Yes Bank stake sale hinges on bidders agreeing to local banking norms

Yes Bank stake sale hinges on bidders agreeing to local banking norms

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The Reserve Bank of India has asked investors seeking a controlling stake in Yes Bank to reconsider their demands, including acquiring and retaining a majority stake, potentially prolonging the deal process, according to people familiar with the matter.

“After the initial discussions with the regulator, potential bidders have been asked to review their stance on certain important deal terms,” one of the people said, requesting anonymity. The investors have made two key requests, according to the people cited.

First, investors want to hold a 51 percent stake in the bank perpetually.

“The incoming investors are not keen to dilute their holding in the bank less than 51 percent stake at any point in time,” said a person aware of the matter.

However, bank licensing norms require promoters to reduce their stake to 26 percent within 15 years of starting operations.

To address this, the RBI has proposed a gradual glide path for investors to reduce their stake in Yes Bank over time, indicating that maintaining a perpetual 51 percent holding may not be possible, the person said.

“RBI hasn’t made an exception to this rule for any promoter, and it is unlikely that they could make one now to accommodate a new investor in Yes Bank,” the person said.

To complicate matters further, even holding a 51 percent stake requires regulatory changes because single investors are usually not allowed to own more than 15 percent in private sector banks.

The investors have also demanded that the regulator permit voting rights equivalent to their 51 percent stake in the bank. “This hasn’t made the cut with the regulator because voting rights are strictly capped at 26 percent, and the regulator hasn’t made any exception to this rule,” said a second banker aware of the matter.

Given the initial feedback conveyed by the RBI to the investors, they are likely reassessing the feasibility of investing in Yes Bank.

According to media reports, First Abu Dhabi Bank (FAB) and Japan’s Mizuho Group have evinced interest to take a controlling stake in Yes Bank. They are keen to own a stake higher than 24 percent currently held by the State Bank of India.

“Interested bidders are well aware of the complications involved in the transaction and are expected to get back to the regulator soon,” said a highly placed source who didn’t want to be identified. It is gathered that while investors may be willing to bite the bullet on the 26 percent cap on voting rights, since it is a norm specific to India, they may want to hold 51 percent control till perpetuity.

“Most foreign banks work in that manner outside of their home countries, and this may be a tough one for them to let go of,” said the person cited above.

Emails sent to spokespeople for RBI, Yes Bank, Mizuho Group and FAB seeking comments remained unanswered till press time, while Citibank, which has the investment banking mandate for the deal, declined to comment on the matter.

Foreign banks acquiring Indian banks

The investors who have shown interest in Yes Bank so far have branch operations in India, whereas banking regulations permit only a wholly owned subsidiary of a foreign bank to take controlling stake in a private bank. The reason being once set up as a WOS, the foreign bank’s Indian operations would be on par with any local bank. In Yes Bank’s case opting for a wholly owned subsidiary structure may not be feasible as Yes Bank is a listed entity.

Further, foreign direct investment norms also do not permit a single foreign bank to take a controlling stake in an Indian bank. Present FDI norms permit aggregate foreign participation in Indian private banks up to 74 percent, with the holding of each entity capped at 15 percent. According to sources, there are deliberations within the government to lift the entity-wise cap of 15 per cent to permit a single investor, including a foreign bank, to acquire a controlling stake in the Indian private bank.

For the Yes Bank deal to go through, this change in regulation will also be a critical aspect.

Overall, a deal that was initially anticipated to be concluded by December may take longer, given these complexities.

According to media reports, SBI has placed its 24 percent stake in Yes Bank on the block. Other banks, including Axis Bank, Kotak Mahindra Bank, ICICI Bank, and HDFC Bank, collectively own 7.4 percent of the bank. PE investors Carlyle and Advent collectively own about 14 percent of Yes Bank.