The Banker Who Crushed His Diamonds

by Furquan Moharkan

  As one of his colleagues at YES Bank said: ‘Every business does some wrong at some point of time. But the question is how far can you go, and how do you reverse the wrong?’

  In Rana’s case, he didn’t know where to stop. And he was continuing with the risks that he was taking when the bank was at a nascent stage. The simple rule in the finance industry is that the more you grow, the stronger your assessment has to be.

  But there were hardly any tough questions asked to the bank. Rather, in most of the media outlets, there were paeans sung about it. Did they not know what was happening at the bank? Well, probably they did. I know two journalists in two prominent business publications who confessed that their stories were killed by their respective editors. Why did it happen? The answer lies in Rana’s knack for handling people. In 2017, YES Bank, led by Rana, signed a three-year deal with a prominent media house for Rs 50 crore and became a sponsor at their annual event. ‘He wanted publicity. They wanted money. It worked for both of them,’ a person who worked on that deal said. But how was the entire media pliable? Probably not. Whenever a journalist came up with a critical story on the bank, the tools of defamation and legal notice were used against them, as it was in my case.

  So, in essence, Rana and YES Bank used the carrot-and-stick approach to keep critics at bay, while they lent recklessly to stressed businesses—for which a large chunk of the country, from investors to depositors, had to pay dearly later.

  We will talk about the media’s role later in this book, but let’s first complete the story of YES Bank.

  ENTER RBI, EXIT RANA

  After Raghuram Rajan’s abrupt exit from the RBI, the bank was led by his go-to man Urjit Patel—a hawk who most bankers and most financial market participants in India feared. The fear was based on simple grounds: Patel knew how to follow the rule book and implement it strictly.

  To give you an idea about how people feared Patel, I have a personal anecdote. It was 8 December 2018, a Saturday. I was supposed to travel to Mysuru overnight for a personal trip. Since my reporting manager was also on leave, the chief editor wanted me to be in office on Monday. ‘I have a feeling that something is going to happen on that day,’ he told me.

  I left from Mysuru on Monday noon, 10 December. As luck would have it, the brakes of my car failed mid-way. I somehow got them repaired temporarily and managed to reach Bengaluru. When I was just 15 minutes away from the office, I got a call from a senior RBI official. ‘A big announcement is likely soon. He (Patel) is likely to step down,’ the official said.

  Immediately after Patel’s exit at 5 p.m. on 10 December, as I scrambled for related stories, many experts expected a bloodbath in the markets. There was a perception that if the ruling BJP lost the elections in five key states, the markets would collapse.

  The very next day, on 11 December, the BJP—a darling of the stock markets—was routed in the assembly elections in three major states.

  Contrary to expectations, the markets behaved differently. In the next seven trading sessions following Patel’s exit, the markets gained over 4 per cent. The BSE Sensex, in seven trading sessions post his exit, gained a whopping 1524 points or 4.36 per cent. On the other hand, the broader index, NSE’s Nifty-50 had an inter-market arbitrage over the Sensex, which gained 30 basis points more than the Sensex. This behaviour of the Indian markets is best described as cynical. ‘Patel was seen as a very strict person by the markets. What you witnessed in the markets was just a celebration of his exit. That is why you saw bond yield going down as well,’ the CEO of a big brokerage house told me at that point.

  This explains the impact of Urjit Patel on the Indian financial system, which is probably why I have concluded that Patel was the best thing that could happen to the Indian financial system. Patel is very important in the YES Bank story. During his tenure, the heads of three private banks were forced to step down due to alleged governance lapses, and one of them was Rana Kapoor.

  By the end of 2017, Rana, unaware of the RBI’s eye on him, thought he was invincible. There is a concept of proxy advisory firms that provide services to shareholders to vote their shares at shareholder meetings of, usually, quoted companies. This is mostly availed by foreign portfolio investors. In early 2016, the BSE was going for its IPO. So, it was offloading 30 per cent of its stake in one such firm: IiAS. YES Bank bought a 5 per cent stake in it.

