The Banker Who Crushed His Diamonds

by Furquan Moharkan

  While this story sounds more like a history lesson, things will get interesting as we uncover what was happening behind the curtains.

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  YES Bank’s business story looks more or less like an inverse variation graph—with the bank first seeing a steep growth curve and then a steep collapse curve. But the story of the control of YES Bank is a more complicated one, where its foundations were scheming, manipulations and back-stabbing—a trend that ultimately became the bank’s culture. We will talk about their business story in the next few chapters, but for now let’s focus on the battle for control over YES Bank.

  The plan to start a bank was originally not Rana Kapoor’s. He was nowhere in the picture. It was banker Harkirat Singh’s idea. Who was he?

  At that point in time, Harkirat was a celebrity banker. He was a banker that the current lot of powerful bankers, the ones who were somewhere in the middle of the corporate ladder, looked up to. Till 1999, Harkirat was the head of Deutsche Bank in India. He had worked in Deutsche Bank for eighteen years, having started the bank’s operations in India in 1981. He led Deutsche Bank’s first foray into venture capital with an investment in India’s first venture capital company, Indus Venture Capital India Private Limited.

  Harkirat began his banking career at the Citibank training centre in Lebanon. During his long and illustrated career, he also worked with ANZ Grindlays. It was here that he made friends with Ashok Kapur. At Grindlays, Ashok served in various capacities, including general manager for institutional banking and managing director for Grindlays Merchant Bank of Nigeria. He also worked as ABN Amro’s regional manager (executive vice president) in Singapore where he was involved in expanding the bank’s network in Asia and Australia. He also worked in different business groups, including commercial and investment banking. In fact, Ashok was the first Asian to be appointed ABN Amro’s country manager for India.

  When Rabobank was scouting for opportunities in India, Harkirat came to know about it. Since Harkirat knew Ashok, and Ashok was retiring from ABN Amro and could immediately take up the task, he invited Ashok to join him as a partner in this venture. Ashok and Harkirat were contemporaries who were heading two different foreign banks and had a lot of mutual respect for each other. Until this point, Harkirat did not know Rana Kapoor, who was then heading the corporate business of ANZ Grindlays.

  It was Ashok who recommended that they invite Rana Kapoor to join as the third partner. ‘I accepted that suggestion only because of his very strong recommendation, as I did not know Kapoor very well nor was I fully acquainted with his experience and expertise,’ Harkirat had told Economic Times1 years later in 2013. In the same interview, Harkirat had said that he didn’t know that Ashok and Rana were related. Else, according to him, he would not have taken Rana on board.

  The plan was to set up set up a non-banking financial corporation (NBFC) and ultimately a bank. An NBFC is an entity that provides certain bank-like and financial services but does not hold a banking licence. NBFCs are not subject to the banking regulations and oversight by federal and state authorities, which traditional banks adhere to. The most important difference between NBFCs and banks is that the former doesn’t take demand deposits.

  The arrangement of things was simple: while Rabobank would control majority stakes in the NBFC, the three Indian partners would control majority stakes in the bank. After hectic discussions, Rabo India Finance Limited was incorporated with the Registrar of Companies in Mumbai on 5 February 1998, and a few months later commenced operations.

  Rabobank held 75 per cent stake in the India entity, while the three other partners held 25 per cent each in the entity. The Indian partners had chipped in with Rs 9 crore each. From their personal pockets, they had to contribute only Rs 40 lakh each. The rest of it was the joining bonus from Rabobank. In the NBFC, all three of them were managing directors, with Harkirat usually operating from both London and India.

  Many claim that the NBFC was not operating to its fullest as it was aiming at getting the bank licence. In the words of one NBFC veteran, he saw it as ‘dysfunctional’. But, in fact, the NBFC was doing pretty good business. Back then, Prime Minister Atal Bihari Vajpayee focused a lot on infrastructure. He had launched Bharat Nirman. Rabo India was minting money through short-term lendings to these projects. Rana was mainly looking after the credit growth and collection—and going by the accounts of the people who know him, he was very good at it.

