The controversy over Additional Tier 1 (AT1) bonds has returned, this time with a wider footprint and sharper implications. What began as an isolated issue of mis-selling has now extended across borders, involving the sale of Credit Suisse AT1 bonds to NRI clients through overseas branches of an Indian bank. The episode raises questions that go beyond disclosure lapses—touching on suitability, regulatory gaps, and the integrity of distribution practices.
This is not without precedent. In an earlier column during the YES Bank crisis, this author had flagged the need for a forensic audit of AT1 bond transactions. The concern then was limited to a single bank and a domestic episode. What has now surfaced suggests that the underlying issues—mis-selling, weak oversight, and misaligned incentives—were neither contained nor corrected.
READ | Banking reforms must go beyond Viksit Bharat branding
AT1 bonds and investor risk
AT1 bonds are issued by banks to strengthen regulatory capital. They are perpetual instruments, carry high coupons and are meant to absorb losses in times of stress. RBI’s Basel III capital regulations make this explicit. They also state that banks should not issue AT1 instruments to retail investors.
That prohibition matters because these are not ordinary income products. They can be written down or converted into equity when a bank comes under severe stress. In such cases, investors can lose their principal.
In the present case, NRI account holders were offered returns of 12% to 13% on Credit Suisse AT1 bonds. The attraction was the coupon. The risk was the instrument itself.
Credit Suisse and the AT1 write-off
The collapse of Credit Suisse turned that risk into reality. In March 2023, Swiss authorities pushed through a rescue by UBS. FINMA then ordered a complete write-down of Credit Suisse’s AT1 bonds, citing both the contractual terms of the bonds and the Swiss emergency ordinance issued that weekend. The wipe-out covered roughly CHF 16 billion of AT1 debt.
That decision triggered global controversy because it appeared to invert the normal hierarchy of loss absorption. The ECB, the Single Resolution Board and the European Banking Authority publicly reiterated that, in the European Union framework, common equity is the first to absorb losses and AT1 is written down only after equity is fully used. The Bank of England made the same point in its own statement on creditor hierarchy.
That context is essential. The high return on AT1 bonds was never compensation for ordinary credit risk. It was compensation for the possibility of sudden and total loss.
READ | RBI’s push for banking transparency and the right to information
India already had a warning in YES Bank
India had already seen the dangers of AT1 bonds during the YES Bank rescue. RBI’s own capital rules had barred banks from issuing these instruments to retail investors. Yet the YES Bank episode showed how easily such products could still find their way to investors who did not fully understand the risks. SEBI’s 2021 adjudication order in the YES Bank matter recorded complaints that AT1 bonds had been misrepresented to retail investors, including senior citizens, as deposit-like products.
That domestic precedent should have made every bank far more careful. Instead, the same class of instrument has resurfaced in another mis-selling controversy, now with a cross-border dimension.
Mis-selling, suitability and fiduciary duty
The issue is no longer only one of morality. It is one of suitability, disclosure and fiduciary responsibility. SEBI’s investor guidance for investment advisers is clear on the principles involved: no misrepresentation, full disclosure of conflicts and commissions, and risk profiling to ensure that investments match the client’s risk appetite. High-risk products cannot be sold as safe yield options.
That is why the HDFC Bank episode raises deeper questions than the loss suffered by one set of customers. Were investors told that AT1 bonds exist precisely to be written off in stress? Were they informed that these instruments had already triggered one of India’s most contentious investor disputes in the YES Bank case? Were the risks explained in a form a reasonable investor could understand?
READ | How crisis-era monetary policy reshaped the limits of central banking
Governance and regulatory questions
The controversy has already led to managerial fallout and market concern around HDFC Bank. Reports also indicate disciplinary action against senior officials in connection with the sale of these bonds.
But the larger question is regulatory. Did these transactions come to the notice of RBI in time? Were the risks, the client profiling process and the route through offshore branches adequately disclosed? If a globally systemic bank such as Credit Suisse can fail and its AT1 bonds can be wiped out overnight, Indian regulators cannot treat cross-border distribution of such instruments as a technical compliance matter.
What is needed first is not explanation, but examination. A forensic audit of risky cross-border exposures and of the sale of complex bank capital instruments by Indian banks is now overdue.
The AT1 controversy is no longer about one bank, or even one episode of mis-selling. It is about whether Indian banking oversight has kept pace with the instruments banks distribute, the incentives they create, and the risks they can quietly transfer to investors.