Why change in banking regulations is important for Yes Bank to find a buyer

Why change in banking regulations is important for Yes Bank to find a buyer

The process of inducting strategic investors into Yes Bank has been on since the first quarter of this year as per news reports. Japanese banks as well as lenders based in the Middle East have been mentioned as among the potential suitors  said to be willing to pump in billions of dollars for a controlling stake.

Recently, Yes Bank was quick to refute a report which said RBI had approved a foreign bank buying a majority stake in Yes bank.

However, questions around the feasibility of a majority stake sale in Yes Bank to overseas investors, particularly foreign banks, may take centre stage as the divestment process moves forward.

To set the context, State Bank of India (SBI) invested in Yes Bank since 2020, when it bailed out the latter as part of a reconstruction process. After four years of deploying capital, SBI is apparently seeking an exit from Yes Bank. But regulations may need change if a foreign bank is to take a controlling stake.

Foreign banks in India
Foreign banks can operate in India either as a wholly owned subsidiary (WOS) or through branches. Foreign direct investment norms permit aggregate holding of foreign investors in Indian banks, including foreign banks, up to 74% of capital of a domestic bank. However, the central bank allows any investor, including a foreign bank, to take 5% stake in an Indian private bank through the automatic route and up to 10% stake through  the approval route. Any stake beyond 10% needs mandatory clearance only through the approval route. For the purpose of mergers and acquisitions, foreign banks with a WOS set up in India, may be treated at par with a domestic bank to take controlling stake in the Indian bank.

While guidelines permit the central bank to make an exception to the rulebook under circumstances such as bailing out an ailing Indian counterpart, the RBI is yet to make any exceptions.

For instance, even when Lakshmi Vilas Bank saw interest from many contenders, including a few foreign banks, DBS Bank India, which is a wholly owned subsidiary of Singapore’s DBS Bank was seen the clear favourite to take over LVB. The reason being, as an entity, DBS Bank India was compliant with local laws in terms of its corporate structure.
While the extant FDI norms permit foreign banks to own up to 74% stake in an Indian bank, the devil lies in the details. FDI regulations cap an individual overseas bank’s holding in an Indian bank at 15% stake. This ceiling is to ensure diversity among investors.

However, in practice, such an ownership model may not cut ice with foreign banks as it does not give control to anyone, thereby not justifying substantial investment into such a structure.

In short, while the RBI and the FDI norms permit foreign banks to hold shares of Indian banks, the question of acquiring controlling stake in a private bank is a grey area.

Changes needed
Given the differences in FDI norms and RBI regulations on foreign bank ownership in domestic lenders, an amendment in both the governing regulations may be essential for a transaction such as Yes Bank to go through. FDI norms may need to permit a single foreign bank to take controlling stake in an Indian bank and the RBI regulations should also allow a foreign bank irrespective of whether it operates in India as a WOS or through branches to hold up to 74% stake in an Indian bank.

Yes Bank case
The change to banking regulations assumes relevance as the country is preparing for major ownership changes in a few private banks, namely YES Bank and IDBI. According to the news reports, SBI has placed the 24% stake it holds in YES Bank on the block. Other banks including Axis Bank, Kotak Mahindra Bank, ICICI Bank and HDFC Bank collectively hold 7.4% in YES Bank. While SBI and other banks have not confirmed the development, it is understood that Citibank has been appointed as the arranger for the possible transaction.

While in case of IDBI Bank, Prem Watsa’s Fairfax Holdings Limited is seen as the key contender for the bank, with YES Bank, sources say the government is keen to rake in  top dollar foreign money through the stake sale. “To do so, it would be imperative to make the amendment,” said a banker aware of the development.

Why foreign banks
The rationale for roping in foreign banks is to ensure that sustainable long-term money is invited into Indian banks. “Unlike private equity capital which enters the bank with a pre-determined expiry date, foreign banks have a much longer gestation and heavy lift the bank with capital whenever needed,” said a highly placed source aware of the matter. The success of HDFC Bank where JP Morgan Chase continues to remain a shareholder through the American Depository Receipts is said to have triggered the thought process in the direction of allowing foreign banks to hold major stake in Indian banks. In fact, back in the 1990s when HDFC Bank was incorporated, JP Morgan was among the significant shareholders of the bank. Even till December 2017, the foreign bank held 18.26% stake in the Indian banking major.