  Not only was Rana good at collection, he would also go to any extent to get the job done. Once at YES Bank, he was not getting repayments from one of his small-and medium-scale enterprise borrowers. The client was out of the country. When he returned, Rana sent a car to receive him at the airport. From the airport, the borrower was directly driven to Rana’s cabin on the ninth floor of Nehru Centre. There, Rana, according to a former YES Bank employee present in that meeting, using Hindi cuss words told him: ‘Tune mera paisa liya hai. Tu lautaayega kya yeh paisa, warna tujhe uthaaunga (You have borrowed my money. If you don’t return it, I will get you kidnapped).’

  Rana and Rabobank India helped Tata Tea acquire Tetley, which would be India’s first leveraged buyout (LBO). An LBO is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The acquiring company sets up a special purpose vehicle (SPV), a kind of holding company, to hold all the debt related to the deal. ‘Krishna Kumar [R.K. Krishna Kumar, who was heading Tata Tea at that time] wanted a letter of comfort from Rabobank saying that we would support him right through, having failed in an earlier bid to take it over. We worked diligently with Tata Tea at every stage for several months before concluding the deal,’ Rana Kapoor told Business Standard in an interview.2

  A comfort letter, also called a letter of intent, is a business document that is intended to assure the recipient that a financial or contractual obligation with another party can and will be met. The sender is often an independent auditor or accountant. This was probably when Rana Kapoor got his first taste of the limelight. He had successfully aided India’s first LBO. At that time, the deal, which saw an Indian company acquire a foreign company thrice its size, was the biggest ever in India’s corporate history, worth a staggering Rs 1870 crore (£271 million).

  The acquisition was to be financed with £70 million pounds of equity, of which £60 million would have come from Tata Tea. The balance £10 million would be raised from Tata Tea Inc USA, a wholly owned subsidiary of Tata Tea. Tata Tea’s global depository receipt (GDR) issue was to finance £45 million of the equity component. Of the debt component, £20 million was set to be raised by issuing subordinate vendor loan notes and the balance was to be raised through debt offerings arranged by Rabobank, which was the investment adviser to this deal.

  After this, the trio started working for the licence of the bank. They used to frequent the RBI so often those days that the officials there gave them a moniker of ‘three musketeers’. But the majority of these negotiations were done by Harkirat because he was the most well-known face among the three. ‘He was known in the global banking industry because he was very close to the then finance minister and the RBI babus,’ a person who knew all three of them said. In fact, in 2000, Harkirat had also met Finance Minister Yashwant Sinha for these negotiations.

  Back then there was a gentleman, late S.P. Talwar, then the deputy governor of the RBI. Talwar used to see the three musketeers slogging away at the RBI office every day. In 1997, Governor C. Rangarajan had divested Talwar of his key portfolios, which were later restored during Governor Bimal Jalan’s tenure.

  ‘There were whispers that it was Talwar who was responsible for granting a provisional banking licence to the dubious CRB Group which later went bust,’ veteran journalist Sucheta Dalal noted in a piece in Moneylife in August 2010.3 More about Talwar later, but for now let’s keep our focus on Harkirat Singh.
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br />   At that point of time, when the RBI gave the licence to the bank, M.R. Srinivasan was the chief general manager in-charge of RBI’s department of banking operations and development. His appointment to the post had come around the time when the world was transitioning into a new millennium.

  RBI documents say this about the functioning of the department of banking operations and development: ‘Its functions broadly relate to prescription of regulations for compliance with various provisions of [the] Banking Regulation Act on establishment of banks such as licensing, branch expansion, maintenance of statutory liquidity, management and operations, amalgamation, reconstruction and liquidation of banking companies and issue of guidelines on Prudential Norms relating to Capital Adequacy, investments and loans. In order to achieve its objective, it has to maintain a flexible organizational set-up with activities in tune with the time.’

  In essence, Srinivasan was in charge of the department that gave the in-principle licence to the bank that would be later named YES Bank. Why I am explaining it here will become clear in the later part of this chapter.

