HDFC Bank has suspended two senior executives amid an investigation into alleged mis-selling of high-risk Credit Suisse AT1 bonds, marking another chapter in the controversial history of these complex financial instruments.
Key Takeaways
- HDFC Bank executives benched over Credit Suisse AT1 bond mis-selling probe
- AT1 bonds are high-risk instruments that can be written off during bank crises
- Both Credit Suisse and Yes Bank saw massive AT1 bond write-offs affecting investors
- SEBI has restricted retail access to AT1 bonds after the Yes Bank crisis
Understanding AT1 Bonds
Additional Tier 1 (AT1) bonds are perpetual, high-risk debt instruments that banks issue to meet regulatory capital requirements under Basel III norms. These bonds have no fixed maturity date and rank below other debt but above common equity in repayment hierarchy during bank failures.
Considered “going concern capital,” AT1 bonds are designed to absorb losses when banks face financial stress. Investors accept higher risks for potentially higher returns, with bonds either converting to equity or being written off entirely during crises.
Banks can offer a ‘call’ option to redeem bonds, and investors typically price them based on expected returns at first call dates. These instruments emerged post-2008 financial crisis to strengthen bank capital quality and improve shock absorption capacity.
Why AT1 Bonds Carry Significant Risk
AT1 bonds serve as loss-absorption buffers during financial stress or bank collapses, helping maintain stability and protect deposits. However, issuers can halt interest payments or write down these bonds if capital ratios fall below minimum thresholds.
These bonds are first in line for write-downs when banks reach non-viability points. The regulatory protection placing them above equity in repayment priority failed during both Credit Suisse and Yes Bank crises, highlighting their inherent riskiness.
Despite these dangers, investors are attracted by returns of 7.5-10% from highly-rated Indian issuers.
HDFC Bank Investigation Details
HDFC Bank has placed two senior executives on gardening leave following Bloomberg reports about alleged mis-selling of Credit Suisse’s AT1 bonds. The bonds were written off two years ago, prompting overseas clients to allege improper sales practices.
Accusations include bank employees inflating client income to qualify them for AT1 bond investments while failing to disclose the instruments’ high risks. Four high-net-worth investors have filed complaints with the Economic Offences Wing, alleging misuse of deposits worth Rs 25-30 crore for Credit Suisse AT1 bond investments.
The Dubai Financial Services Authority recently barred HDFC Bank from onboarding new clients, with experts linking this action to the AT1 bond mis-selling controversy.
Credit Suisse AT1 Bond Crisis
In 2023, Swiss regulator FINMA wrote off Credit Suisse’s AT1 bonds worth over $20 billion during the bank’s emergency merger with UBS. The bonds were already trading at distressed levels before the complete write-off.
The decision devastated many investors, leading to legal challenges across multiple jurisdictions. A Swiss court recently ruled the write-off unlawful, providing some hope for affected investors.
Yes Bank Precedent in India
India witnessed a similar crisis during Yes Bank’s 2020 reconstruction, when the RBI superseded the bank’s board amid severe financial stress. As part of restructuring, Yes Bank’s AT1 bonds were written off, causing investor losses of approximately Rs 9,000 crore.
Multiple investors approached courts claiming inadequate risk disclosure. The Bombay High Court ruled in 2023 that write-off wasn’t necessary, but the RBI and Yes Bank secured a Supreme Court stay. The case continues before Justice A S Oka’s bench.
Current Regulations for Indian Investors
Following the Yes Bank crisis, SEBI restricted retail access to AT1 bonds. An October 2020 circular limits primary market participation to qualified institutional buyers with minimum investments of Rs 1 crore.
Secondary market trading permits all investor categories but maintains the Rs 1 crore minimum lot size. Retail investors who understand the risks can still access these bonds through secondary markets seeking higher returns.
