Rbichalksoutdraft rescue plan for YES A lender’s fall from diamonds to dust
SBI set to pick up a 49% stake in the lender, RBI to lend ₹10,000 crore immediately
nMUMBAI: The Reserve Bank of India (RBI) on Friday announced a draft rescue plan for Yes Bank, saying State Bank of India (SBI) has expressed its willingness to invest in the troubled lender.
Such a move would end up making Yes Bank, placed under RBI control on Thursday, one of the subsidiaries of SBI, the country’s largest lender.
The move came as the newly appointed administrator of Yes Bank Prashant Kumar told depositors that their money is safe “and there is absolutely no reason to panic”. In tandem, finance minister Nirmala Sithamaram said the central government is “completely committed” to safeguarding depositors’ interest.
The draft policy architecture announced on Friday also requires other investors, in addition to SBI, to inject fresh capital.
Separately, RBI also decided to extend a loan of ₹10,000 crore as the lender of last resort (LOLR) to the bank against government securities, according to two people aware of the matter who spoke on condition of anonymity.
The 90-day loan will be offered at the current bank rate of 5.4%, plus 3% to meet the immediate liquidity needs of the bank.
Under the LOLR, RBI gives loans against eligible securities to financial institutions in emergencies.
The draft ‘reconstruction scheme’ said Yes Bank’s authorised capital will increase to ₹5,000 crore (from ₹600 crore currently) and the paid-up capital will be enhanced to ₹4,800 crore, comprising 24 billion shares of ₹2 face value. This will be effective from the day the government notifies the scheme in the Official Gazette. Currently, there are 2.55 billion fully paid-up shares issued, totalling ₹510 crore.
Under the scheme, SBI is likely to purchase a 49% stake in the bank’s expanded capital, or 11.76 billion shares. The reconstruction mandates that the acquisition price will be not less than ₹10 per share. Assuming SBI buys the shares at ₹10 apiece, it will have to shell out a minimum ₹11,760 crore for acquiring a 49% stake in the expanded capital. In addition, other private investors will have to be roped in for issuing the balance of 9.69 billion shares.
However, the final price to be paid by SBI and other new investors is yet to be decided. It is also not known if the pricing will be subject to Securities and Exchange Board of India (Sebi) regulations or whether the reconstruction scheme will have superior status over it and other capital market regulations.
Existing shareholders own 2.55 million shares, and they will end up with a roughly 11% stake in the company. The balance 40% stake will presumably be held by other institutions and investors, who will need to infuse around ₹9,600 crore, assuming the acquisition price is ₹10 per share.
The scheme also overrides certain clauses of the articles of association which grants rights to promoter-shareholders to appoint directors and chief executives.
News reports on Thursday said five large private banks will participate in the recapitalization of Yes Bank. This could not be independently verified by Mint.
The scheme recommends reconstitution of Yes Bank’s board with a new chief executive officer and managing director.
While SBI will have two nominee directors on the board, RBI may appoint additional directors in exercise of powers conferred under Section 36 AB of the Banking Regulation Act 1949. The board members will be in office for a year until an alternative board is constituted by the bank under the memorandum and Article of Association.
According to the plan, all the employees of the reconstructed bank will continue with the same remuneration for at least a year. The offices and branches will also continue to function as before.
nMUMBAI: Till about 6pm on Thursday, Yes Bank Ltd did what many thought it could not: Avoid lending restrictions that the central bank typically imposes on capital-starved banks owing to deteriorating asset quality and capital buffers.
Known as prompt corrective action (PCA), such action entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary. For Yes Bank, however, it was a straight dive into an Rbi-imposed moratorium using its powers under Section 45 of the Banking Regulations Act and superseding the board on Thursday.
“While Yes Bank did not breach the thresholds, signs of stress were visible. As we understand, PCA norms are also preemptive so it could have been used earlier,” said an analyst, requesting anonymity, adding whether RBI did some internal assessment and found any disparity in Yes Bank’s numbers is anybody’s guess. “Therefore, if financials looked rosier than the actuals, a PCA could not have salvaged the bank like a moratorium would.”
At the end of September, Yes Bank’s tier 1 capital adequacy ratio stood at 11.5% against the regulatory requirement of 8.875%. Its common equity tier 1 capital ratio stood at 8.7%, marginally above the regulatory requirement of 7.375%. The bank was supposed to disclose its December quarter financials on or before March 14.
It has also emerged that on Wednesday evening Ravneet Gill, former CEO of Yes Bank, had taken foreign investor Tilden Park Capital Management LP to the RBI office to seek its approval for an investment in the bank, according to one person familiar with the matter.
“RBI asked the investor to bring in $500 million into an escrow account the next day before it gives a go-ahead for the investment. Even as Tilden Park did meet its commitment, RBI decided to go ahead and supersede the board, which caught Yes Bank’s senior management by surprise,” the person added.
An official at SBI said that talks on Yes Bank’s rescue plan were on for at least two months.
According to Ananth Narayan, professor, SP Jain Institute of Management and Research, and a former banker, the situation was likely dire in Yes Bank’s case. “There is a possibility that with proper asset quality recognition and provisioning, the true net worth of the bank would have breached minimum regulatory thresholds by some distance. With no investors bringing in fresh money despite all the efforts, there was little to shore up the capital.”
Narayan said this could have triggered ratings downgrades, breached bond covenants and potentially led to a run on the bank’s deposits. Given this, RBI probably had no choice but to recommend a moratorium on the bank, as a last choice, he added.
Meanwhile, a banker aware of the negotiations said that foreign investors who were exploring investments into Yes Bank earlier, needed more time as the sixweek time frame by RBI was not enough, considering the complexity of the situation.
“They also needed some dispensation from Sebi, either on the pricing or in the form of some relaxation in Sebi’s takeover code. There were potential worries on the taxation as well. As there were no clear answers being given to them from the RBI, they decided to walk away,” said a banker directly aware of the matter.
Nirmala Sitharaman said that the finance ministry and RBI were monitoring the banking sector on a daily basis for the last six months. She went on to explain how the regulator made small strides in cleaning up the bank that had taken disproportionate exposure to some stressed corporates. She said the bank’s promoter-ceo Rana Kapoor was forced to leave in September 2018, and a former RBI deputy governor was then appointed to its board.