  The three partners had received the RBI’s in-principle approval for setting up a bank in the private sector on 7 February 2002. The local promoters (Harkirat Singh, Ashok Kapur and Rana Kapoor) were to together hold 51 per cent in the new bank.

  In 2003, the three made a fortune. They sold their holding at Rabo India for $10 million (around Rs 40 crore to Rs 50 crore at that point of time). In the same year, when the bank, which hadn’t been named till then, was expected to commence operations by August, Harkirat Singh, who had tirelessly worked towards starting it, pulled out.

  Explaining his decision, Harkirat, in the news reports from that time, was quoted saying: ‘There is no longer a complete alignment with the vision going forward.’ Just days before this, Rabobank had come out with a statement saying that Harkirat would not have a major role to play in the bank and would be just a shareholder.

  Why had this happened? There seemed to be a tussle even before things got going. I spoke to a person who knew all the three men and was in the thick of things back then. It had been decided that Harkirat would be the executive chairman of the bank, Ashok Kapur would be the CEO and Rana Kapoor a director. The three Indian partners, who had reaped a windfall by selling their shares at Rabo India, were to pitch in equity of Rs 40 crore each.

  In early 2003, Harkirat, who his friends called Harki, had gone for a family vacation to Mauritius. Back in India, Rana thought of doing the unthinkable. He convinced Rabobank to place bets on him as managing director (MD) and CEO, and Ashok Kapur as the CEO. Till then, Harkirat was completely unaware of the decision. He came to know when he returned to India after a week.

  How were they able to pull it off? Apparently, Rana had bribed one of the senior Rabobank officials in India. ‘He had bribed a senior Rabobank guy with £1 million,’ one person, who was part of the redressal process between the three parties and knew the situation inside out, told me while I was writing this book.

  At that point of time, after his return to India, Harkirat started reasoning with Ashok, whom he knew personally. Ashok was covertly in support of Harkirat because he knew Rana had played dirty. Helpless, he tried to get back to the old understanding. Ashok, who had recommended Rana to Harkirat, was trying to be the voice negotiating the deal. He was trying to broker a deal in adverse circumstances. ‘He was trying to get a rotational basis working for the CEO’s post,’ a person who knew all of them told me.

  But Rana was adamant. He wanted Harkirat to become a normal investor, nothing more nothing less.

  This wasn’t acceptable to Harkirat, who pulled out of the partnership in late April 2003. ‘I value my reputation above everything else,’ he said. However, Rana Kapoor, who was then the MD and CEO of Rabo India Finance and a non-executive director of the banking company, said that Harkirat had been consulted before the decision to appoint Ashok Kapur as chairman was taken. ‘Due to personal reasons, Harkirat has chosen to withdraw from the bank. His contribution to Rabo has been extremely valuable and it is indeed very sad that he is leaving us,’ he had told the press.

  But Harkirat wasn’t going to take this manipulation lying down. He sued Rabobank in the London Court of International Arbitration. Harkirat was caught in a trade-off there. He had the option of going to the RBI as well. But then he thought prudently: if the RBI intervened, they would cancel the licence and Harkirat wouldn’t receive any monetary award. But in case of an international arbitration, he would get the award. So, the case was filed against Rabobank, who during the proceedings called in Rana as a witness. In 2005, the London court ruled in Harkirat’s favour. While the quantum of the award wasn’t public knowledge, people who knew Harkirat speculated that it was £25 million.

  Since Rabobank was putting its weight behind Rana Kapoor and Ashok Kapur was optionless, the RBI didn’t revoke their licence. But later, in the court argument, the RBI is said to have given a letter to Harkirat stating that he was wrongfully removed and without their permission. When this was happening, Harkirat, according to the accounts of people who knew him, was being cautious of his image. ‘Had he gone to the RBI, the bank’s licence would have been revoked. A lot of muck would have come out,’ one such person told me.

  Post that, Harkirat oscillated mostly between India and London, staying away from any media glare. Most people who knew him well say that they lost the touch with him by 2010. Harkirat also severed contact with Rana but continued to remain in touch with Ashok Kapur.