  But how could this have helped YES Bank? Let me give tell you. In 2018, Institutional Shareholder Services LC (ISS), a proxy advisory firm, had asked HDFC shareholders to vote against Deepak Parekh’s reappointment. The result was that on 31 July 2018, at the annual general meeting, Parekh got just 77.3 per cent votes as against the minimum required 75 per cent. Foreign shareholders voted as a block through proxy advisers based on ISS’s suggestion.

  In the case of YES Bank, more than 40 per cent of the shareholding was held by foreign portfolio investments (FPIs) at that point in time (as shown in the figure below). Rana was trying to leverage this by influencing the proxy advisers through ownership. In fact, feelers were sent through a senior member of the then marketing and communications department for YES Bank, and one of Rana’s close aides (who is now based in London). He was trying to break ice by getting the IiAS on board for the bank’s magazine—CFO Insights. The IiAS however paid no heed to him and Rana’s plans failed.

  In 2017, as YES Bank’s loan book was outgrowing the industry margin—mostly in wholesale lending—it alerted people within the RBI. And with Patel being a hawk and a tough boss, an inquiry into the bank’s functioning started. Over the next one year, as the RBI started to find damning evidence of governance lapses, which ultimately turned out to be of a deliberate nature, the bank propped up Rana’s name for yet another three-year term as bank chief. By then, Rana had already been heading the bank for almost fifteen years.

  The RBI, however, seemed to have made up its mind. It wasn’t going to give any further extension to Rana Kapoor.

  On 30 August 2018, the bank informed the exchanges: ‘Rana Kapoor may continue as Managing Director & CEO of YES Bank till further notice from RBI.’ However, as the investigation started revealing misgovernance, the RBI informed the bank that Rana Kapoor couldn’t continue as the bank’s chief beyond 31 January 2019.

  The RBI, in its letter dated 17 September 2018, a letter which is said to have been toned down by the central bank, to the bank’s then chairman Ashok Chawla also said that the bank had displayed ‘highly irregular’ credit management practices. Since, the bank was being run as a one-man show, management used all its might to save its promoter and long-serving CEO Rana Kapoor. Just eight days later, on 25 September 2018, the bank’s board said that it would ask the RBI to grant an eight-months extension to Kapoor. The plan was to seek extension till 30 April 2019, so that he could supposedly help finalize the financial statements for the financial year ending on 31 March 2019. Thereafter, it would apply for yet another extension till 30 September so that Kapoor could preside over the annual general meeting.

  ‘The board also decided that, given the role of Rana Kapoor as MD and CEO since the inception of the bank in 2004, and the time-consuming challenges of finding a suitable successor, the incumbent MD and CEO be given further time in his current position beyond 31 January 2019,’ the bank had informed the exchanges after the 25 September board meeting. In fact, YES Bank’s then chairman Ashok Chawla had also met RBI governor Urjit Patel to bargain for an extension of Kapoor’s tenure, much to the latter’s dismay.

  However, by 18 October, with a no-nonsense governor running the show, the RBI said a firm no to any plans of extending Rana Kapoor’s tenure on any pretext. ‘The Reserve Bank of India has reaffirmed that a successor to Rana Kapoor should be appointed by 1 February 2019,’ YES Bank informed both the exchanges on 18 October 2018. Internally, the move by the RBI gave confidence to the employees who were otherwise scared of Rana Kapoor. Many saw him as a maverick banker who was also an ultra-tough boss.

  In the notes to the accounts of the
September 2018 results, the bank had said, ‘The bank became aware in September 2018, through communications from stock exchanges, of an anonymous whistle-blower complaint alleging irregularities in the bank’s operations, potential conflicts of interests in relation to the former managing director & CEO and allegations of incorrect NPA (non-performing loans) classifications.’

  The bank conducted an internal inquiry of these allegations, which were carried out by the management (then headed by Rana Kapoor himself) and supervised by the board of directors. A report based on this inquiry was reviewed by the board in November 2018. In December 2018, the audit committee of the bank engaged an external firm to independently examine the matter. In April 2019, the bank had received the phase 1 report from the external firm and, based on further deliberations, directed a phase 2 investigation from the said firm. Further, during the quarter ending on 31 December 2019, the bank received forensic reports on certain borrower groups commissioned by other consortium bankers, which gave more information regarding the above-mentioned allegations.

