On 13th February, I
wrote of a possible public-private solution to the Yes Bank crisis that had been proposed by one of the most respected names in the Indian financial sector to the Reserve Bank of India (RBI) governor. On 5th March, Yes Bank was placed under a moratorium announced by the central bank and, the very next day, a ‘reconstruction scheme’ was announced that seems headed exactly on the lines of the proposal made by this individual to RBI. The final scheme for Yes Bank may be announced in the next couple of days. Its soaring stock price indicates that the market expects the reconstruction effort to work.
The solution proposed was for State Bank of India (SBI) to lead a rescue with private bankers including ICICI Bank, HDFC Bank, Kotak Bank and others chipping in equity, agreeing to commit funds for at least two years and getting a seat on the board. If they are able to pull it off, we will have a unique new model of resolution.
The Best of the Three
There were three options before the government. One, a merger with SBI/ nationalisation, which a chorus of voices is still pushing for. This has been the preferred option in the past and ensures that private players and failed regulators are protected, while people of India pay for the loot via the exchequer. Fortunately, the government had emphatically ruled out this possibility.
Second, what the government would have preferred—borrowing dubious wisdom from abroad—is a financial resolution plan that pushes the burden on to the Bank’s depositors in the form of a ‘bail-in’ provision, where deposits above a certain threshold are converted into equity and used to re-capitalise the Bank. This was proposed in the
dreaded Financial Resolution and Deposit Insurance Bill, 2017 (withdrawn from the Lok Sabha in 2018), and the still
‘secret’ Financial Sector Development and Regulation (Resolution) Bill, 2019 (FSDR). Had the Bill been passed, it would have led to serious panic. We are fortunate that FRDS 2019 remains a ‘secret’ and has not been introduced in the Parliament, yet.
A third possibility agitating bankers was that the government might not do anything and allow Yes Bank to fail. In that scenario, private banks and finance companies would have had to bear the brunt as deposits fly to public sector entities which continue to have an implicit sovereign guarantee. So private banks are only protecting their own interest by joining the rescue effort. Remember, their offer to chip-in came when Yes Bank ran out of options and failed to find acceptable investors willing to invest at anywhere near the ruling market price. In fact, none of the investors was willing to pay more than Rs13 to Rs15 a share.
The financial sector was fully aware that Yes Bank desperately needed a fat infusion of funds to remain afloat. The Bank was lobbying with the Securities and Exchange Board of India (SEBI) for exemption from an open offer and special dispensation to bring in funds, without declaring its precarious financial position or the need for a bailout. SEBI, correctly, refused to consider a waiver, unless it was a bailout situation.
Significantly, even the public-private rescue proposed to the RBI governor was at Rs10 a share. And that is exactly what the ‘reconstruction’ scheme published by RBI on 6th March has proposed. But none of this would have been possible without declaring a moratorium and invoking RBI’s wide-ranging powers under Section 45 of the Banking Regulation Act, 1949.
It was a catch-22 situation. Had Yes Bank announced disastrous results with no rescue plan in sight, there would have been a massive run on deposits and triggered a financial contagion that would have been hard to contain. The government has done well to prevent it by announcing a moratorium and a simultaneous ‘reconstruction’ plan, with the promise of quick execution under the leadership of SBI. By seeking feedback from stakeholders, it has also left room to tweak the final plan which will hopefully prevent delays due to litigation.
Why the Write Down of AT-1 Bonds?
The most contentious issue in the proposed reconstruction is the decision to write down the additional tier-1 (AT-1) bonds to zero, while equity infusion, which is essentially risk capital, will be at a premium of Rs8 per share (face value Rs2). The reason for this is still unclear, except that private equity players were willing to offer Rs13-Rs15 per share.
The shocked outrage on social media revealed that even bankers and financial experts were unaware that AT-1 bonds were riskier than equity because of coupon discretion and loss absorption clauses (see thread
https://tinyurl.com/rwpkpch).
RBI’s decision will certainly impact the issuance of AT-1 bonds, as an instrument to meet capital adequacy requirements. According to
The Economic Times, Axis Trustee Services, which has moved court against the reconstruction scheme, has proposed a settlement on behalf of AT-1 bondholders. It has sought the conversion of Rs8,500 crore AT-1 bonds into Rs1,700 crore equity shares of Yes Bank entailing a haircut of around 80%. Hopefully, the government will see the good sense in accepting this, rather than risk delaying the reconstruction due to prolonged litigation.
Investors who stand to lose are not merely institutional investors and mutual funds, but depositors of Yes Bank who had been actively lured by the Bank’s relationship managers to converting their fixed deposits (FDs) into bonds on the promise of safer investment at a coupon rate of 9% locked in for five years.
The Bank had claimed that AT-1 bonds had become available for investment because one of the original investors had agreed to a secondary market sale. Ironically, it is the FDs that will be protected under the reconstruction scheme.
Regulatory Indifference to MIS-selling
The two financial regulators—RBI and SEBI—have remained oblivious to rampant mis-selling of financial products by banks and face no responsibility for the losses suffered by ordinary people. Their failure is especially egregious here, because Yes Bank was already making headlines for hiding bad loans in October 2017 (that is when the Bank reported a divergence or under-reporting in gross bad loans of Rs6,355 crore for FY16-17). Yet, RBI was silent when the Bank mis-soldAT-1 bonds in December 2017, as a secondary sale.
