The Banker Who Crushed His Diamonds
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FURQUAN MOHARKAN
THE BANKER
WHO CRUSHED
HIS DIAMONDS
The Yes Bank Story
Foreword by Andy Mukherjee
PENGUIN BOOKS
CONTENTS
Foreword
Seeing Things Unfold
The First Signs of Trouble
The Birth of YES Bank
Soap Opera
The Bank’s Loan Story
Enter RBI, Exit Rana
Enter Ravneet Gill
Stretching It Too Long
The Mess Got Real
Doom’s Day
ED Investigations and Cobwebs
Defining Secrecy
Where Does Banking Go from Here?
Conclusion
Footnotes
The First Signs of Trouble
Soap Opera
The Bank’s Loan Story
Enter Rbi, Exit Rana
Enter Ravneet Gill
Stretching it too Long
Ed Investigations and Cobwebs
Acknowledgements
Follow Penguin
Copyright
PENGUIN BOOKS
THE BANKER WHO CRUSHED HIS DIAMONDS
Furquan Moharkan is a senior correspondent with Deccan Herald. He covers banking, financial institutions, markets, investments and the Reserve Bank of India. He completed his bachelor’s in business administration from Christ University, Bengaluru, and joined UBS’s India affiliate as an investment banker in the financial institutions group. Within a year, he answered his calling for writing and joined Deccan Herald’s business desk in Bengaluru.
Foreword
Rana Kapoor was certainly not the first Indian financier to behave badly. But what makes the story of his rise and fall compelling is the light it shines on a certain stage in India’s economic development, a period in which the innocent enthusiasm of the country’s 1990s reforms slowly gave way to cynical and pervasive rent-seeking. In a sordid display of greed and hubris, some private-sector bosses erected for their private gains vast edifices of assets with the help of money taken from other people, usually bank depositors, but later also mutual fund investors.
The start of this age coincided roughly with the 2004 launch of Kapoor’s YES Bank. So the intimate account Furquan Moharkan gives in The Banker Who Crushed His Diamonds—The YES Bank Story is not merely of one failed bank or one humbled banker; it’s the story of an era.
Since this period is far from over, the regulators should read this book as a cautionary tale rather than a history lesson. There’s a growing idea that India’s banking industry needs an influx of fresh capital; new licences need to be given to non-bank financial services firms and even non-financial conglomerates to enable them to run deposit-taking institutions. The question policymakers should ask of themselves after reading this book is: ‘We failed to catch most of Rana’s shenanigans, his wayward lending, and his many conflicts of interest. His board was even more ineffective. What makes us sure that we will do it right this time?’
The lay reader should pick up this book to know how badly the game is rigged. As Kapoor ran YES bank into the ground—and his successor spun fantastic yarns about raising survival capital—most (though not all) brokerage analysts and business television anchors decided to play along in cheerful complicity. Furquan lays bare the extent of the rot, and the pain it inflicted on an unsuspecting public. Hopefully, depositors and investors will be less trusting when they are being lied to the next time. While on paper India has robust banking regulations and supervision, the trappings of independent boards, and the attendant paraphernalia of auditors, rating agencies and a free press, the political economy renders them all into caricatures—an example of what economist Lant Pritchett calls an ‘isomorphic mimicry’ of developing countries to make their institutions look like those in the developed world.
In the YES Bank saga, the public was fooled several times over. In my own writing about the lender, I coined the term ‘price-to-truth ratio’, as the true measure of its elevated valuation. I also revealed that Morgan Credits and YES Capital, the two entities through which the Kapoor family held large stakes in the bank, had sold debentures to mutual funds to raise money for private ventures. The backing for the debentures came from covenants, or assurances structured around YES Bank’s stratospheric share price. Based on those assurances, rating companies issued lofty certificates of creditworthiness. ‘Retail investors probably have no idea they’re the ones financing Kapoor’s diamonds, on the basis of debt covenants as fluffy as cotton candy,’ I wrote.
