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The Downfall of Yes Bank and Prospective Revival Measures

Over time, innumerable criminal activities within the corporate sphere have been witnessed, right from the Mundhra Scam, the very first scam of Independent India to the contemporary Yes Bank controversy. With advancements in technology and increasing intricacy of institutional frameworks, corporate crimes have been on an all-time high. It becomes difficult for the necessary authorities to recognise such malicious occurrences let alone catch them and implicate them following the due process of law. Structures like that of Corporate Veil make it difficult for authorities accountable to act upon these matters as soon as it comes to their knowledge. Implying that the available legislations in this sphere is lacking merit and proper implementation. The inadequacy of the Indian Penal Code in the arena of corporate crimes led to the enactment of the Prevention of Corruption Act, 1947.

Nonetheless, the Yes Bank saga is a convoluted tale. The central bank had to step in to uncomplicate it.

Establishment

Back in 2004, during the Vajpayee Government rule, revised guidelines were issued regarding entry and licensing of private sector banks. Many banks were launched including Yes Bank. Yes Bank was founded by two brothers-in-law- Ashok Kapur and Rana Kapoor in 2004. Before Yes Bank’s journey began, Ashok Kapur, Rana Kapoor and Harkirat Singh were partners of an NBFC of Dutch banking major Rabobank. After having envisioned setting up a commercial bank, they were set to exit the Rabo India Finance Company.

The two brothers-in-law sold their shares worth 10 million each and invested the same in Yes Bank, which later went ahead to become a billion-dollar valued company.

The Partner who took off

Harkirat Singh, a south Mumbai banker (now retired) was one of the promoters of this venture. As per his words, he was the prime mover behind the banking license and had invited Ashok Kapur to work with him. He did not know Rana Kapoor personally and allowed him to be onboard on Ashok Kapur’s recommendation. However, he left abruptly stating non-mutuality of objectives of the bank. He had also said that both the brothers- in law conspired against him and ousted him from the venture.

Distressed relations between the two brothers-in law

Rana Kapoor is a person with an excellent academic record and career pedigree. He obtained an MBA from Rutgers University, New Jersey, where he was awarded the President’s medal. He also did an honorary PhD from G.B. Pant University of Agriculture and Technology. Rana Kapoor has previously worked with Bank of America (BoA), ANZ Grindlay’s Investment Bank (ANZIB) before setting up of an NBFC as a joint venture with Rabobank and Yes Bank’s launch. Ashok Kapur too had an excellent career pedigree. He had previously worked with Grindlays Bank, ABN Amro and Rabo Bank before joining Yes Bank as the founding promoter and non-executive chairman. Ashok Kapur was a stable banker while Rana Kapoor was flamboyant and a speculator, one can say.

Though connected by family ties, they shared a fraught relationship. During the whole journey of Yes Bank, from its very establishment to its present downfall, the two families have always been in litigation. Unfortunately, in the 26/11 gruesome incident in the Oberoi Hotel, Mumbai, Ashok Kapur was killed, resulting in Rana Kapoor being the only Founder left.

Ascending Heights

After its launch in 2004, the bank started to gain public trust and brought about a lot of technological advancements in the sphere of banking. It was a bank, bankers wanted to work for and a bank people wanted to bank with. In 2014, the government changed again and at this point in time, Yes Bank was reaching its peak. Share value being over Rs 400/share and Non-Performing Assets (NPAs) of the bank was valued at a mere 0.31%. In 2017, the bank was at its crest. Rana Kapoor became a billionaire in 2017 as per Bloomberg news article.

Now the question arises as to when one of the most trusted private sector banks went from valuing over Rs 400/share to almost nix/share. After roaring for years, the bank is now facing its worst nightmare.

A public sector bank had to come to their rescue and the RBI had to intervene amid growing concerns.

Status QUO

The Metropolitan Magistrate was given Yes Bank fraud case due to the inability of CBI to obtain sanction to prosecute Rana Kapoor, the main accused. On March 8th, 2020 Rana Kapoor was arrested by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act. His family was also charged with bribery and money laundering in link with Yes Bank case. Rana Kapoor’s bail plea on the grounds of his ill health and the ongoing pandemic was rejected in April 2020. According to the CBI, DOIT Urban Ventures India Pvt. Ltd., a company linked to Rana Kapoor’s family received kickbacks to the amount of Rs.600 crores when Yes Bank had extended a Rs.3000 crore loan to the scam-hit Dewan Housing Finance Corporation (DHFL) group. It was also alleged that the kickbacks were given as a reward for going easy on the recovery of the loan.

Rana Kapoor’s family was also questioned because the companies receiving the kickbacks are in the name of his daughters. Apart from this, Yes Bank had given loans to many companies under stress like Anil Ambani group and Zee group and these had started to become bad loans, increasing the percentage of Non-Performing Assets (NPAs) of the bank. Correspondingly, there was a run of deposits and a huge wave of people took out their deposits from the bank as a result of lost faith in the working of the bank. The share price was at a record low and even substantial deposits from depositors like Tirupati Trust withdrew its deposits worth Rs. 1300 crore. Amongst the spate of investors’ exit, Rana Kapoor himself sold his stake leaving only 900 shares in his name in November 2019, as reported by Business Standard. RBI had to step in to make sure innocent people are not affected by the alleged defaulters.

Role of RBI

Raghuram Rajan, the RBI governor from 2013-16 was on a cleaning spree of the banking sector of the country. He had discerned the ability or default on part of banks in understating the NPAs and hiding the sludge in balance sheets. The government wasn’t exactly thrilled by this move as it was broadcasting too much underbelly filth. He was attacking at vulnerable places.

