The COVID pandemic has disrupted our lives and focused attention so exclusively on our livelihood and health issues that we tend to ignore the decimation of savings and wealth, which has happened, as mere statistics. Every day, people are waking up to the fact that the post-tax savings that they had safely squirreled away have vanished. There is justifiable anger and panic. I have written endlessly about failed supervision, lack of regulatory accountability and poor grievance redress in India. This time, I intend to focus attention on one’s personal responsibility for decisions.
It is time investors question themselves and assume responsibility for their actions too. The tendency to play the victim card, when asked if they did any due diligence, is almost universal. Women will claim they don’t understand money (then why not stick to a safe bank deposit?); senior citizens immediately cite age as an excuse (those who are 70+ may have real issues coping with technology but rarely for making risky or speculative investments); and then there are the ‘entitled’ millennials with well-paid jobs who are easily duped with spiffy presentations by ‘wealth managers’ and won’t even check basics. Here’s a gist of some requests for help that I have received in the past few weeks; I am fully sympathetic about their loss, but can offer little reassurance and can’t help asking some basic questions.
The Wrong Bonds
This is the most tragic of the lot, since those who bought perpetual bonds issued by banks – additional tier-1 and tier-2 (AT-1 and AT-2) bonds believed they were safe and offered higher returns. Yes Bank’s AT-1 bonds were extinguished as part of the Bank’s bailout. The Bank had hard-sold these bonds to their own depositors saying they were as safe as fixed deposits (FDs) and locked in a higher return for five years. They now face a long and uncertain litigation.
It happened again with the AT-2 bonds of Lakshmi Vilas Bank (LVB) which offered a return of 10.70% and 11.80%. On 26thNovember, the Reserve Bank of India (RBI) ordered LVB’s AT-2 bonds, worth about Rs318 crore, to be wiped out in the amalgamation with DBS India Ltd. The victims: mostly senior citizens looking for a higher yield. Brokers, financial consultants and advisers actively canvassed the bonds. A Mumbai newspaper quoted one brokerage firm as having sold Rs20 crore worth of bonds to senior citizens. Did it explain the risk to them? Several bondholders, who allege they have been discriminated against, have approached the Madras High Court.
But did bondholders check some basics? For instance, did they ignore the fact that LVB was making losses and, hence, even in the best scenario, there was a chance the AT-1 or AT-2 bonds may skip dividend if LVB’s capital ratio dropped below 8%? Did investors notice that the rating agency CARE had downgraded LVB’s bonds in October saying they had reached a ‘point of non-viability’ trigger which could lead to loss of principal? Did they act on the information? Did they know that there was no liquidity and, hence, no secondary market exit that would keep them locked-in for a long time? Finally, why wasn’t the Yes Bank write-off a wake-up call for LVB depositors?
When advisers and distributors registered with Securities and Exchange Board of India (SEBI) began to hard-sell unsecured, AT-1 bonds issued by State Bank of India (saying they were similar to FDs and offered a higher returns) Moneylife was among the few to protest. To its credit, on 6th October, SEBI decided to restrict) the sale of perpetual bonds (like AT-1 and AT-2) to retail investors. They can be sold only to qualified institutional investors that too with a minimum allotment and trading lot of Rs1 crore. This should put an end to mis-selling by financial advisers; but it is cold comfort for those who have already lost big chunks of their savings and are now taking their chances with litigation. Also, SEBI has not questioned advisers who wrongly sold perpetual bonds to others. The Economic Times has reported that investors are finally waking up to the risk and dumping these bonds.
Penny Stock Gamble
Yet another set of investors protesting unfairness are those whose shares have been extinguished as part of amalgamation (as in LVB) or in the bankruptcy process. Equity is risk capital and investors are taking a conscious decision when they decide to hold on to shares of companies that are sinking into deep financial trouble. Expecting to benefit from an acquisition was a gamble. Consequently, LVB shares had hit a circuit even after RBI announced that they were to be extinguished. It means that real investors had an exit opportunity even after the RBI announcement. Can they blame others, if they failed to act?
A source with first-hand knowledge about this manipulation tells me how an Ahmedabad-based operator is able to whip up volumes of even up to Rs10 crore a day in penny stocks under bankruptcy proceedings. Such shares often trade as low as 60 paise to 80 paise; there is a fat brokerage and the operators even offer a pass-back to investors. It is essentially a gamble in a country where gambling is banned and the primary targets are non-resident Indians (NRIs). Investors make a killing if the shares are not extinguished and the company gets acquired by a large business group (as in Ruchi Soya and Alok Industries), or lose everything when existing shares are extinguished as part of the bankruptcy process (as in LVB, Bhushan Steel, Electrosteel, etc).