  ‘The bank at the direction of its Nomination and Remuneration Committee (NRC) obtained an independent legal opinion with respect to these matters,’ the bank said in its March 2020 quarterly filings. In February 2020, the bank received the final phase 2 report from the said external firm.

  The special audit confirmed the complaint that exorbitant payouts were made to some employees who were close to Rana Kapoor, like his executive assistant (secretary) Lata Dave; Amit Shah, former group president and head of marketing and communication; Rajat Monga, former senior group president and chief financial officer; and Ashish Agarwal, former chief risk officer, reported business daily LiveMint in November 2019.1

  ‘The bank is in the process of evaluating all of the above reports and concluding if any of the findings have a material impact on financial statements/processes and require further investigation. The bank has taken this report to the newly constituted audit committee and board and will progress further action basis the guidance and recommendations,’ the bank said in Note 14 of March 2020 financial results. The whistle-blowers’ letters kept coming even after Rana was gone. During the financial year ending on 31 March 2020, the bank had received various whistle-blower complaints against the management, the former MD and CEO and certain members of the board of directors prior to being superseded by the RBI, the bank had informed exchanges.

  Now, back to Rana’s last days at YES Bank. What were the reasons behind the RBI’s firm no against Rana Kapoor’s extension? The signs behind this decision had become clear by April 2018. The central and Rana-controlled Yes Bank exchanged at least eight letters related to persistent governance and compliance failures, and violations of statutory and regulatory rules at the bank till that time. The RBI had been keeping a strong vigil on YES Bank, right from Raghuram Rajan’s time. Rajan, when I approached him for his opinion on YES Bank, wasn’t willing to divulge much as he was part of the RBI, yet he told me, ‘We, at the RBI, started scrutinizing Yes Bank more closely during my term, trying to reconcile our sense that it was taking significant credit risk with the low NPAs it was reporting.’

  But Rana wasn’t someone who would give up so soon. He had a friend in the central government, a minister, who was powerful back then. He called him multiple times, but the minister didn’t receive his calls. As Rana was dealing with the RBI’s strict vigil, he was also trying to sell his shareholding in the bank—for which he tried approaching two prominent business tycoons in the country. One of them offered to pay him Rs 200 per share, but Rana wanted Rs 300 per share and the deal was called off. Rana approached yet another tycoon, who saw the rot in the books, and instead of buying stake in the bank, started shorting on the YES Bank stocks. Shorting an asset means investing in such a way that the investor will profit if the value of the asset falls. Shorting happens when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference.

  It is said that these people used to sweat after Rana used to show them the list of the top fifty borrowers at YES Bank—in a way, they were just very, very bad assets.

  As the RBI tightened its noose, the YES Bank board saw a flurry of exits. On 14 November 2018, the bank’s chairman Ashok Chawla stepped down, citing an inability to perform his duties. ‘YES Bank announces that Ashok Chawla, non-executive independent part-time chairman, has tendered his resignation from the bank’s board, with immediate effect, mentioning that during the current transition period, the bank would need a chairman who could devote more time and attention,’ the bank told exchanges on that day.

  Interestingly, Chawla, a former babu and also the NSE chairman at a time when he was YES Bank chairman well (he stepped down as NSE chairman in January 2019), has been alleged to play a key role in the high-profile Aircel-Maxis deal scam—a matter which is sub judice still. Chawla, along with six other members who are being prosecuted, were part of the Foreign Investment Promotion Board (FIPB) which has been disbanded now. The Central Bureau of Investigation (CBI), the investigating agency in the matter, has alleged that despite the fact that an investment of $800 million (over Rs 3500 crore) was made in Aircel by Maxis, and the Cabinet committee on economic affairs was the competent authority to grant approval, the investment proposal was wrongly projected as merely involving an investment of Rs 180 crore.

