The Wadhawan family behind Housing Development and Infrastructure Limited (HDIL) and Dewan Housing Finance Limited (DHFL) have been involved in two massive loan fraud cases, which affected customers of Yes Bank, the Punjab and Maharashtra Cooperative Bank, and the Punjab National Bank. Among top bankers, Yes Bank’s co-founder was in cahoots with DHFL’s promoter, and pulled off a Rs 5,000 crore scam that left consumers and investors hanging in the balance. The bank was later reconstituted under the Reserve Bank of India’s watch, but a call taken for the lender’s survival has come back to haunt it.
Investors bear the brunt
As part of the restructuring process, AT-1 bonds issued by Yes Bank were written down, as SBI and other banks infused Rs 10,000 crore to rescue the organisation. But this completely washed away the investment of bond holders, who have been waiting to be compensated ever since. They have finally found relief in a Bombay High Court verdict to reject the write down, and stay the order for six weeks.
What are Yes Bank’s AT-1 bonds?
AT-1 bonds are considered to be high-quality debt instruments, sold to raise money for financing business expansion and new projects. During Rana Kapoor’s reign as Yes Bank CEO, the AT-1 bonds had been sold to investors with the promise of high returns and safety of super fixed deposits (FD). But at the same time, the bank was hiding financial mismanagement by Rana Kapoor in collusion with the Wadhawans, promoters of DHFL.
Standing on a house of cards
Yes Bank had bought debentures, which are bonds without collateral, from DHFL for an investment of more than Rs 4,000 crore. It had also granted a Rs 750 crore loan to DHFL for developing a project in Bandra, but the money was siphoned off via shell companies. Hence Kapoor was using customers’ money and proceeds from bond sales to fuel the scam, for which DHFL granted a Rs 600 crore loan for a firm linked to his family.
Left in a lurch
When the scandal was finally unearthed and Yes Bank was on the verge of a collapse, the RBI stepped in and roped in a consortium led by SBI to rescue the ailing lender. Since Yes Bank was deemed unviable, it made a case for the write down of bonds worth more than Rs 8,400 crore. But being high quality debt instruments, AT-1 bonds are supposed to absorb the losses in case of a financial crisis, which includes a lender’s bankruptcy.
Since bond-holders were given false promises about the stability of the instruments, the High Court has ruled in favour of the investors who challenged the write down by Yes Bank’s new administration.
