Yes Bank: Missing Pieces Of The Puzzle

State Bank of India’s rescue of Yes Bank starts with a Rs 2,450 crore investment – a measly amount in the face of a capital hole estimated by analysts to be upwards of Rs 20,000 crore.

Many have asked – if the resuscitation of Yes Bank involved mere mouth-to-mouth, then why the blazing siren of a moratorium?

1. Why freeze the bank’s activities?
2. Put depositors to such inconvenience?
3. Create so much panic across the financial system? Allow such volatility to rock the stock further?

Couldn’t SBI have pooled it’s Rs 2,500-crore kitty with other prospective investors that the bank has been courting these past few months? After all, investment by a sovereign bank was one big reassurance they wanted, right? They could have all participated in a fundraise together.

Well, the moratorium siren helps in two ways, I expect.

The first, most important and obvious benefit is that, by freezing the bank’s activities, it brings the deposit traffic to a standstill. That was headed one way – out. The RBI said so itself. That needed to stop so that Yes Bank’s financials didn’t weaken beyond repair.

Second, the moratorium siren also allows SBI's emergency assistance to sidestep all traffic rules and get to its destination faster.

The moratorium has been imposed under Section 45 of the Banking Regulation Act. This gives the RBI wide powers to intervene in such a situation. And under such powers, the reconstruction scheme overrides all laws.

“The provisions of the Scheme shall have effect notwithstanding anything to the contrary contained in any other law or regulations or directions or agreement, award or other instrument for the time being in force.”

Yes Banks’ Scheme Of Reconstruction

What that means is no hurdles on account of SEBI pricing regulations or takeover regulations or insider trading regulations.

Pricing regulations use the listed company’s historical stock price to determine a floor price for further equity issuance. This was one big problem that prospective investors faced when Yes Bank was trying to raise funds on its own. The precipitous decline in the bank’s stock meant investors would have to pay a price higher than current market price. Also, since the third-quarter earnings due on March 14 were expected to reveal further nasty surprises on the asset and liability fronts, the stock price was expected to slide lower. No investor wanted to invest unless they could do so at a substantial discount to the prevailing stock price. That would need an exemption from SEBI, which apparently was not forthcoming. For a variety of reasons.

Do remember, in the midst of Yes Bank’s fundraising, the SEBI chairman’s tenure was nearing its end. He got a six-month extension at the eleventh hour. Chairmen in a lame-duck period don’t like to take controversial decisions, is my guess.
Especially in the case of a bank tainted by stories of past mismanagement, shoddy lending, etc. Also, exemptions set poor precedents. (Though there was SpiceJet.)

Now, SBI has no pricing threshold to deal with. It’s buying Yes Bank shares at Rs 10 each (Face Value Rs 2, Premium Rs 8), much lower than would have been the case if SEBI pricing rules had prevailed. Lower than the market price before the moratorium was imposed.

The change in control, which would ordinarily trigger an open offer under SEBI Takeover Regulations, is also covered by the scheme. So no open offer to public shareholders required.

It also lifts any constraints on due diligence by a prospective investor - which in the case of a listed company is mostly limited to published information.

The scheme comes into effect as soon as it’s notified by the central government. No shareholder approvals required either.

Without this protection, SBI would not have been able to acquire up to 49 percent. Not at this price. Not at this speed.

The path has also been cleared of any other laws or regulations that could have come in the way – approval from the Competition Commission of India, etc.

Also, an ordinary fundraise would not have allowed for a complete overhauling of the bank’s board and management. The broad perception is that the bank’s toxic assets are not limited to loans.

The scheme allows for the unprecedented write-down of AT1 capital, hence reducing losses by a corresponding Rs 8,000 crore. Yes Bank’s balance sheet will benefit. Though the capital will be far short of regulatory requirements.

Missing Pieces

SBI will invest Rs 2,450 crore now, and does not expect its total exposure to exceed Rs 10,000 crore. It is likely staggering the amount over financial years. Rs 2,450 crore in FY20 and more next financial year and after.

For the rescue to succeed, it needs to bring in more investors as soon as possible. SBI Chairman Rajnish Kumar said in a press meet on Saturday that “potential investors have approached us”.

But, there’s one problem. There’s no place for them in the draft scheme.

Yes, while it substantially expands the authorised share capital of Yes Bank, making clear that more investors will be inducted, there is no mention of them in the scheme.

It mentions just one investor: SBI. There is also no mention of making the Rs 10-per-share price available to other investors, now or at a future date.

So, unless the scheme is modified to include other investors, it’s not clear:

• when they’ll come on board?
• at the time what price they may have to pay sans the scheme’s sweeping protection?
• whether chances of regulatory exemptions will be higher then, as Yes Bank will be a subsidiary of a government-owned bank?
• how all this will impact further fundraising?

Without the same regulatory relaxations as SBI is being given, others will be reluctant to invest.

Maybe SBI will suggest modifications to the scheme, or the RBI will propose a second scheme to accommodate other investors while the month-long moratorium is on. We are in uncharted territory here as all such previous rescue efforts have been mergers.

But time is short. As is evident in the three short days the RBI has allowed for public comments on the scheme.

Given the severe difficulties faced by Yes Bank’s retail and commercial clients, the longer the moratorium lasts the less effective this emergency assistance will be.

Menaka Doshi is Managing Editor at BloombergQuint.