HDFC Bank has placed two senior executives on leave amid an internal probe into alleged mis-selling of Credit Suisse Additional Tier 1 (AT1) bonds. The investigation follows complaints that the high-risk instruments were sold to clients without proper disclosure of their inherent risks.
What Are AT1 Bonds?
AT1, or Additional Tier 1 bonds, are perpetual, high-risk debt instruments issued by banks to strengthen their capital base under Basel III regulations. These bonds have no fixed maturity and rank below all other forms of debt in repayment priority but above equity.
Funds raised through AT1 bonds help banks absorb potential losses in times of financial stress. However, they can be written off or converted into equity if the bank’s financial health deteriorates, making them highly risky for investors.
Banks often offer these bonds with attractive interest rates — typically between 7.5% and 10% in India — to compensate for the higher risk. AT1 bonds were first introduced globally after the 2008 financial crisis to enhance banks’ resilience and protect depositors.
Why Are AT1 Bonds So Risky?
AT1 bonds act as a loss-absorbing buffer for banks during financial crises. If a bank’s capital ratios fall below regulatory thresholds, it can suspend interest payments or write off the bonds entirely.
In cases like Credit Suisse (2023) and Yes Bank (2020), investors lost their entire investments when regulators wrote down these bonds during rescue operations — despite AT1 bonds technically ranking above equity.
This highlights the “high return, high risk” nature of these instruments.
The Allegations Against HDFC Bank
According to Bloomberg, HDFC Bank benched two executives amid allegations that the lender mis-sold Credit Suisse AT1 bonds to clients. Reports claim that the bank’s relationship managers:
- Inflated clients’ income details to make them eligible for these investments.
- Failed to disclose the significant risks associated with AT1 instruments.
Several high-net-worth individuals (HNIs) have reportedly lodged complaints with India’s Economic Offences Wing (EOW), alleging misuse of their deposits worth ₹25–30 crore for investing in the now-worthless Credit Suisse AT1 bonds.
In a related development, the Dubai Financial Services Authority (DFSA) recently barred HDFC Bank from onboarding new clients, citing lapses in its client verification process — believed to be connected to the same issue.
Credit Suisse AT1 Bond Crisis
In 2023, Swiss regulator FINMA wrote off $20 billion worth of Credit Suisse AT1 bonds during its emergency merger with UBS, leaving investors empty-handed. The move triggered global outrage and legal challenges, with a Swiss court recently ruling the write-off as unlawful.
The Yes Bank Precedent
India witnessed a similar episode in 2020 when Yes Bank’s AT1 bonds worth ₹9,000 crore were written off as part of its rescue plan. Investors alleged they were not informed of the associated risks.
In 2023, the Bombay High Court ruled the write-off unnecessary, but the RBI and Yes Bank appealed to the Supreme Court, which stayed the decision. The matter remains under judicial review.
Can Indian Retail Investors Buy AT1 Bonds Now?
Following the Yes Bank episode, the Securities and Exchange Board of India (SEBI) in October 2020 restricted the sale of AT1 bonds to Qualified Institutional Buyers (QIBs) in primary markets, with a minimum investment of ₹1 crore.
Retail investors can still buy AT1 bonds in the secondary market, but only in lots of ₹1 crore and with a clear understanding of their risks.
Disclaimer:
This article is for informational and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any securities. Investors should consult qualified financial advisors before making investment decisions, especially in high-risk instruments like AT1 bonds
