Yes Bank: Smart Rescue Plan but What about Regulatory Accountability?
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 This was proposed in the dreaded Financial Resolution and Deposit Insurance Bill, 2017 (withdrawn from the Lok Sabha in 2018), and the still ‘secret’ Financial Sector Development and Regulation (Resolution) Bill, 2019 (FSDR).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
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?



2 years ago
Bolo Yes Money plant privately shared Public lies Withered AT 1 Anytime 1? Mahesh Kirticorp
Aniruddh Gupta
2 years ago
Good article. It is indeed very important to now start questioning the regulator, not just for Yes bank but also for the lakhs of crores written down by PSU banks and question them why so many banks are under PCA if the regulator was awake all these years. Someone must lose his pension and government provided house at the minimum if not go to jail. Having said that, there are several good things happening in this credit cycle unlike the past which is heartening. Promoters are losing their companies and a few are even going to jail, few bank chiefs are also going to jail while many of them have lost their jobs (including almost half of all private bank chiefs). Now bank sub-debt is taking a hit, which will at least bring discipline in the institutional side of careful investing. Retail investors in FDs and savings account must be protected, but equity and sub-debt holders must take a loss, which has happened finally. Way to go. Indeed, some corrective measures are required at SEBI to ensure such instruments are not allowed to be sold to retail investors and minimum face value of one bond must be made 1 crore or at least 25 lacs to keep them out. This was a great way of saving the bank and capitalizing it. Nearly wiping out current equity and locking them in even for the balance 3-10% value left, bringing in new equity cheap from reputed investors to bring back confidence and leave them upside and get in additional equity by writing off sub-debt... excellent structure with no nationalization of private losses. Similar innovation is needed for public sector banks instead of feeding them endless doses of public money. Lastly, do hope to see some of the past RBI governors and deputy governors behind bars and under enquiry.
2 years ago
Yes Bank's loan book grew to Rs 2,50,000 crore from Rs 55,000 crore. The loan book actually almost doubled between FY17 and FY19. If this has happened despite of proper monitoring being in place since last two years - then is this really a "proper monitoring" ?? This can also mean that our FM was not briefed of correct situation till this time and then suddenly when on a good day when deposits by TTDS trust and other such smart ones were pulled out.. the so called foolish regulator felt like briefing "properly" to FM !! FM should make a note of such bull headed regulators and frame a law of lifetime imprisonment for such devils who in bright sun allow to eat away hard earned money of investors. A small thief is beaten up by a crowd for stealing just hundreds.. but the big devils get spared which shows the tolerance of govt. and the public.. but this is not the correct way it should be. Very good article by moneylife - very timely pointed out that Regulators CANNOT run away from their responsibilities and SHOULD NOT be spared if they fail to do so.
2 years ago
Sucheta Dalal of the money life had been instrumental in exposing several financial irregularities, regulatory failures right since the time Harshad Mehta scam in 1992.RBI and SEBI might have learnt a few fundamentals from her writings revealing stark realities with her strong conviction and pungent pen. RBI or SEBI have not till date made best use of sucheta's talent , her vast knowledge and mastery over banking, finance and related matters. RBI may consider to avail of her services by recommending her to the board of directors of RBI or by appointing her to the post of executive director in the Bank or appointing her as an advisor.
2 years ago

