Introduction To Yes Bank Limited

Yes Bank Ltd (hereinafter referred to as YBL) is engaged in providing a range of banking and financial services. The Bank operates in four segments: Treasury Corporate/Wholesale Banking Retail Banking and Other Banking Operations. Since inception in 2004, YBL has fructified into a ‘Full-Service Commercial Bank’ that has steadily built Corporate Banking, Financial Markets, Investment Banking, Corporate Finance, Branch Banking, Business and Transaction Banking.

The YBL in 2018 had published the Bank Sustainability Performance in which certain aspects changed liquidly which had deep repercussions on the share price of the bank, this was primarily done due the asset valuation record of the Bank which had deteriorated ever since.

Fall of Erstwhile Yes Bank Limited

Pursuant to the Security Exchange Board of India vide Circular SEBI/ HO/ MIRSD/ DOS3/CIR/P/2019/70 dated 13.06.2019 has obligated all the CRA’s registered with the board to disclose the Credit Rating Norms, through which it grants entities ratings which later seek credit from financial and non-financial institutions.

This action sought by the Securities Exchange Board of India (hereinafter referred as SEBI) as recommended by the Report of the Committee on Comprehensive Regulation for Credit Rating Agencies by Capital Markets Division, Ministry of Finance came into effect right after the Indian Leasing and Financial Services Ltd fiasco, in which faulty scheme of CRAs was exposed. Acting swiftly, on the issue the SEBI came with a Circular, directing all the CRAs impaneled with SEBI to disclose their norms for Credit Rating. This action came to light after the Indian Leasing and Financial Services (hereinafter referred to as ILFS) had declared the NPA’s.

Thereafter, YBL under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 wrote a letter to the National Stock Exchange NSE and Bombay Stock Exchange BSE dated 24.12.2019 disclosing High levels of slippages which had led to an increase in Gross NPA from 5.01% in Q1FY20 to 7.39% in Q2FY20, PCR is maintained at 43.1%. Resolutions have been slower during H1FY20. The Bank’s Gross NPA has increased from Rs. 7883 Cr in FY19 to Rs. 17135 Cr in H1FY20, resulting in a net increase of ~ Rs.5000 Crore in each of the first two-quarters of FY20.

The aforementioned figure revealed by Brickwork Ratings (hereinafter referred to as BWR) had relied upon the Bank financials up to September 30, 2019, publicly available information, and information and clarification provided by the Bank's management. Pursuant to this BWR had downgraded the Tier I Bonds and Innovative Perpetual Debt Instruments from BWR A+ to BWR A-. The cautious Financial Institutional Investors (hereinafter referred to as FII) had commenced exiting the company after the above facts came to light. This led to a constant fall of the YBL stock price from Rs. 367 (August 2018) to Rs. 16.1 (March 2020).

The following reasons led to the 05.03.2020 announcement by Reserve Bank of India(hereinafter referred to as RBI) whereby:

In exercise of the powers conferred under 36ACA of the Banking Regulation Act 1949, the RBI had, in consultation with the Central Government, superseded the Board of Directors of Yes Bank Ltd. for a period of 30 days owing to a serious deterioration in the financial position of the Bank. This had been done to quickly restore depositors’ confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation. Shri Prashant Kumar, ex-DMD and CFO of State Bank of India has been appointed as the administrator under Section 36ACA (2) of the Act.

Therefore, the above event led to RBI superseding the board of YBL the explanation which was given was owing to a serious deterioration in the financial position of the Bank, further under Section 45 of the Banking Regulation Act, 1949, the RBI had imposed a moratorium which limited the rights of the creditors/ bank holders.

Rescue By Reserve Bank of India

The moratorium which was imposed on 05.03.2020 had limited the withdrawal limit to Rs. 50,000/- and the IMPS and NEFT systems were shut down pursuant to the order. Amidst the above condition, RBI had on 06.03.2020 placed in the public domain a draft scheme of reconstruction of the Yes Bank Ltd. The Reserve Bank invited suggestions and comments from members of the public, including the banks' shareholders, depositors, and creditors on the draft scheme. The Yes Bank Ltd. was placed under an order of moratorium on March 5, 2020, which will be ffective up to April 3, 2020, however, due to the speedy acquisition process the moratorium was lifted on 18.03.2020.

