(The following is an excerpt from Pandemonium: The Great Indian Banking Tragedy by Tamal Bandyopadhyay, courtesy Roli Books. The book releases on 9 November.)
Typically, a bank gives the Reserve Bank of India (RBI) a list of names to pick from for the CEO’s post. The regulator’s primary focus is on the so-called fit and proper criteria. This means, unless the person who tops the list is unfit, it does not look at the second person even if the second person is more competent than the first.
Two names were sent to the RBI for approval for the top post – Ravneet Gill and Rajat Monga, the senior group president of Yes Bank, and believed to be Rana Kapoor’s Man Friday. Actually Monga had been sidelined by Kapoor when he started objecting to many loan proposals Kapoor was pushing for approval. However, he was an insider and arguably, close to Kapoor.
Naturally, the RBI chose Gill. Gill (and probably a few others) did have rounds of discussions with senior RBI officials before meeting Kapoor at his Samudra Mahal residence, along with a Korn Ferry executive. Half a dozen directors of Yes Bank board interviewed Gill in the first week of January 2019.
They wanted to know how he would run the bank differently.
Could the regulator pick the MD unilaterally? Yes, it could. In the past, on rare occasions, it has chosen the MDs for banks. At least on two occasions, the RBI has chosen the boss of one private bank, Tamilnad Mercantile Bank – M Jesudasan (1992-96) and S Krishnamurthy (1997-2002). Both of them were RBI executives.
Even after Gill was appointed, Kapoor wanted to remain associated with the bank as an adviser, occupying his room on the 9th floor at Nehru Centre, Dr Annie Besant Road, Worli, Mumbai. He suggested the new CEO be given another room.
As an adviser, he wanted to inspire the confidence of the prospective investors. The Board for Financial Supervision, a committee of the central board of directors at the RBI, put its foot down. Kapoor was politely told that as a promoter his wholehearted support to the new management would inspire sufficient confidence; he would not need to be an adviser!
Ravneet Gill Takes Over
When Gill took over in March 2019, the so-called CET1 or Common Equity Tier 1 ratio of Yes Bank – a measure of the ratio of a bank’s capital against its assets – was just 8.4 percent, the lowest in the industry and just 40 basis points (or 0.4 percent) higher than the minimum regulatory requirement.
Gill also reportedly found massive under-provisioning of bad assets. Just three stressed exposures – ADAG Group, Essel Group and DHFL – could have wiped out the bank’s entire net worth of Rs 26,000 crore. Yet, not a paisa was provisioned against any of them.
Yes Bank had the single-largest exposure to Cox & Kings Ltd, after taking over Axis Bank’s exposure to the tours and travels agency, which went bankrupt.
After State Bank of India, it was the second-largest lender to the now-defunct Jet Airways Ltd. Its exposure to Infrastructure Leasing & Financial Services Ltd was around Rs 2,500 crore. Apart from this, there was a string of real estate developers to which Yes Bank had lent – Omkar Realtors & Developers Ltd, Radius Developers Ltd, Sahana Builders & Developers Pvt Ltd, Suman Developers Pvt Ltd, Skill Infrastructure Ltd… You name it.
Every bad loan that surfaced in the Indian financial system seemed to have a link with the bank. Yes Bank had probably lent to every Indian company that went belly up between 2018 and 2019.
There have been many stories about the relationship between Yes Bank and Indiabulls Housing Finance Ltd as well. But as a borrower, Indiabulls had an impeccable record, not missing a single instalment for its Rs 6,000 crore loan.
According to a board member, on 16 May 2019, two-and-a-half-months after taking over, Gill made a presentation to the board on all stressed assets. A month later, he got the board approval for preferential allotment to private equity funds.
Advent International Corporation of the US, under the guidance of its adviser PJ Nayak, conducted due diligence for a possible investment. Once it was done, Nayak, former chairman of Axis Bank Ltd, met Yes Bank chairman Brahm Dutt and said the stressed asset book could be as much as Rs 80,000 crore, one-third of the total loan book.
A bank can’t grow without capital. But for Yes Bank, it was an existential crisis. It could not survive without capital infusion as the bad loans had to be provided for.