  But YES Bank’s tryst with having some retired IAS officer heading the board didn’t stop there. Brahm Dutt, a former IAS officer who was on the board of YES Bank since 2013, replaced Chawla on 12 January 2019, days before Rana’s time at YES Bank was over.

  Back to the developments of 14 November now. Yet another director at YES Bank, Vasant Gujarathi, stepped down and was replaced by Uttam Prakash Agarwal. The blows didn’t stop here. On 15 November 2018, O.P. Bhatt resigned as the external expert of the ‘Search & Selection Committee’ (S&SC)—a committee aimed at finding Rana Kapoor’s replacement. Bhatt himself was under the lens of the CBI at that point in time.

  A former SBI chairman, O.P. Bhatt, along with more than a dozen senior officials of the lender, were under the CBI scanner for a loan granted to Vijay Mallya. Couple of years back, the flamboyant liquor baron had escaped from India after accusations of money laundering and defaults on loans worth Rs 9000 crore. Bhatt was the SBI chairman between 2006 and 2011, when the lending was done. The others worked at SBI branches in Bengaluru and Mumbai and held posts such as deputy manager, group executive, assistant general manager, credit analyst and relationship manager.

  As irony would have it, a man who was under the scanner for bad loans was looking for a successor for a man who was being shunted out for rising bad loans.

  However, the bank preferred not to find any replacement for Bhatt, which many believe was aimed at avoiding any kind of scrutiny. ‘Given the significant progress made by the S&SC, with the support of Korn Ferry, over the past three meetings (the most recent being held on November 13, 2018), in its mandate to identify a suitable successor to Shri Rana Kapoor, MD & CEO, YES Bank, the NRC has decided to continue with the existing members to complete the process as per the timeline communicated by RBI,’ the bank informed exchanges on 15 November 2018.

  Just four days later, Rentala Chandrashekhar, non-executive independent director, tendered his resignation from the board of directors of YES Bank with immediate effect, which was attributed to personal reasons by the bank in its regulatory filings. However, the next day the bank put out a revised press release, silently removing the attribution to ‘personal reasons’. According to a Business Standard report,2 Chandrashekhar wasn’t happy with the functioning of the bank.

  As the bank was seeing a flurry of exits, Rana Kapoor was trying to make a comeback. He wanted to be named as the bank’s non-executive chairman once his term ended on 31 January 2019.

  The RBI’s no was so firm that despite the bank’s former Articles of Association, the terms for which were decided in 2005 and were loa
ded in Rana’s favour, he could not be reinstated in any capacity. A closer reading of YES Bank’s Articles of Association—that specify the regulations for a company’s operations and define the company’s purpose —reveals that under Article 121 Rana Kapoor could not retire from the board. Also, as per Article 110, Rana Kapoor had the right to nominate up to three directors, provided he secured the approval from his estranged sister-in-law Madhu Kapur for these appointments.

  It is here that the YES Bank story goes into soap-opera mode.

  So, in early October 2018, Rana Kapoor’s close aide at the bank, Rajat Monga, called up Madhu Kapur and Shagun Gogia Kapur. He requested for a meeting with Rana Kapoor. The mother and daughter agreed. The meeting was held at Rana Kapoor’s home. Present at this meeting were Bindu, Madhu, Rana, Shagun and Neeru Puri (Madhu and Bindu’s sister). The negotiations started, where Rana wanted Madhu Kapur’s consent to get directors nominated on the board. It was decided that Rana would share a draft proposal. Rana also held a separate meeting with Madhu Kapur’s son, Gaurav Kapur, to get his family on board with his terms.

  Later on, Rana is said to have shared a draft proposal that asked him to be made non-executive chairman and for Shagun to be kept away from the board. But this was unacceptable to the Kapur family. They wanted one director to be nominated by each family, while the third one would be on a rotation basis. Between November and December, negotiations were held between Madhu Kapur’s family and three members of the YES Bank board —Subhash Kalia, Ajai Kumar and Lt Gen. (Dr) Mukesh Sabharwal (retd).