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.
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.
2 years ago
Namo govt pretended until recently everything was okay.How can such a big scam be without their involvement?All experts have been talking about Yes Bank scandal since last 18 months.
2 years ago
Hopefully the Court would act this time. I have been joining the chorus with you that mis-selling is the bane of Indian banking and the powers who have gained after introduction of universal banking and are in prime positions in the industry and outside would do all they can to prevent it. If banking has to be reformed, it should start here: let banks get back to banking; give up the western model of banking because we do not have the muscle to close down the rogue banks - whether private or public in the name of protecting large small investors and hapless depositors. The cry is louder now than ever that the section 35 and 45 of the RBI Act that empowers the regulator for timely action have been used only posthumously. We introspect and do nothing to avoid similar prospect. Not merely time for the Court to act timely, but also for the Government to bring about reforms - whether you call it second or third generation - to ensure that the clients of banks, depositors and borrowers get their due and respectable attention. I was just reading the World Blog - Behind every loan approval, there stands a great information about a client - and every second and subsequent lenders get the benefits. This is what happened: PSBs that made the first loans enabled the private banks to milk the data and leave the former even without water. The blame rests more with the former than the latter. Time to learn lessons and move on the path of prosperity and not get into penury.
2 years ago
This is not the time to point out fingers and time for rescuing and creating confidence. if the amount is not much, in fact, those who lecture should also purchase shares of YES bank thinking that it is a donation for some good purpose. Past is Past, time to show as to how one can better the position. The issue is subtle and many might have been aware of the bank's bad position, RBI after taking corrective steps on experimental basis announced moratorium. A very bold decision. Hope the chances will be better.
Meenal Mamdani
2 years ago
As you said in an earlier article, Indian regulators should not become complacent again after the immediate crisis is over.
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?
2 years ago
I will ask both both parties please reply ,how much money recovered till today by selling assets of fraud persons who taken huge fraud loans,how much money returned to the bankrupted bank account holders , don't do drama,my friend lost several lakhs from Alpic finance a NBFC in twenty five years back, but till today he have not received single paise , this Alpic finance company is a subsidiary of Cipla group, this NBFC done huge fraud,but till today no action taken, these companies go to court and take stay order for the sale of theirs assets, Court will drag the case to twenty to thirty years at that time all investers will die, these fraudessters enjoy our loot money with political leaders, these are all drama nothing will happen only poor will die , why not Auditors arrested who have been submitting manuplated Audit reports by fabricating balance sheets. Even concerned officials from RBI are also equally liable for this situation. We need to initiate proper legal steps to compel RBI to immediately resume normal operations of Bank.In past history no business man who had taken huge fraud loans are not punished by court,ask these RBI give the list of who had punishment for such crime in India, nothing only poor people are finished from these fruduster, former finance minister chidambaram who had made banks to give loans by phone calls is getting bail after bail from all courts ,his son has thousand crores money in foreign country, these money has gave by Vijay malya like business men for getting fraud loans,no hope for our India , UPA gave 70%fraud loans , NDA has gave 30%fraud loans,one is 840and another is420, this is only difference, both parties taking India to bankruptcy,no hope for common people
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
Replied to nagaraju2691 comment 2 years ago

Our Executive, Parliament, Judiciary & the Press are too busy to address the important issues raised by you, Nagarajuji!!!
2 years ago
95%of Indian companies doing fraud by taking huge fraud loans, most of the loans money pumped out of India,in this scam all parties leaders involved in this, ICICI Bank CEO ,chandkocher,sheekasharma etc done fraud but till today they are not arrested and enjoying the looted money,till today no court gave punishment,courts giving bail after bail,in few years India become bankruptcy
Replied to nagaraju2691 comment 2 years ago
No space available to accommodate the fraudsters.
2 years ago
Investors too should take serious criminal action against such misselling, malpractices. File criminal complaints against respective Relationship Managers who missold AT1 Bonds.
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.
Replied to Nahom comment 2 years ago
With out capital infusion govt has put in all PSB's they are in same boat or worse to YES. Nothing seems to work in this country, everything is a sham. We can't trust myths about sovereign protection but the fact is even PSB depositor's are only insured for 5L cap by DICGC.
Replied to Nahom comment 2 years ago
With out capital infusion govt has put in all PSB's they are in same boat or worse to YES. Nothing seems to work in this country, everything is a sham. We can't trust myths about sovereign protection but the fact is even PSB depositor's are only insured for 5L cap by DICGC.
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