So, capital was Gill’s priority no 1.
At the first analysts’ call on 26 April 2019, he outlined his task:
Build a better revenue mix between wholesale and retail loans
Ramp up retail liabilities to cut down the cost of money
Strengthen governance by empowering the board on risk and HR matters and delegating authority to the respective business heads – something unheard of in Yes Bank’s history
De-risk the corporate book
After Advent refused to invest, there was no choice but to go for a QIP or a Qualified Institutional Placement, the fastest route to raise money. In August 2019, Yes Bank raised Rs 1,930 crore at Rs 83.55 a share of the face value of Rs 2. The QIP opened on 8 August and closed on 14 August.
This is what Gill said in a release after raising the equity:
"“We are delighted with how our fund raise has been supported by marquee global and domestic investors... The success of the QIP is extremely satisfying given the strong global and domestic headwinds and a credit environment beset with challenges. We see this as a strong endorsement by the investor community of the inherent strengths of the Yes Bank franchise and its future growth prospects.”"
Gill also started selling off the loan portfolio to bring down the requirement for capital. The problem is, there were takers only for good loans. So, when the loan book shrank from Rs 2.4 lakh crore to Rs 2.05 lakh crore over nine months, it turned even uglier.
There were other issues. Gill had taken the assignment presuming that, like all listed companies, Yes Bank would be a board-managed entity. The problem started fairly early when the board wanted to appoint Kapoor as an adviser with sweeping powers. When Gill refused to play ball, the battle lines were drawn between him and some board members.
An Obstructionist Board
Insiders mention that there were frequent run-ins with the board on matters of hiring new talent, credit, audit, staff accountability – everything, in short. That probably led to the RBI nominating former deputy governor R Gandhi on the board.
The way the board functioned was quite bizarre. Kapoor’s stake in the bank came down to zero in October. But his nominee director (his daughter’s father-in-law, Ravi Khanna) was allowed to be on the board until March 2020, when SBI was ordered to carry out a rescue. There were only two bankers on the board among its dozen-odd directors – Anil Jaggia and Subhash Chander Kalia.
As if an obstructionist board was not enough, the RBI and the finance ministry started getting anonymous letters that made wild allegations about Gill’s style of functioning and his alleged purchases of artwork at exorbitant prices.
When the third such letter reached the RBI and the ministry, apparently Monga told Gill that from the tone and language of the letters, he was sure that Kapoor himself was writing them. Monga was qualified to make this judgment since he had worked with Kapoor for over a decade. He went on to add that if the promoter of the bank was hell-bent on destroying it, nothing could save it from going under, before himself resigning.
Monga’s observations were discussed at the board and the RBI was kept informed as, by that time, the bank had already sought the regulator’s clearance for making Monga an executive director. Ashish Agarwal, chief risk officer of the bank, was to be promoted to the board level. But the RBI rejected this.
The regulator was extremely unhappy with the bank’s risk management and credit appraisal culture. The regulator’s Risk Assessment Report for three successive years from 2017 to 2019 – based on the annual inspection of the bank – was scathing on governance and the overall functioning of the board. They highlighted very poor credit discipline and compliance and too much centralisation of powers. They were also very critical of the role of the board.
Was a Turnaround Too Daunting a Task?
Gill had arrived from Deutsche Bank so it makes sense to compare the institutions. Yes Bank was 1.7 times Deutsche Bank in size. It had 22,000 employees against 12,000 of Deutsche Bank. The business mix of the banks is fairly similar – ranging from retail to wealth management, structured finance, transaction banking, investment banking and corporate banking. Deutsche Bank had the lowest net NPAs in the industry and one of the highest post-tax returns on equity. And, India was the most profitable location for Deutsche Bank in the entire Asian region, including China, Japan, Australia, Hong Kong and Singapore.
More than the enormity or the complexity of the role, the real challenge for Gill was the balance sheet, which had been dressed up through creative accounting.
