The ongoing crisis at Yes Bank has the potential to trigger a domino effect in Indian financial markets, and the job of markets regulator SEBI is no less daunting.
One tricky issue arising out of the Yes Bank episode is how to avoid a potential conflict of interest when State Bank of India (SBI) acquires 49 percent stake in the troubled private lender.
In that scenario, SBI becomes the main promoter of Yes Bank, which in turn, holds a majority stake in Yes AMC.
And, that is where the problem lies.
SEBI regulations do not explicitly limit one AMC per sponsor but they do mention avoidance of conflict of interest situation, according to a former SEBI officer who worked in its MF department.
"SBI is set to become de-facto sponsor of two mutual funds - SBI MF and Yes MF - which creates a prima facie conflict of interest situation," said the former SEBI officer.
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SBI MF presently is in numero uno spot with AUM of RS 3.80 lakh crore as of January 31, 2020, while Yes AMC had AUM of Rs 400 crore.
On March 6, the government launched a rescue plan for Yes Bank under which the State Bank of India (SBI) will pick a 49 percent stake as part of a restructuring proposal.
On March 5, SBI said its board had given in-principle approval to explore an investment in Yes Bank. Earlier that day, in a sudden move, the RBI took control of Yes Bank and limited withdrawals.
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RBI restricted withdrawals that customers can make from their YES Bank accounts to Rs 50,000 until April 3, 2020.
The moratorium comes after the Rana Kapoor-promoted bank failed to raise capital to address potential loan losses and in the wake of deteriorating financials of the bank.
In 2010, the Securities and Exchange Board of India (SEBI) had asked France-based firm BNP Paribas for details on how it intends to continue its mutual fund (MF) business in India as BNP Paribas owned Fortis Mutual Fund and also held a stake in Sundaram BNP Paribas Asset Management.
SEBI had asked BNP Paribas to choose either or merge the two, as regulations do not permit an entity from having stakes in two asset management companies.
It remains a conjecture how SBI would approach its overall handling of being a parent to two MFs simultaneously. Will SBI approach SEBI with a merger proposal of Yes AMC with SBI AMC remains to be seen, fund experts said.