Regulators’ Accountability under Test as Mutual Funds Use Public Money to Privately Fund Yes Bank’s Rana Kapoor
In a scandalous case of using public money to fund private deals, mutual fund schemes of Reliance Mutual Fund, controlled by Anil Ambani, and Franklin Templeton, have lent money to the front companies of one of the founders of Yes Bank, Rana Kapoor, against his shareholding in Yes Bank, wrote Andy Mukherjee in a piece in Bloomberg https://www.bloomberg.com/opinion/articles/2018-11-25/lessons-from-il-fs-group-bankruptcy-go-unheeded-in-india
 
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?
 
 
 
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COMMENTS

Aditya Singhal

2 weeks ago

History repeats. Unfortunately these things will keep happening as there is no fear of law.

RUSHIKESH YOGENDRA DHEBAR

3 weeks ago

Madam not understand your wording used in brackets"WHO ARE NOT GOVERNMENT EMPLOYEES". PLEASE EXPLAIN HIDDEN MEANING.

Ramesh Poapt

3 weeks ago

Superb!

ramchandran vishwanathan

3 weeks ago

Really sad how all institutions have no accountability , there is no point having regulators who just dont do their jobs

Dr. Rakesh Goyal

3 weeks ago

Loot as much one can.

Dr Ashok Bhatkhande

3 weeks ago

Excellent article.
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.

shivkumar

3 weeks ago

Once again Sucheta has done a terrific job by bringing forth one more expose.
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.

MS Lopa Mavani

3 weeks ago

Thank you Suchetaji for giving this inside information as I have high amount of Fixed Deposits in YES bank for my retirement income.Please keep us posted with new developments at Yes Bank.

Suketu Shah

3 weeks ago

Thanks for the informative article otherwise we would never know such corporate conspiracies.Would you suggest long term investors to stay with Yes Bank or quit on rise?

REPLY

shashi kiran

In Reply to Suketu Shah 3 weeks ago

No upward movement, till the price closes above 295 conclusively on monthly close basis .

Krishnan Hariharan

3 weeks ago

Look another major scam brewing at Yes Bank with the connivance of Regulators. It gives rise to suspicion that no government machinery has learnt any lesson from crisis ridden IL&FS a d similar scams of the recent past. God save this great nation!

Rajendra Ganatra

3 weeks ago

Shocking failure of the regulators and credit rating agency. MF's due diligence and compliances are very questionable and are a matter of serious concern. SEBI & RBI must act
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.

Shankar Pachari

3 weeks ago

Excellent article. If the promoter holding is very low (20%), who exactly calls the shots at YES bank? How did they let this lapse happen?

Mihir A. Kulkarni

3 weeks ago

Say NO to Yes!

Why did R Chandrashekhar and 2 other directors leave the Yes Bank Board?
Rentala Chandrashekhar, who was appointed as independent director just seven months ago, is the third director to have resigned from the board of Yes Bank in the past few weeks. While the Bank, in its revised regulatory filing, has not given any reason for the resignation, according to media reports, Mr Chandrashekhar was concerned and dismayed at the manner in which recent developments, especially on corporate governance,  were dealt with by the lender. 
 
Last week, Ashok Chawla, who was non-executive chairman of Yes Bank, resigned, saying he would not be able to devote adequate time to the Bank in the run up to appointing a new CEO. At that time, it was speculated that his exit was triggered by his name being mentioned in the charge sheet filed by Central Bureau of Investigation (CBI) in the Aircel-Maxis case.’
 
Earlier Rana Kapoor, managing director (MD) and chief executive (CEO) of Yes Bank was denied an extension by the Reserve Bank of India. The central bank had asked the lender to find a replacement to Mr Kapoor by 31 January 2019. 
 
According to reports, the RBI has found corporate governance issues and under-reporting of non-performing assets, which has led to a series of negative developments in the private sector lender's functioning in the recent past.
 
Vasant Gujarathi, another independent director, has also resigned from Yes Bank board. 
 
Later OP Bhatt, former chairman of State Bank of India (SBI) and a member of Yes Bank's committee to find a successor to Mr Kapoor, also resigned. 
 
The spate of resignations without a clear reasons for their exit, once again raises questions about the futility of the elaborate good governance rules and their many check-box declarations and evaluations.
 
When a situation as grave as the one at Yes Bank why is it met by complete silence from the market regulator, Securities & Exchange Board of India (SEBI) and the Ministry of Corporate Affairs. The rationale for high sitting fees and commissions offered to independent directors is linked to the expectation that they will ensure a strict oversight on management. The new rules also require independent director to give proper reasons for resigning from the board. But this is not happening.  The reasons cited are paucity of time or health reasons.
 