When he took over, Gill got two pieces of advice from the regulator:
Kapoor has lots of external business interests which he synergises through the bank and they must be stopped
Yes Bank has a lot of veneer. Typically, under veneer there is teak, but in this case, there is a lot of rot. ‘We want you to clean it up,’ the RBI told Gill. For any bank CEO, it was a nightmare assignment
If insiders are to be believed, Gill kept on stumbling across clients who talked about what they had been made to do in the past. Even these issues, vexing as they were, could possibly have been addressed.
What really broke the back of the bank was Nippon Asset Management selling Kapoor’s shares as the loan to value had spiked due to a decline in the share price and Kapoor was not able to top up the collateral.
Kapoor had pledged his shares to the Anil Ambani’s ADAG group-owned Reliance Nippon Life Asset Management and Franklin Templeton. As soon as Nippon Life Insurance Company bought ADAG out, allowing the ADAG group company Reliance Capital Ltd to exit the mutual fund business, it took a call to sell the pledged shares as the loan to value had breached all covenants.
On 31 September and 1 October 2019, Nippon Life sold 100 million shares of Kapoor, leading to a 37 percent drop in the bank’s share price. This made the investors and the depositors anxious.
The problem was exacerbated by two contributing factors.
The Punjab & Maharashtra Cooperative Bank had just gone under and it had severely jolted confidence in the banking system.
The annual bargain sales of e-commerce majors Amazon and Flipkart, which were running at that time, put a lot of pressure on MTNL and BSNL telephone lines. As a result, net banking services were down for a few banks, including Yes Bank. That made Yes Bank depositors apprehensive about the state of affairs in the bank. In the next two weeks, Yes Bank saw an outflow of nearly 20 percent of its deposit base.
A Run on the Bank
The sudden drop in deposits and the rise in provision for bad assets led to successive rating downgrades and that, in turn, undermined depositor confidence further. There was very nearly a run on the bank and its solvency was under growing pressure.
Stemming the tide became virtually impossible. In September, the bank’s CET1 dropped to 8.7 percent. In late October 2019, Gill led a team to the office of SC Murmu, executive director in charge of supervision at RBI, to make a presentation on the bank’s liquidity and asset quality. He also submitted projections on every aspect of the bank’s financials along with the likely earnings of December 2019 and March 2020 quarters. From then on, Yes Bank started sending a daily report to the regulator on the liquidity management.
As things got worse, both the RBI and the finance ministry were monitoring Yes Bank in real time as it could not be allowed to fail. To maintain the private character of the bank, the initial plan was for SBI and HDFC to pick up a minority stake each and get a string of foreign investors on board for the balance. However, SBI was not willing to play ball as it wanted to buy the share at its face value of Rs 2. And, if it was given to SBI at face value, others too would have got it at the same price.
The plan had to be changed as nobody was comfortable offering the shares to foreign funds at face value. The foreign funds were ready to invest at a higher price but not as much as called for by SEBI norms. Going by the SEBI norms, the price per share was about Rs 37 – roughly four times the intrinsic value.
Under the SEBI’s Substantial Acquisition of Shares & Takeovers Regulations, 2011, anyone acquiring a 25 percent stake in a listed entity also has to make an open offer to the existing shareholders. It also has its norms on how to price a share when it is sold this way.
SEBI Norms Stumbling Block
These norms had also come in the way of the revival of Jet Airways. Abu Dhabi-based Etihad Airways, which owns 24 percent in Jet Airways, was willing to put in money and increase its stake, had the SEBI waived the norm but the market regulator did not budge.
An open offer is made to the existing shareholders to buy their shares if they are willing to sell. How does it help a company which needs the money? If a company dies, what happens to its minority (and majority) shareholders?
The SEBI waives such norms only when a company is insolvent and is being revived through the bankruptcy law. But the catch is the moment a company goes through this route, its value gets eroded and investors lose interest as it is no more a ‘going concern’ – an accounting term for a firm that has the resources needed to continue operating. It denotes a company’s ability to make enough money to stay afloat and avoid bankruptcy.
There was another issue too. When a share is bought below market price, the difference in pricing is treated as income for the buyer and income tax needs to be paid on that.