The candy melted, the diamonds got crushed. Yes, there was a rescue, engineered by the authorities by roping in State Bank of India (SBI). Depositors didn’t suffer beyond seeing their money trapped for a while. Nor were equity investors made to lose their entire investment the way additional tier-one bondholders were wiped out. But the manner in which the authorities handled the rescue didn’t leave them with a template for dealing with future failures of deposit-taking institutions. As I write this foreword, a news article says that more than 60 per cent of insolvencies resolved by the bankruptcy tribunal in the July–September quarter of 2020 ended up in liquidation. That’s a bad omen for creditors when the tribunal starts admitting fresh cases after the pandemic. Out-of-court corporate restructuring in India has anyway gone haywire.
Furquan shows how the crisis at YES Bank was coded in its DNA of sharp practices and outright deceit. Harkirat Singh, one of the three Indian co-founders, was edged out by Rana Kapoor even before the bank got its licence. Ashok Kapur, who could have steered the lender in a very different direction, died in the November 2008 Mumbai terror attack. Even before that fateful day, Rana, the ‘control freak, maverick banker’, as one of Furquan’s numerous well-placed sources described him, had decided that he was the one in charge—even of selecting the tiles for the office floor. When his brother-in-law, Ashok, objected to this hyper-centralization, he found his cabin door locked. Rana is said to have told him: ‘There is no need for you to come to office from now. You are a non-executive chairman; just come for the board meetings.’
It’s the anecdotes Furquan has tapped from his experience in investment banking research and financial journalism that make this book rich in details of what went on behind the scenes. The report that UBS wrote in 2015—five years before the bank went belly-up—showed clearly that YES Bank’s stressed loans were 125 per cent of its net worth. And yet, Rana brazened it out. What’s worse, nobody stopped him. This book demonstrates the surge in the bank’s loan book between 2015 and 2018, belying the oft-repeated claim that all of Kapoor’s misdeeds had taken place under the previous government.
No blame game can detract attention from what is a collective political failure. If near-universal state control of banking before 1994 stymied credit to deserving borrowers, private-sector ownership by bankers like Kapoor led to an uncontrolled orgy of crony lending. There are notable exceptions, of course. But the grim reality is that without a sweeping change in the relationship between the private sector and the government, starting from a reform of the opaque financing of costly election campaigns, there is no way to get to a better, safer model of banking in India. Rana Kapoor would not be the last financier to behave badly.
Andy Mukherjee
SEEING THINGS UNFOLD
On 26 April 2019, the BSE Sensex, the benchmark index of the Bombay Stock Exchange (BSE), was trading with gains of over 200 points at 3 p.m. Suddenly, the index started tumbling and lost about 500 points in the next fifteen minutes before it recovered the ground.
Being mandated with primarily covering financial markets and banking at Deccan Herald, I start
ed building my story.
To me this seemed normal, as it had happened a day before as well. In those days, foreign funds were playing safe due to Sino–US trade and pulling out of emerging markets. India, being one of the emerging markets, was not immune to this. Usually, foreign fund sell-off starts making an impact on Indian markets in the afternoon. The logic? Most foreign investors are Westerners whose day starts after 1 p.m. IST due to different time zones.
Still, to double-check if this was indeed the case, I grabbed my phone and called a senior fund manager who also happens to be good friend. Unlike previous such clarification calls, his tone seemed different. He quipped, ‘There is a lot of shit hinted at in the YES Bank books.’
YES Bank at that point of time was what we call a blue-chip company, and part of the coveted thirty-share BSE Sensex and fifty-share NSE Nifty.
It was known by then that there were divergences in the bank’s bad loans. A divergence is the difference between what a bank thinks is its total bad loan and what the regulator thinks is its bad loan. It was also known that the bank had gone through a tough phase after the Reserve Bank of India (RBI), led by then governor Urjit Patel, had cracked down on YES Bank’s founder and former CEO Rana Kapoor.