A report from LiveMint says, "Chandrasekhar, who joined the bank as an independent director in April, 2018, while tendering his resignation letter on Monday, indicated that he was not expecting such instability due to the series of resignations from the bank recently."
 
Quoting from this resignation letter, the report says, “I have been deeply concerned about recent developments at Yes Bank and dismayed at the manner in which they have been dealt with. It is even more distressing that all this should have occurred during a critical transition period when tact, wisdom and purposeful, well-considered actions were called for.”
 
Mr Chandrashekhar, the former chairman of Nasscom, was also telecom secretary. He had also quit from the information technology strategic committee of Yes Bank. 
 
YES Bank's nomination and remuneration committee is reviewing the performance of the board members. The Committee is also looking for a replacement from IT and cyber security for Mr Chandrashekhar.
  
The bank currently has seven board members – Mr Kapoor, Lt General Mukesh Sabharwal, Brahm Dutt (former secretary), Subhash Kalia (former executive director of Union Bank and Vijaya Bank), Ajai Kumar (ex-CMD of Corporation Bank), Dr Pratima Sheorey (director of SCMHRD, Pune) and Uttam Prakash Agarwal (former president of ICAI).
 
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COMMENTS

Mahesh S Bhatt

3 weeks ago

We hate rules at Top Levels so this one is different Enjoy the indifference as it used to be Yes bole toh Yes Boss Mahesh Bhatt

50% of existing ATMs may down shutters by March 2019 Due to Unviability of Operations: CATMi
Service providers may be forced to close down almost 1.13 lakh ATMs across the country by March 2019, due to unviability of operations, warns, Confederation of ATM Industry (CATMi), the apex body of the domestic ATM industry. These numbers include about one lakh off-site ATMs and a little over 15,000 white label ATMs. Currently, the country has around 2,38,000 installed ATMs, as per the latest publicly available figures. 
 
CATMi said the forced closure is due to unviability of operations brought about by recent regulatory guidelines for ATMs hardware and software upgrades, recent mandates on cash management standards and the cassette swap method of loading cash. CATMi estimates an additional outlay of about Rs3,500 crore – only for complying with the new cash logistics and cassette swap method.
 
CATMi said that its members, which include the ATM managed service providers (MSPs), brown-label ATM deployers (BLAs) and White Label ATM Operators (WLAOs), are already reeling under the financial impact caused by huge losses during and post-demonetisation as cash supply was impacted and remained inconsistent for months. 
 
“The situation has further deteriorated now due to the additional compliance requirements that call for a huge cost outlay. The service providers do not have the financial means to meet such massive costs and may be forced to shut down these ATMs, unless banks step in to bear the load of the additional cost of compliances,” it added.
 
According to CATMi, revenues from providing ATMs as a service are not growing at all due to very low ATM interchange and ever-increasing costs. It says, “These requirements were never anticipated by the industry participants at the time of signing contracts with the banks. Many of these agreements were inked four to five years ago when no such requirements were in sight.”
 
These compliance costs may also see the 15,000-plus white label ATMs going out of business, the apex body of ATM operators says, adding WLA operators already have huge accumulated losses and are in no position to bear additional costs. ATM interchange, the only source of revenue for WLAOs, has remained static despite frantic pleas to increase the rates, it says.
 
CATMi, says, “The ATM industry in India has reached a tipping point, and unless ATM deployers are compensated by banks for making these investments, there is likely to be a scenario where contracts are surrendered, leading to large scale closure of ATMs.”
 
“A large number of ATMs in non-urban locations may be shut down due to unviability of operations. If this happens, the financial inclusion programme would be severely impacted as millions of beneficiaries under the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, who withdraw subsidies in form of cash through ATMs, may find their neighborhood ATM shut. This may result in long queues and chaos similar to what the country witnessed when ATMs were not dispensing cash, post demonetization,” it added.
 
Several hundred thousand jobs ride on this industry and as per CATMI estimates, the closure of ATMs may result in considerable job losses that would be detrimental to financial services in the economy as a whole.
 
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COMMENTS

Mahesh S Bhatt

3 weeks ago

Foolish Western Models of automations without Business and Without logic Let Sanity prevail Mahesh Bhatt

ramchandran vishwanathan

4 weeks ago

The Telecom industry is loosing jobs @ 3000 per month . Its high time our PM gets his act together & refurbish the finance ministry which is responsible for this mess

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