Revival of Yes Bank Limited

State Bank of India (hereinafter referred to as SBI) had expressed its willingness to make an investment in Yes Bank Ltd. and participate in its reconstruction scheme. As per the reconstruction scheme, 49% of equity shake would have to be acquired to which the SBI had agreed for a consideration of Rs. 7,250 Cr.

The following entities have agreed to invest in YBL pursuant to the reconstruction/ bailout plan:

S. No	Entity	Investment
1	State Bank of India	49% of Equity Stake
2	Housing and Development Finance Corporation (HDFC)	1000 Cr.
3	Industrial Credit Investment Corporation of India Bank (ICICI)	1000 Cr.
4	Axis Bank Limited	600 Cr.
5	Kodak Mahindra Bank	500 Cr.
6	Bandhan Bank	300 Cr.
7	Federal Bank	300 Cr.
8	IDFC First Bank	250 Cr.
9	Life Insurance Corporation	135 Cr.

The above investors would be entitled to shares of Rs 2 each of Yes Bank Limited, for cash, at a premium of Rs 8 per equity share. As approved by the Union Cabinet and notified in gazette further, Disclosure under Regulation 30 and 51 of SEBI (LODR) Regulations, 2015 by YBL. The following is called YES Bank Limited Reconstruction Scheme, 2020.

Key Provisions of The Yes Bank Limited Reconstruction Scheme, 2020 And Their Implications:

1. There shall be a lock-in period of three years of this Scheme to the extent of seventy-five per cent. in respect of:
   (a) shares held by existing shareholders on the date of such commencement;
   (b) shares allotted to the investors under this Scheme.
   However, Retail Investors holding less than 100 shares have been exempted from this provision. This step was much needed as it would prohibit market manipulation practices which YBL shares have been prone to in recent times.
    
2. Mandatory Lock-in period for 26% stake infused by SBI by the RBI, therefore giving market stability to the Bank and preventing it for any adverse action under the SEBI (Substantial Acquisition Takeover Code) Regulations, 2011 by fixing the threshold to lock-in, therefore exempted SBI from the above rule.
    
3. The authorized capital of the lender has been increased to Rs 6,200 Cr. from Rs 1,100 Cr., that the scheme had been approved with the objective of protecting the interest of depositors and providing stability to YBL as well as to the entire financial system.
    
4. All the employees of the Reconstructed bank (YBL) shall continue in its service with the same remuneration and on the same terms and conditions of service (T&C), including terms of determination of service and retirement, as were applicable to such employees immediately before the Appointed date, at least for a period of one year.
   

These provisions were in consequence with the plan which RBI had proposed and successfully executed. However, since a consortium of private lenders has helped YBL to resurface, the implication of it would be volatile in the near future.

Implication of This Reconstruction

This reconstruction again has been a tactic by the RBI to conceal its own wrong, since it had never raised any red flag when the bank led by the former Managing Director and CEO Mr. Rana Kapoor was aggressively giving loans to entities with minimal creditworthiness. Further, till 2018 there was rampant market manipulation whereby high volumes of the shares were traded to keep the prices up float since the fundamental and technical analysis of the company was always weak.

The fate of retail investors who have invested in the shares of YBL would also be recommended to pull out their investments since RBI’s three-year lock-in period is a gimmick once the period is over the FII would start pulling out their money and again the retail investors would suffer. Therefore once the bank commences stable operations and is up float the retail investors should exit.

Indian Economy which is undoubtedly going through a slow down and a phase in which retail investors are demotivated to invest in equity and liquidity funds due to the constant increase in Volatile Index (VIX) which the Reserve Bank of India, Government of India have utterly failed to control.

Further, since the government in adherence to the Basel-III Norms has written off more than 8,000 crore worth Tier-I Bonds, the consequence of this sovereign action will affect the confidence in the domestic bond market.

Written By: Aadarsh Kothari