But no one knew the extent of the mess that Rana Kapoor had left behind; and this news seemed to forewarn what was to come.
I quickly opened the bank’s investor presentation. It had reported huge fresh slippages—the loans that become bad. ‘Gross Slippages of Rs 3,481 crore in Q4FY19, of which Rs 552 crore was on account of an airline company exposure that was performing as on 31 March 2019, and Rs 529 crore on account of Stressed Infrastructure Conglomerate.’ Even though the bank didn’t name these defaulters anywhere, anyone on the street would know which companies these were: they were the two biggest and high-profile collapses at that point of time—Jet Airways and Infrastructure Leasing & Financial Services Limited (IL&FS).
Despite these slippages, the bank’s bad loans seemed to be very much manageable—Infrastructure Leasing & Financial Services Limited at 3.22 per cent of their loan book. Even though, in the back of my mind, I was wondering what made them provide so less for their bad loans. They had made provisions on only 43 per cent of their bad loans.
I sensed that there was a story in these numbers. There was something that the markets knew but we didn’t. I made another call to a person who managed a fund that held a significant stake in the bank. As I asked him about the mess, he laughed and said, ‘Sir-ji, jo suna hai sach suna hai. Aage aage deko kya hota hai (Whatever you are hearing is true. Just wait and watch what is going to happen).’
Post this call, my suspicions turned to solid belief. I knew I had to stay on top of this over the next few months. Immediately, the bank started scrambling in search of funds, which seemed to be difficult to come by. In fact, on 8 April 2019, the bank, in a regulatory filing had said, ‘The board of directors of the bank is scheduled to meet on 26 April 2019 to consider raising of funds by way of issuance of equity shares including but not limited through preferential issue and/or Qualified Institutions Placement (QIP)/ Global Depository Receipts (GDRs)/ American Depositary Receipts (ADRs)/ Foreign Currency Convertible Bonds (FCCBs)/ or any other methods on private placement basis.’
As the bank held an initial fund-raiser meeting with potential investors, two different market players who had large monies at stake across a gamut of India Inc’s who’s who, confirmed the developments (regarding YES Bank looking for funds) to me, adding that they were sceptical about investing in the bank. The reasons? These will be elaborated in the coming chapters.
By the end of July 2019, I rolled out a story based on how many companies—three shadow banks, a chemical manufacturer, a cement manufacturer, a financial services company and a bank—were facing trouble in raising funds. All of this was confirmed by a gamut of sources across these companies.
In hindsight, it does give me a lot of happiness to know that most of these companies either managed to tide over their financial woes or are on the verge of doing so. However, the sad part of the story was that the two companies I had hinted at didn’t survive the hit. And yes, no surprises on guessing the names: Dewan Housing Finance Limited (DHFL) and YES Bank—the two entities which had become closely intertwined over the years. By September-end, it was clear that YES Bank wasn’t getting any funds, and by October-end DHFL had collapsed.
On the morning of 20 September, after most fund managers had said a clear no to the bank’s attempts at wooing them, I mailed a questionnaire to the bank. The team deputed by the bank to fight the crisis called me up and assured me that everything was fine, money was on the way and no one had said a ‘no’ to the bank. But I went for the next logical step and asked them if they would be willing to say this on record. The answer came as no surprise: ‘No, we can’t comment on the record. You can say declined to comment.’
We rolled out a story in the Saturday edition of Deccan Herald. Even though the markets were closed, the story picked up really well. Unnerved, the bank’s marketing and communications team sent my publication and me a legal notice, which they ultimately didn’t pursue. As soon as the legal notice was sent, word spread among the circles and I started getting calls from friends in other publications. They revealed details about YES Bank that gave me a lot of insight into Rana Kapoor’s mindset.