  Back at the bank, a new arrangement was brought in. Since the initial plan was to invest Rs 120 crore (Rs 40 crore each), now they were short of funds. That is where Rabobank came to the rescue and granted both partners a loan of Rs 17 crore each, without any interest, to fill in for the deficit amount. The promoters, Rana Kapoor and Ashok Kapur, held a 52.12 per cent stake, while Rabobank held 20 per cent. Rana was the CEO and MD, while Ashok was the non-executive chairman. Ashok, who was about sixty years old by then, believed that Rana, who was fifteen years his junior, would be more energetic in the executive role.

  Delayed by a year, the bank began operations in 2004. But where did the name YES Bank come from? Rana Kapoor had come up with a logic that resounded years later with another man, Erwin Singh Braich, who tried to bail out the bank. There were five names on the table: YES Bank, Mint Bank, My Bank, Gateway and Octra. In various interviews over the years, Rana Kapoor had given credit to Bharat Patel (Procter & Gamble India chairman and a YES Bank board member). ‘Yes is one of the most-spoken words in English, and it was a new-age bank. It kind of reinforced high energy,’ Rana Kapoor said in an interview to Hindustan Times.

  In 2019, the then biggest suitor of YES Bank, Erwin Singh Braich, said his rationale for investing in YES Bank was simple. ‘I loved the logo, and I had my people do the due diligence very deeply,’ he said. ‘If it was called “No Bank”, I wouldn’t have been interested.’

  Less than one year after the bank commenced its operations, the bank got ex-RBI deputy governor S.P. Talwar on board. With effect from 1 July 2005, YES Bank had appointed Talwar as senior adviser (corporate development). ‘This is a very significant appointment for YES Bank, as it comes at an extremely critical take-off phase. Shortly, YES Bank will be a listed entity, which assumes an extra responsibility and commitment towards all our investors and stakeholders. We are confident that with Mr Talwar’s extensive and invaluable experience, YES Bank will continuously adopt global best practices, ensuring that the organization is managed and monitored in a responsible manner to “create and share value”,’ Rana Kapoor, then donning the role of CEO and MD said on his appointment.

  At that point of time, both Rana and Ashok, who didn’t know what the future had in store for them, tried to consolidate power at the bank which they now controlled. The two partners incorporated four articles in the memorandum of association (MoA) in the bank—Article 110 (b), Article 127 (b), Article 127A (a) and 127A (b)—all directed at consolidation of powe
r by the duo.

  Here are the relevant extracts of those clauses:

  Article 110 (b): ‘So long as the Indian Partners hold along with any of their Affiliates directly or indirectly, at least 10 per cent of the issued and paid up share capital of the Company, the Indian Partners shall have the right to recommend the appointment of three directors collectively referred to as the “IP Representative Directors”. So long as Rabo holds along with any of its Affiliates directly or indirectly, at least 10 per cent of the issued and paid up share capital of the Company, Rabo shall have the right to recommend the appointment of one director referred to as the “Rabo Representative Director”.’

  Article 127 (b): ‘The Indian Partners shall have the right to recommend the name of the Chairman. Ashok Kapur shall be the first Chairman. The Indian Partners shall have the right to recommend the name of the CEO and Managing Director of the Company. Rana Kapoor shall be the first CEO and Managing Director. Rabo shall cause the Rabo Representative Director to vote along with the IP representative Directors for appointment of the Chairman and the CEO and Managing Director to the relevant Committees of Directors (as indicated by the Indian Partners).’

  Article 127A (a): ‘Subject to the provisions of the said Acts and these presents, the Board shall subject to a recommendation made by the Promoters, also include such Whole time Director/s as may be appointed in terms of these Articles.’

  Article 127A (b): ‘The Board may, subject to its obtaining approval from the Reserve Bank and also subject to such approval as may be necessary under the Act, and subject to the other provisions of these Articles, appoint and/or re-appoint from time to time one or more of its member(s) to be designated and to act as Whole time Director/s of the Company, not in any case exceeding one third of the total number of the Directors of the Company for the time being.’