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Yes Bank rescue plan: 3-year lock-in may not be bad for equity shareholders

The Yes Bank reconstruction scheme notified on March 13, prescribes a three-year lock-in for all investors, including retail investors, to the extent of 75 percent of their holdings

March 15, 2020 / 07:46 AM IST
 
 
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It looks like stars are aligning for Yes Bank after the government notified a rescue plan for the private sector lender led by the State Bank of India (SBI) and joined by others.

The reconstruction deal is good for the depositors. However, it may not have gone down well for shareholders and bondholders. The reconstruction scheme notified on March 13, prescribes a three-year lock-in for all investors, including retail investors, to the extent of 75 percent of their holdings.

“All shareholders holding 100 or more equity shareholders are advised to exercise utmost caution while dealing in the script of the Bank and be guided by the enclosed scheme,” Yes Bank said in a release.

Only retail investors that hold under 100 Yes Bank shares are exempted. The lock-in is effective as of March 13.

Under the circumstance, the deal is ‘good’ for shareholders of Yes Bank as compared to the bondholders who have to face a write-down, suggest experts Moneycontrol spoke to.

Close

This means that when trade of the stock resumes on March 16, any shareholder holding more than 100 shares will be able to sell only 25 percent of his/her shares, while the rest will be under lock-in.

“It is not a bad deal or negative for shareholders considering the fact that government has written off perpetual bonds. In the deal equity holders are not losing everything, instead, there is a lock-in,” AK Prabhakar, Head of Research at IDBI Capital told Moneycontrol.

“Shareholders can still liquidate 25 percent of their holding. But, remember the rescue plan was put in place by the government to rescue the depositors. Ideally, equity shareholders share should have become zero and then new equity should have come, but here the government has given some value to them which is still okay,” he said.

Last week, the proposal, which is a draft, stated that although all of Yes Bank's liabilities would continue as before, the additional tier 1 (AT1) capital bonds that the bank had issued, shall be written down permanently. This announcement has caught the Rs 28 trillion Indian mutual funds (MF) industry by surprise.

Prabhakar further added that it is a good deal and after three years if the bank sustains, shareholders will get a better value.

Also read | Explained: The impact of Yes Bank's AT1 bonds on debt fund investors

But, depositors come first

While the primary aim of the final reconstruction scheme for Yes Bank notified by the Centre, which locks-in 75 percent of all shareholding for three years, is a move in the right direction, it may not go down well with most of the shareholders.

In any rescue plan, the interest of depositors comes first. Hence, the regulator and the government is playing by the book and in case of equity shareholders, they have been slightly more generous which shareholders should take with both hands.

“The regulator and govt. has been extremely fair in demanding the same sacrifice of existing minority shareholders as being asked for SBI and other institutional shareholders who have answered the clarion call of the nation and come to the rescue of Yes Bank as an institution – the primary aim is to provide a safety net to existing depositors,” Ajay Bodke, CEO-PMS at Prabhudas Lilladher told Moneycontrol.

“Equity capital is a ‘risk’ capital, and in terms of financial claims, the safest are depositors, followed by Tier II capital, the Tier I capital, followed by preference shares and then comes common equity. Hence, in any rescue plan, it is equity capital is at most risk,” he added.

Bodke further explained that when the enterprise does well, the upside is shared by equity holders and not be debt holders. “Also, in the rescue plan Tier I bondholders have been asked to accept the full write down which is in line with Basel 3 norms, and if Quasi Equity can be written down to zero why should equity holders also not be on the same footing, but the regulator has been generous. Hence, I see no reason for shareholders to complain,” Bodke said.

Reduce volatility

Yes Bank's shares have rallied more than 300 percent after hitting a low of Rs 5.55 on March 6. The cash-strapped lender received a Rs 3,700 crore booster shot from five financial institutions along with SBI. The move is likely to calm the frayed nerves of investors and depositors.

The rescues plan is in the right direction to curb volatility in the stock, suggest experts. “The decision of three-year lock-in may disappoint retail investors especially the one who has invested looking at the momentum, but the intent of the government is to reduce the volatility,” Sanjeev Jain, VP Equity Research, Sunness Capital India told Moneycontrol. “Not to forget that volatility and business operations are different,” he added.

The Union Cabinet on March 13 approved the Yes Bank Reconstruction Scheme 2020, with a higher authorised capital of Rs 6,200 crore as against Rs 5,000 crore as per RBI Draft Reconstruction Scheme 2020.

As per the contours of the scheme, ICICI Bank (Rs 1,000 crore), Axis Bank (Rs 600 crore), Kotak Mahindra Bank (Rs 500 crore), Bandhan Bank (Rs 300 crore), Federal Bank (Rs 300 crore) and HDFC (Rs 1,000 crore) will infuse Rs 3,700 crore as equity into the crisis-hit Yes Bank. State Bank of India will invest Rs 7,250 crore for up to 26 percent stake with a lock-in of three years as against the earlier envisaged 49 percent stake.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Mar 14, 2020 06:43 pm

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