Next morning, as the share markets opened, the shares of the bank faced a lot of selling pressure. In a move which was directed to stabilize its shares, the bank issued an unprecedented two-page clarification, stating how in the past they had raised funds and that there were no problems in the bank. But by then it was too little, too late—everyone knew about the bank’s woes. In the next ten days, the bank’s shares were hammered on the exchanges—crashing by 42.3 per cent. By the end of those ten days, on 1 October 2019, a YES Bank share was worth just 16 per cent of what it was exactly a year ago. A lot of this share price fall was attributed to Rana Kapoor—the bank’s co-founder and former CEO—downsizing his stake in the bank. More about that later, but it is safe to say that this fall had a spooking effect on the already cautious depositors.
As October set in, the prudent depositors of the bank started to play safe. By the end of October, I suddenly got a call from one of the bank’s senior executives, whom I happened to know, informing me about a very grim situation—a situation that continued even after the bank was bailed out on 5 March 2020. In December 2019, I got a call from the same banker. ‘There is a huge run on the bank. As of November-end, the depositor base has eroded Rs 37,000 crore,’ he said. However, the bank was hoping to partially mitigate the damage, banking on the year-end salary and bonus disbursals to shore up the deposits. But that remained just unmaterialized hope as the bank continued to bleed.
Despite having accurate information, I decided not to pursue the story until I got a document. My mind said that it may expedite the run on the bank and the retail depositors would be hit. By February, the situation was far from stabilizing or improving, and I got a document stating the obvious.
This was days before the bank announced the delay in results. The day we rolled out the story about the bank delaying the results in the wake of heavy withdrawals, it confirmed the same to stock exchanges through a filing. A director at YES Bank, who had worked with both Ravneet Gill and Rana Kapoor, told me, ‘The sky had patches everywhere. No one knew which one could be fixed first.’ All these patches were hidden from the public glare, but they came out tumbling after the fall of YES Bank.
But throughout all this, every action that the bank took, every move that the bank made, revealed a huge façade behind which the bank had existed all these years. More than those patches, many in the markets seem to be puzzled about the psychological make-up of the man—Rana Kapoor—who over the years had transformed into a villain in the story of YES Bank. Was he alone in this game at YES Bank?
So, that is why I am here, bringing to you the story of the most high-profile banking failure and the man wh
ose story ran parallel with that of the bank—YES Bank and its founder and former CEO Rana Kapoor.
As we dive into the book, you’ll read many snippets of information from sources who have worked closely with Rana Kapoor and have interacted with him directly at some point. This is a story of a soap opera-styled family feud, betrayals, manipulations, and the mixing of personal and corporate lives—a story that is no less than a thriller.
THE FIRST SIGNS OF TROUBLE
In September 1957, a Punjabi family in Delhi was blessed with a baby boy—a boy who would go on to become famous and then gain notoriety. This boy happened to be Rana Kapoor, who sixty-three years later, is in the firm grip of the Enforcement Directorate (ED) for alleged money laundering.
As he grew up, the boy developed connections with the rich and powerful of India. But it was not just connections that he was banking upon; to his credit, he was smart. After all, graduating from the prestigious Shri Ram College of Commerce (SRCC) is not everyone’s cup of tea.
After his graduation in 1977, Rana went ahead and obtained an MBA degree from Rutgers University in New Jersey, USA, by 1979. It was during this period that he interned in Citibank—a stint that would have far-reaching consequences on Rana’s decisions going forward. At Citibank, he was mesmerized with the glamour and culture of the global banking world and felt a burning desire to set up something on his own. Later, when he went founded a bank of his own, Rana used the same colours in the logo of YES Bank as in Citibank’s. While the red colour in the Citibank logo symbolizes passion, joy, acceptance and the determination of the company, the blue stands for its dominance, excellence, approachability and elegance.
After his graduation, he started scouting for opportunities. Kapoor, in one of his interviews, had said that he had applied to three banks after passing out of Rutgers University: Citibank (where he had interned), ANZ Grindlays and Bank of America.1