The events at Yes Bank once again bring into sharp focus the concept of ownership, control, conflict of interest and regulations.
An enduring mystery in India’s banking industry has been how Yes Bank consistently outperformed many of its peers for a long time. One reason was of course the way it functioned under founder-promoter Rana Kapoor, as detailed in this October 2019 Outlook Business article.
Now, everyone knows and talks about concentration risks. It appears that a single person was the entire management of the bank and either he was the total system or the system got transformed to his style. This once again brings to the fore the efficacy of our governance systems. The bank ticked almost all boxes on governance, yet we know that those boxes were only ticked.
Else, how one can explain a series of awards received both by the bank and Kapoor? One is dumbfounded because the board is supposed to consist of seasoned and experienced professionals. How they allowed themselves to be dictated is material for a research thesis on ‘board behaviour’.
Did the board not know what was happening? Was it ignorant or inefficient or did it turn into an ostrich? We can debate this ad nauseam. It is no secret that board had ex-RBI officials, ex-IAS and many more accomplished individuals. At least now, the RBI can ask its former officials, if not for penalising but for understanding how things could go so wrong. The information could be used to improve its monitoring, supervision and control function.
The events at Yes Bank once again bring into sharp focus the concept of ownership, control, conflict of interest and regulations. Kapoor was controlling the bank, with his nominees on the board, with a minuscule equity, which was majorly pledged. He was compliant with promoters’ equity norm of the RBI. Effectively, there was very little skin in the game.
The other person (Madhu Kapur) who had skin in the game was not allowed to enter the board. Due to provisions of the AoA (Articles of Association), Rana Kapoor could nominate his directors. By pledging shares, Kapoor raised money and had economic interests other than banking, thus creating conflict of interest situation. Should the RBI not amend its regulations immediately and ensure that promoters are not allowed to pledge and AoA provisions of nomination of directors are scrapped?
Now, Yes Bank is in a precarious position and with the recently reported divergence in NPAs (non-performing assets), the financial position has become acute. It needs immediate equity infusion.
One does not know who is going to be the white knight rescuing the bank. Anyone putting a billion dollar plus would have substantial equity, much beyond the 5 percent limit of the RBI, unless the investor is in the exempt category, allowing 15 percent or 40 percent equity.
Or will the RBI look other way and allow waiver of this requirement? The logic for such a waiver would appear to be simple: in public interest and to save the bank. Will the new investor need to make an open offer? If yes, then how is the bank going to get capital if a part of money is used for the open offer? And why will anyone start with a substantial equity, much beyond 15 percent / 40 percent limit and be forced to dilute once the bank becomes healthy?
Another important factor besides fit and proper would be to have potential investors perform their obligations properly. While one doesn’t know for sure how future performance will be, the past track record of some of the prospective investors revealed by Yes Bank doesn’t instill confidence.
Macquarie in its report has given some interesting and relevant facts about these investors.
- “SPGP is a Hong Kong-based fund that could not pay up earnest money in the Reid and Taylor bid under NCLT.
- Erwin Singh Braich, backing SPGP, has been involved in a few lawsuits, one against the Canadian government.
- The second-highest bidder Citax failed to bring in the bid security amount of Rs100m for their bid for Nagarjuna Oil which had gone through NCLT proceedings under IBC.
- UK filings indicate Citax’s balance sheet is limited.”
Can RBI risk passing control to such suitors? From a risk perspective, certainly not.
The cycle of low promoter equity-stress, leading to fresh infusion-high promoter equity and then forced dilution-leading to control with little skin in game and stress will continue. Yes Bank, Laxmi Vilas Bank and Catholic Syrian Bank are living examples of the lopsided policy relating to promoter equity in banks. Control without skin in game and conflict is a sure shot recipe for disaster. Does the RBI have any appetite for big bank failure? If not, it is high time the central bank recognised that skin in the game and control go hand in hand and absence of conflicting business interest is an important benchmark for management control.
In addition, the RBI must work on its reporting system and seek only the data it can analyse and it must analyse. It must also see how transparency can improve further with maximum possible data in public domain. The top bank should also carry out peer comparison to get early warning signals for focussing on weak areas.J.N. Gupta is co-founder and managing director of Stakeholder Empowerment Services. Views are personal.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.