Under the SEBI pricing formula, if a group of entities – termed as ‘persons acting in concert’ – is buying a stake in a listed entity such as Yes Bank, the price for the acquisition is determined by its takeover code.
The pricing formula under the takeover code says it has to be the highest among the following three criteria. The average market price of the share in the past 52 weeks before the public announcement, the highest price in the immediately preceding 26 weeks, and the average market price of the past 60 trading days.
If the shares are not traded, merchant bankers can step in for valuation.
Anshu Jain, former co-CEO of Deutsche Bank AG, and now president of Cantor Fitzgerald, a New York-headquartered investment bank and brokerage firm, who is also a mentor for Gill, was helping him in arranging equity along with two domestic investment banks – Ambit Pvt Ltd and IDFC Securities Ltd.
JC Flowers & Co, Tilden Capital, Oak Hill Advisors and Silver Point Capital were willing to put in money but time was running out. Yes Bank would have to announce its December quarter earnings by 14 March and the money had to come before that as otherwise its deteriorating legacy asset book could trigger a run on the bank.
Not Too Little But Too Late
But the RBI could not afford to wait till then. It had already informed the finance ministry of Plan B led by SBI, which was in the making since January. The ministry was to brief Prime Minister Narendra Modi on the evening of 5 March.
The plan was to reconstruct the bank, first putting it under a moratorium, under Section 45 of the Banking Regulations Act. The government announces this, not the central bank.
Gill camped at the RBI office for the most part of 4 March. Jain’s colleague at Cantor Fitzgerald, Ashwini Mathur, flew down from London to rush through the deal. The RBI wanted to see money on the table. That was also done. Tilden Capital put in $500 million in an escrow account in Bank of New York. The amount was not too little, but it was too late.
After market hours on 5 March, the government clamped a moratorium effective 6 pm that day till 3 April 2020, freezing all activities of Yes Bank and capping withdrawal of deposits at Rs 50,000 per account. Higher withdrawal was allowed for meeting expenses of medical treatment, education, wedding and other emergency needs.
The reconstruction scheme was announced the next day, expanding the bank’s equity base and making SBI 49 percent owner.
The last time a new private bank was put under a moratorium was in July 2004. Global Trust Bank Ltd, the bank in question, was merged with the public sector Oriental Bank of Commerce within 72 hours. This time, SBI stepped in as the white knight. But SBI did not merge Yes Bank with itself; instead, it put in 49 percent equity and may continue to hold at least 26 percent stake for the next three years.
Two weeks later, the moratorium was lifted with a consortium of lenders putting in Rs 10,000 crore as capital. SBI apart, the investors were HDFC, ICICI Bank, Kotak Mahindra Bank, Axis Bank, IDFC First Bank, Federal Bank and Bandhan Bank.
On 6 March, a day after the moratorium was clamped, the Yes Bank stock closed at Rs 16.20 after slipping to Rs 5.55 in the early hours of trade. On 18 March, when it resumed operations, the stock closed at Rs 60.8, after hitting a high of Rs 88, giving near four-fold returns to the new investors.
The regulator explored a market-led solution first but the SEBI norms did not permit it. In April 2009, the Mahindra group could rescue the scam-hit Satyam Computer Services Ltd after the SEBI waived the norms. Under the current takeover code, the market regulator does not have any discretion to do that….
In March 2009, Yes Bank had a loan book of Rs 12,403 crore. A decade later, in March 2019, its loan book had increased by 20 times to Rs 2.42 lakh crore. Had RBI waited for a few more years, at this pace, Yes Bank would have become too big to fail.
Since it was a well-capitalised and profit-making bank, it was not easy to get rid of Kapoor.
Couldn’t RBI have imposed the moratorium immediately after Kapoor’s exit? That would have probably created a bigger problem as it was already grappling with the multi-state PMC Bank fraud, which shook the depositors’ trust in a big way.
Besides, in March 2019, Yes Bank had a deposit portfolio of Rs 2.28 lakh crore. It came down to Rs 1.66 lakh crore in December 2019 and Rs 1.05 lakh crore in March 2020. Had the moratorium been imposed earlier, it would have caused a far larger crisis for the depositors.
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