Unlike in a casino, where one accepts losses with good grace, some investors then file complaints hoping to force the regulator into taking action. Strangely though, SEBI’s famous real-time, market surveillance system never seems to catch manipulation while it is happening and send a strong deterrent signal.
Realty or Investment
A bunch of young, high net-worth individuals, mainly NRIs, were lured to invest in Bengaluru’s real estate on the promise of annual average returns of over 24%. SmartOwner, the company that allegedly made these promises, was not registered with SEBI and was ‘crowd-sourcing funds’ for real estate projects in the pre-launch phase, say angry investors. In other words, it wasn’t offering to sell real estate, which would be regulated by RERA (the real estate regulatory authority), but financial investment of highly doubtful legality. As always, the story had a sad ending. But why invest so much money (over Rs25 lakh each), when they knew it was an unregulated entity? The answer: Due diligence or background check was done only after the company duped them and they were looking for redress.
In the last week, I have received a slew of complaints alleging that over 650 people have invested a hefty Rs1,000 crore in projects of an entity called C&C Construction at Mohali. The investors say that they were persuaded to invest in the project by the Karvy group’s wealth management team. But here is the catch. None of them was investing in apartments or property. They made a financial investment on promise that it would give them high returns. The project is before the bankruptcy court. Investing in real estate in India has always been a minefield, until the Real Estate Regulation and Development Act brought in greater transparency and consumer protection. But who can protect investors who make a financial investment which is unregulated, because it was ‘sold’ by intermediaries who are strictly regulated? So far, SEBI has never asked these questions.
It all boils down to poor financial literacy, being too trusting, not investing a little time on research and due diligence, like a simple web search. The price they pay for such folly is often very unfair but also inevitable. Sadly, not every loss can be recovered.
Absolutely agree. Well written article and great video on ML News Bites!
Honestly, IMHO, there's no difference between a bank relationship manager, investment advisor, MF distributor, PMS manager, research analysts. They're all cut from the same cloth. The tragedy isn't this, but the end investors do not know the difference.
They do not even know who an investment advisor is, or for that matter who a fiduciary is. This needs to be addressed by the regulator. It's a convoluted mess. This is akin to an accountant peddling tax "advice" in guise of a CA, except most people often equate accountants to CAs! So, these bonds were peddled by PMS managers, mutual funds, bank relationship managers etc in the guise of "investment advice". The only class of people who can spot this BS are fiduciaries, and maybe investigative journalists like you :)
Ultimately, it's the investors who have to make the call. The sad part is we have too few fiduciaries in this country who truly care for investors, and fewer customers willing to pay fiduciaries to handhold them, like doctors and lawyers. They all want free lunch!
Also, excessive regulation will only kill the golden goose. We're heading that way. We reap what we sow. It's tragicomedy of epic proportions.
Once again, great article. Financial literacy has a long long long way to go in this country.
For many people including me who consider ourselves as reasonably aware of financial basics are not aware that AT-1, AT-2 bonds in case of Yes Bank and LVB as well as Equities in case of LVB can be written off. I also lost some money in these products.
Much more than greed, it is the lack of understanding risk and at the same time when they see that stock market is going up and FD rates going down, they wish to take the middle way. This is where these advisors step in and lure them. I was interested in buying Bonds of these banks two years ago. At that time, no one could think that bank bonds could be written off. The risk was written all over, but people including me thought that how can a bank go down. RBI will always protect this. Hence the comfort not realising that things can change even for Banks.
I consider myself financially literate, I was close to buying. Of course I would not buy LVB bonds, but yes bank bonds was 50 - 50%. It is is the need of getting additional 1% which is driving retail investors into these bonds. Look at people who write about MFs - All have cropped up now as the market is at all time high. Everyone saying to put money in bonds and not into FD. When the market was the lowest, they were advocating asset allocation. Honestly put only surplus money into these products and depend on FD, post office and other saving scheme like my father and grand father did. Surplus money put in stock market.
