy lie Additional Tier 1 (AT1) bonds. These are a type of perpetual debt instrument issued by banks to bolster their capital base. Key features of AT1 bonds include:
• Perpetual Nature: They have no fixed maturity date, making them akin to equity rather than traditional debt.
• Write-Down or Conversion: In times of financial distress, banks can write down the value of these bonds or convert them into equity shares, effectively wiping out investor returns.
• High Risk, High Reward: Due to their inherent risk, AT1 bonds offer higher interest rates than traditional debt instruments.
• The Yes Bank Crisis:
• In early 2020, Yes Bank, a prominent private sector bank in India, faced a severe liquidity crisis.⁵To prevent a systemic collapse, the Reserve Bank of India (RBI) intervened, implementing a unique reconstruction scheme. A cornerstone of this scheme was the write-off of ₹8,415 crore worth of Yes Bank’s AT1 bonds.
• Investor Backlash and Legal Challenges:
• The write-off decision triggered widespread outrage among bondholders. Investors argued that:
• Breach of Contract: The write-off violated the terms of the bond agreements, which did not explicitly authorize such a drastic measure.
• Lack of Transparency: The decision-making process lacked transparency and adequate consultation with investors.
• Erosion of Investor Confidence: The write-off severely eroded investor confidence in the Indian financial market, particularly in AT1 bonds.
• Legal challenges ensued, with bondholders filing petitions in various courts. The Bombay High Court, in a landmark judgment, quashed the RBI’s decision, ruling that the write-off was not authorized under the relevant legal framework. The RBI and Yes Bank subsequently appealed this decision to the Supreme Court.
• The Supreme Court’s Intervention:
• The Supreme Court, while recognizing the complexities of the situation, acknowledged the potential for significant disruption to the financial system if the High Court’s order were to be implemented. The Court emphasized the need for a balanced approach that safeguards investor interests while maintaining the stability of the financial system.
• Key Considerations for the Supreme Court:
• The Supreme Court’s decision will likely hinge on several crucial factors:
• Interpretation of Legal Framework: The Court will need to carefully examine the relevant provisions of the Banking Regulation Act and other applicable laws to determine whether the RBI’s actions were legally permissible.
• Balancing Investor Interests with Systemic Stability: The Court will need to strike a delicate balance between protecting investor rights and ensuring the stability of the financial system.
• Impact on Future Bailouts: The outcome of this case will have significant implications for future bank bailouts and the treatment of AT1 bondholders in such situations.
• Potential Outcomes:
• Several potential outcomes are possible:
• Upholding the High Court Order: This would require the RBI to compensate bondholders for their losses, potentially through a government-backed resolution mechanism.
• Modifying the RBI’s Decision: The Court could modify the extent of the write-off or introduce alternative mechanisms to compensate bondholders.
• Upholding the RBI’s Decision with Conditions: The Court could uphold the write-off but impose conditions to mitigate the impact on bondholders, such as providing them with a partial compensation or offering them alternative investment options.
• Broader Implications:
• The Yes Bank AT1 bond write-off has far-reaching implications for the Indian financial landscape:
• Investor Confidence: The episode has shaken investor confidence in AT1 bonds and other complex financial instruments.
• Regulatory Framework: The case highlights the need for a clearer and more robust regulatory framework for bank bailouts and the treatment of AT1 bonds in such situations.
• Role of Courts: The judicial pronouncements in this case will play a crucial role in shaping the legal and regulatory landscape for future bank resolutions.

The Yes Bank AT1 bond write-off remains a complex and contentious issue. The Supreme Court’s decision will have a profound impact on the Indian financial system, shaping the future of bank bailouts and investor protection. As the legal proceedings unfold, it is crucial to maintain a balanced perspective, recognizing the competing interests at stake and the need for a resolution that safeguards both investor rights and the stability of the financial system.

Learnings from the DHFL-Yes Bank Fiasco

• Importance of Regulatory Oversight: The Yes Bank-DHFL case underscores the critical need for robust regulatory oversight of the banking sector to prevent such instances of alleged collusion and financial misconduct. One important factor is how proactive the regulator is. For instance, SEBI has now asked Nippon Mutual Funds about their investments in Yes Bank’s AT-1 Bonds.  This announcement comes after -5- years to the Yes Bank liquidity crunch issue and now appears merely a formality.
• Corporate Governance Concerns: The scandal highlights the importance of strong corporate governance practices, including independent boards of directors and robust internal controls, to mitigate risks and ensure transparency.
• Investor Protection: The case raises concerns about investor protection and the need for mechanisms to safeguard the interests of investors in situations involving potential financial irregularities.