The capital market regulator was, similarly, sanguine. It allowed Yes Bank to set up an asset management company (AMC) in 2017 and permitted the launch of its first scheme in May 2019 (Yes Ultra Short Term Fund), followed by two more in August 2019 (Yes Overnight Fund) and January 2020 (Yes Liquid Fund). Fortunately, it had less than Rs400 crore in these schemes at the end of December 2019. But what does it say about SEBI’s market intelligence, or its ability to decide who is fit and proper to handle investors’ money?
Unless Indian courts punish regulatory failure and ask them to compensate investors, this saga of failed supervision will continue wreak havoc on savings; but that seems nowhere in sight.
Yes Bank’s discredited founder, Rana Kapoor, probably dazzled regulators by ‘bagging’ dozens or corporate awards and sponsoring every business summit – something that continued even as the Bank crumbled. The failed Satyam Computers did exactly the same; but regulators don't learn any lessons from the past!
In what is clearly a move to assuage public anger after the moratorium imposed on Yes Bank, government investigation agencies snapped into action and arrested Rana Kapoor under the Prevention of Money Laundering Act (PMLA). It is notable how they did nothing for well over a year, when his dubious banking deals, quid-pro-quo lending and pledge of shares were already in the public domain.
Yes Bank’s bad loans exceed Rs34,000 crore, over half of which are to two powerful groups. But BJP leaders were emboldened to tweet only after the moratorium. Even today, while the enforcement directorate is digging up kickbacks to Rana Kapoor, there is no move to investigate diversion of loans by powerful cronies of this government.
The man himself had remained untouched for over a year and was furiously lobbying influential financial leaders until a day before his arrest. Will the Modi government listen to market feedback and fix regulatory accountability before we are faced with more financial disasters and lack of public trust?
1. The frauds/scams in Indian Banking Industry are enormous to gulp the entire
GOI’s mobilized funds OF US$.5 TRILLION/ENTIRE WORLD BANK FUNDS. Most of the scams are created at apex level PSBs/SBI/PRIVATE BANKS involving Banks-Boards, CMDs/CEOs/EDs & THE FUGITIVES + RULING POLITICIANS, involved in horse-trading.
2. REMEDY: REVAMP PSB BOARDS WITH HONEST NON-POLITICAL VISIONARIES.
3. A Piquant situation develops, if any SBI/PSB CMD/CEO/ED refuses to oblige the looting masters, namely, ruling party politicians/RBI + GOI nominees in Bank board/the fugitives with political clout.
4. If he/she obliges and shares the booty; it is fine until the bank fails with insurmountable NPAs. Once caught red-handed, only the CMD/CEO/ED is arrested & prosecuted and the rest of looters/scamsters are left scot-free.
5. Any remedy from the Karma Yogi PM/BJP/RSS cadres? Lest the PM’s dream shall be a pipe dream.
6. https://www.youtube.com/watch?v=4Si8U02s8cQ.
7. SATYAMAEVA JAYATHE!!!
We do have the financial know-how untainted by political links to begin making the reforms that are needed. Mr Vijay Kelkar's recent book gives a fairly good picture of where India is in terms of regulation and where it needs to be.
What is the govt waiting for? After all the hullabaloo about corruption under the previous govt, what is this govt doing, if not more of the same?
In India nobody knows how Indian companies are doing fraud from the beginning to last ,for example a big business men will start the company in India as below .His companies actual value is Rs2000crores but with the help of the auditors,Banks,and chartered accountants he made his company s values to RS 6000 crores by book adjustment with bribe and he call IPO that is in share market and collect Rs10000 crores in share market, first he pumped 60%of money to foreign country in the name of business and will deposit most of the money in his name next he will file bankruptcy due to losses and will write off all the loans this is the business doing in India ED is doing drama ICICI Bank chandakochar is well known to all she done huge fraud in ICICI Bank, this drama of enquire is doing from past one year, but still she is not arrested, reasons In this icici bank scam all SEBI auditors ED RBI central government rating agencies big leaders of all parties involved.central government making all efforts to avoid arrest these fellows,if arrested all all foreign country become knows most of the Indian companies running on bogus and take away all foreign investment,then India become bankruptcy.This is well known by central government hence avoiding all efforts to arrest directors of icici bank chandakochar DHFL jetairways Videocon kingfisher airline PNB bank head [email protected] etc .even Vijaymalya kingfisher airline companies don't have single plane in his companies name but all banks gave Rs10000 crores money, same type loans gave to jet airways,DLF, Devan housing finance company,[email protected],fs,etc wait in few months most of the common people investment in icici bank NBFC PSU banks equity NCD mutul funds become Zero,All parties RBI officers, SEBI, etc are corrupt they are taking India towards bankruptcy
Our Executive, Parliament, Judiciary & the Press are too busy to address the important issues raised by you, Nagarajuji!!!
RBI Governor should also be dragged to Court for proposing such atrocious proposals and the whole process should be stayed. Let the Bank go down along with their peers like HDFC Bank, Kotak and ICICI Bank. Public should shift their deposits from these Banks to PSBs immediately.