Sadly the greed and stupidity of retail investors is the main reason for all the scams. SEBI will always be like the police in a typical Hindi potboiler arriving much later at the scene of the crime . At best, They can perhaps prevent the same crime from happening but not a new one. Though Moneylife does not favour mutual funds - in my opinion it is still the safest vehicle for the so called financial illiterate Investors to earn return higher than fixed deposits. Also if the distributors are fined and their licenses cancelled for pushing schemes that cause a huge loss to their investors- this will also help. After all they are also responsible for doing due diligence and should be held accountable.
Investors needs to be self educated and take a tough stance with brokers.For instance my own broker is banned from giving me any advise whatsoever buying or selling.If he gives the same,I imm fire him and point this out via email.
No. It’s the duty of the investor himself to understand the value or the worth of his Money. In India, because of the poor regulations, lethargic judiciary, this becomes more important that you only take care of your money. I have observed that almost 90% of the Mediclaim owning population are dependent on their agents for every small matter. They hardly read the policy properly when it is received. Merely file it and then in emergency rush to the agent, and then blame 1) Insurance Co. 2) TPA 3) The Agent 4) IRDAI and lastly 5) the ruling party except themselves.
The victims of these scams seem to have lost a part or whole of their life savings.
If it was not for a lottery win or an inheritance, it must have taken them time, energy and effort to accumulate this amout of considerable wealth.
Unless these victims are already financially literate, it would not be possible for them to save such considerable amount over many years by holding back on discretionary spending or wasting the income on depreciating assets.
I am starting to think, maybe financial literacy is not the root cause here . The tendency of people to make the wrong financial decisions even though they are good at saving money.
The GREED is the root cause of such decisions. There are 4 Kashay (4 bad virtues) as per Jainism.They are 1) Krodh( Anger) 2) Maan( Hunger for Respect) 3) LOBH ( Greed) and 4) MAYA( Deceit). I remember this as CROMA-LOMA (ie Krodh/Maan/Lobh/Maya). Out of these 4, The greed is the King of these bad virtues. That’s the main reason all these problems arises.
Blind trust is somehow part of our DNA. We trust politicians who repeatedly fail us and businesses who cheat us. The old adage trust but verify is rarely practised. Verification requires time and effort which even investors, who should know better, are not prepared to invest in.
I have been suggesting colleagues to subscribe to either two of the advisories which charge around ₹2500-₹4500/- per year which give unbiased advice, myself subscribed to one of them. But alas none listen. Mind you average earnings of these guys range from 12- 50 L/pa. Advice is free but advisory is costly.
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Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
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Honestly, IMHO, there's no difference between a bank relationship manager, investment advisor, MF distributor, PMS manager, research analysts. They're all cut from the same cloth. The tragedy isn't this, but the end investors do not know the difference.
They do not even know who an investment advisor is, or for that matter who a fiduciary is. This needs to be addressed by the regulator. It's a convoluted mess. This is akin to an accountant peddling tax "advice" in guise of a CA, except most people often equate accountants to CAs! So, these bonds were peddled by PMS managers, mutual funds, bank relationship managers etc in the guise of "investment advice". The only class of people who can spot this BS are fiduciaries, and maybe investigative journalists like you :)
Ultimately, it's the investors who have to make the call. The sad part is we have too few fiduciaries in this country who truly care for investors, and fewer customers willing to pay fiduciaries to handhold them, like doctors and lawyers. They all want free lunch!
Also, excessive regulation will only kill the golden goose. We're heading that way. We reap what we sow. It's tragicomedy of epic proportions.
Once again, great article. Financial literacy has a long long long way to go in this country.
I consider myself financially literate, I was close to buying. Of course I would not buy LVB bonds, but yes bank bonds was 50 - 50%. It is is the need of getting additional 1% which is driving retail investors into these bonds. Look at people who write about MFs - All have cropped up now as the market is at all time high. Everyone saying to put money in bonds and not into FD. When the market was the lowest, they were advocating asset allocation. Honestly put only surplus money into these products and depend on FD, post office and other saving scheme like my father and grand father did. Surplus money put in stock market.
The victims of these scams seem to have lost a part or whole of their life savings.
If it was not for a lottery win or an inheritance, it must have taken them time, energy and effort to accumulate this amout of considerable wealth.
Unless these victims are already financially literate, it would not be possible for them to save such considerable amount over many years by holding back on discretionary spending or wasting the income on depreciating assets.
I am starting to think, maybe financial literacy is not the root cause here . The tendency of people to make the wrong financial decisions even though they are good at saving money.