The government was of the opinion that this might freeze credit. However, if one was to comprehend the then circumstances correctly, they would have found out that the credit the system was already broken because the bank had gone broke. Post him, came the tenure of Urjit Patel. He was more stringent regarding banking rules. His duty of responsible vigilance made him aware of the sizeable incongruity between RBI’s valuation of Yes Bank’s NPAs and Yes Bank’s valuation of its own NPAs. Yes Bank became the focal point on RBI’s radar. This led to Yes Bank accepting more and more NPAs. The RBI went ahead and refused to extend Rana Kapoor’s tenure with the bank as CEO. He remained as the interim CEO till January 2019 and after that RBI appointed Ravneet Gill of Deutsche Bank, a highly principled man, as his successor.

The bank had been stuck in a vicious cycle where raising more capital meant exposing their awful truths and eventually falling share prices. No buyer would have agreed to pay a higher price for a bank whose share prices were only going down.

Cogent Force

Banking Regulation Act, 1949 is a legislation that regulates all banking firms in India. Section 45 of the fore-mentioned act is like robust ordnance in the hands of the RBI. Section 45: Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution or amalgamation. This section provides extensively what RBI has been empowered to do with the sanction of the Central Government when it comes to banks on verge of falling. When RBI was given the sanction, it reconstructed the management and board of Yes Bank and did not allow Rana Kapoor or his family on board due to the ongoing case. The (former) CFO of State Bank of India (SBI) is now the CEO of Yes Bank- Prashant Kumar. For Yes Bank’s revival, RBI fixed its share price at Rs.10 apiece.

Shareholdings in the private lender will remain within the 49% of the paid-up capital of the bank. If it weren’t for RBI’s intervention and SBI’s buying of a stake in the banking company, the share price would have gone much lower. RBI also stated that SBI cannot go below 26% stake in the bank for at least three years because the bank needed time to revive and stabilise to function back on its feet. The rationale behind choosing SBI is that it is the largest public sector bank with a great track record and has the dominance no other bank has. It has the clout to exercise what it takes to revive a failing bank like Yes Bank.

Reasons why conventional methods did not opted

Before the sanction it wasn’t possible to do what is currently being done because of the SEBI rule to open up the offer and in that case, it would have been based on the average price of last six months, a much higher rate, at which no outside buyer would have agreed to buy the stake at that price.

Also, the open offer would have meant more muck coming out and consequently, no buyer would have possibly trusted a bank whose dirt kept coming out and resultantly more depositors with the bank would have left. Implying, a worsened condition for the bank. But now with the empowerment that RBI has got because of Section 45, the SEBI rules have no say. The reason it wasn’t sent to National Company Law Tribunal (NCLT) for insolvency proceedings like Punjab and Maharashtra Co-operative (PMC) bank is that Yes Bank is a large private sector bank and a lot of innocent people would have suffered at the ill deeds of the alleged wilful defaulters. More importantly, Yes Bank comes under the definition of banking company referred to in Section 45. During PMC bank’s downfall, it being a co-operative bank was not included in the purview of Section 45. Now, after Banking Regulation (Amendment) Ordinance, 2020. The ordinance, 2020; the act has been made applicable to cooperative banks too. Obviously, the magnanimous decision of the RBI suffers some shortcomings as well.

One, the Additional Tier 1 (AT1) bonds, as per directions of the RBI, will have no value. These bonds are unsecured perpetual bonds with no expiration date and are treated as quasi-equity capital issued to shore up core capital to meet Basel-III norms. Banks can exercise call option, not necessary to do so but they can opt to pay only interest on them for eternity. Basel III is a 2009 international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector, by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand. These norms were adopted by India after the global financial crisis of 2007-08. While SBI has purchased 49% stake in Yes Bank at a meagre amount, the decision of RBI implies that Yes Bank also gets rid of Rs. 10800 crore credit liability of AT1 bonds simultaneously. Two, this will create a simultaneous harmful effect on IndusInd Bank and Ratnakar Bank. These two banks will be under huge stress as a result of this decision.

Oncoming turn of events

SBI can now either go for Rights Issue or call in for fresh funds. SBI and RBI are already in the midst of negotiations with other banks and funds, Indian and Foreign. SBI cannot sell its stake below 26% for the initial three years. But it has the added advantage of going after the delinquent borrowers and makes the bad loans good, paving way for early recovery.

Epilogue

In the past two decades or so, three major corporate crimes were witnessed. One, the downfall of Global Trust Bank. For its revival, Oriental Bank of Commerce (OBC) made a merger proposal perceiving the synergy between the two banks and the government had sanctioned it. Helping revive the bank did not prove to be a golden stepping stone but instead, the OBC is still suffering and recovering from it. Which is exactly why Yes Bank wasn’t merged or amalgamated with a public sector bank.

Two, the infamous Satyam Scam, which happened during the time of the Lehman Crisis of 2008, a global financial crisis. Lehman Brothers Holdings Inc. was the fourth largest investment bank in The United States. It’s filing for bankruptcy in September 2008 proved to be the prime ground behind the global financial crisis of 2007-08. The people liable for the Satyam Scam were convicted and jailed for a term of seven years. The business was separated from the owners and later auctioned. Tech Mahindra bought the venture and it proved to be a profitable buy for them. Currently, Tech Mahindra’s market capitalization is valued at more than Rs. 64000 crores.

Third, the soap opera of Yes Bank’s downfall and its ongoing revival where RBI’s decision regarding bringing in of SBI, a public sector bank with clout seems to be a sensible and need of the hour decision in the light of the previous two crises. The bad from the bank i.e., the CEO, the management and the board have been removed and reconstructed to what RBI deems fit for securing the interests of the thousands of innocent depositors. What truly is the concern right now is the implementation of a well-thought plan and whether both the banks will come out of this as winners, only time will tell. 

(Note: Pancham Jhala is an Intern with the Content Team at Lawyered)