It appears that Mr Kapoor has raised as much as Rs1,160 crore against his Yes Bank shares through the holding company structure Morgan Credits P Ltd which owns 3.04% of Yes Bank. It is not clear what Mr Kapoor has done or intends to do with the money. The lending was done by a bunch of hybrid and debt schemes of Reliance Mutual Fund by subscribing to the non-convertible debentures (NCDs) of Morgan Credits in two tranches of Rs950 crore and Rs210 crore. The debentures were rated A- with a stable outlook by CARE Ratings.
The Securities and Exchange Board of India (SEBI) will have to investigate whether there was any lending to the Anil Ambani group against this investment, as a quid-pro-quo deal. Market experts say there was, indeed, such a deal; but only the regulator can get at the truth. When contacted Yes Bank for their comments, the bank asserted that "The information is incorrect and totally unfounded."
Separately, Franklin India has subscribed to Rs630 crore of zero-coupon NCD of Yes Capital P Ltd which holds 3.27% stake Yes Bank. How has Mr Kapoor used the brand name “Yes” for a personal investment vehicle when he is a minority shareholder of Yes Bank is another, separate issue.
While offering a A- rating, CARE said that it primarily factored in the “financial flexibility of Morgan Credits Pvt. Ltd. (MCPL) owing to its investment in shares of Yes Bank Limited (YBL) that have a significantly higher market value as compared to book value…Furthermore, the rating considers that there will be no encumbrance on YBL shares held by MCPL and the total borrowings of MCPL will not exceed Rs1160 crore (excluding accrued interest)."
Mr Kapoor apparently has committed that at all times he will maintain a margin of 50%. The accrued interest at the end of each year will be added to total borrowing to arrive at margin requirement since it is a zero-coupon NCD. Morgan is a pure investment company. Its main income is dividends from Yes Bank. If the shares fall in value and margin goes below 50%, Morgan Credits will transfer or purchase of additional Yes Bank shares to the extent of the shortfall. CARE silent on the capital structure or leverage of the borrowing company. According to market sources, the NCD structure is an innovative means to circumvent a formal pledge. The questions that arise are:
1. Did the Reserve Bank of India (RBI) know about this transaction when it refused to give Mr Kapoor another term? If yes, then hasn’t RBI been shockingly lenient to Mr Kapoor? Market experts believe that this transaction and the use of the Yes brand for a private company of Mr Kapoor is a fraud on shareholders. Can the supervisory action for this be to merely end Mr Kapoor’s term? In the light of new findings, the RBI should be forced to disclose the basis on which it decided not to extend Mr Kapoor’s term. People have a right to know whether its apparently punitive action was commensurate with the wrongdoing.
2. There has been an
exodus of independent directors and others from the Yes Bank board in the recent past. One would presume that they rushed for the exit after discovering Mr Kapoor’s personal deals and gross misuse of his position. Will SEBI and the ministry of corporate affairs question the independent directors and demand answers from them? Otherwise, the entire corporate governance code with its huge red-tape is a meaningless exercise that does nothing to protect investors.
3. It also raises serious questions about credit rating agencies. The Economic Times has reported today that SEBI wants mutual funds to ask searching questions. This again is meaningless band-aid in the light of the Infrastructure Leasing and Financial Services (IL&FS) scandal and the Yes Bank findings. SEBI needs to act now, to cut the cosy dealings between rating agencies and corporate houses.
4. Given the revelations in Bloomberg, can Mr Kapoor be allowed to have any say in choosing his successor?
5. Finally, ordinary people invest in shares and mutual funds based on the assumption that all the data available in the public domain (such as audited accounts, credit ratings) are accurate and that RBI, SEBI, the ministry of corporate affairs and the Department of Financial Supervision are doing their job of protecting investors and depositors. If none of the checks and balances work, it means people are forced to take a blind bet with their hard-earned, tax-paid money. For a majority of the people of India (who are not government employees), this money is expected to see them through their retirement to the end of their lives.
6. What should people do when the regulators fail to do their job or are seen protecting fraudulent actions by failing to put out information in the public domain or initiating stringent action against wrongdoers?
The government is in a mood to quietly bail out everyone and maintain the upward momentum till everything falls badly including the government.
Good money will be lost for ever.
Million rupee question is, wiil SEBI care to go beyond the facade and bring out the truth so that the guilty can be brought to book.
w/o delay.
Indian MF managers draw fat packages and cause highest expense ratios in the world. Worldwide, GPs incur unlimited liability. But our soft regulators have ensured very high gain and no risk for MF managers. SEBI must act.