The Banker Who Crushed His Diamonds

by Furquan Moharkan

  In lieu of this, as Rana was staging a backdoor comeback at YES Bank, he offered Shagun directorship at YES Securities—an arm of the bank. ‘I will mentor you there,’ Rana is said to have told Shagun. But this time the Kapurs were adamant. They knew, like last time, that Rana was hiding behind the board. As his days neared an end, Rana became more and more desperate. In fact, the once-arrogant Rana was even apologizing to the Kapurs.

  Around Republic Day in 2019, with only four days to go till he was CEO and MD, Rana made a last bid to amke a comeback. He visited Madhu Kapur at her home for the first time in almost a decade. There, he tried to get emotional to convince Madhu, but to no avail. ‘What will we be giving our grandchildren?’ he asked her. But Madhu was in no mood to budge.

  That is when a breakthrough was achieved, exactly after a decade of tussle. It was agreed that Rana won’t come on board, while both families would nominate one person each, and the third seat would remain empty for now. It was because of this deal that in April 2019 Ravinder Kumar Khanna and Shagun Gogia Kapur were appointed on the board as ‘Indian Partners Representative Director on the Board of the Bank pursuant to Article 110(b) of the Articles of Association.’

  Now who was Ravinder Kumar Khanna? He is the father of Aditya Khanna and father-in-law of Radha Kapoor—Rana’s eldest daughter.

  But Rana didn’t stop with the January agreement. He continued writing to the board until April, telling them how to do the things required to get him appointed as an adviser. It was only after an intervention by Rama Subramaniam Gandhi, former RBI deputy governor and nominee director on the YES Bank board, that Rana stopped directly interfering in issues relating to the bank.

  As the RBI was fighting a battle to clean up the Indian banking system, it was fighting a simultaneous war—a bigger one. It was fighting over the control of the Reserve Bank with the finance ministry led by Late Arun Jaitley—one of the ugliest turf wars fought between the central bank and the government.

  This ugly spat became public on 26 October 2018, when then deputy governor Viral Acharya, speaking at the A.D. Shroff Memorial Lecture in Mumbai, warned the government of the day about the wrath of the markets for not respecting institutions. In the footnotes, Acharya thanked Urjit Patel for suggesting the topic to him. What followed for the next one and a half months were plants and counter-plants by both parties as the game for one-upmanship was fought publicly. On 7 November, after a lot of investigation into this turf war, we at Deccan Herald had reported that the government was looking to use one-third of the RBI’s reserves to make up for its lack of revenues, and this was the primary reason for the turf war. Even as Jaitley and then Finance Secretary Subhash Chandra Garg vehemently denied the story, over the course of next one year, it was proven to be true.3 In August 2019, the RBI accepted the suggestions made by Bimal Jalan committee and transferred Rs 1.76 lakh crore to the Government of India—almost Rs 52,000 crore of which came from RBI reserves.

  However, that wasn’t the only reason. Another big reason was the government’s position on RBI’s bank clean-up drive—that led to the axing of Rana Kapoor—which hampered the growth in the country as banks were not able to lend as freely as before.

  As irony would have it, Urjit Patel made an unceremonious exit from the RBI before Rana Kapoor stepped down from YES Bank. But by that time, Urjit had sealed Rana’s fate and that of two other private lending chiefs—Shikha Sharma of Axis Bank and Chanda Kochhar of ICICI Bank. As the new governor took charge, the central bank started pushing for more and more lending, and the clean-up of balance sheets seemed took backstage. This brings the RBI’s role in handling the YES Bank fiasco under severe questioning.

  Going by the schedule set by the RBI in September, YES Bank, on 24 January 2019, announced the appointment of Ravneet Gill as Rana Kapoor’s successor. However, he was supposed to join in March. Till then, YES Bank board member and former Syndicate Bank top boss, Ajai Kumar, was appointed as the bank’s interim boss. One of his friends later told me that Kumar wasn’t happy with the way things were at YES Bank. We will dwell more on the post-Rana phase of in later chapters, but for now let’s focus on how the RBI as a regulator could not insulate itself from the fall of YES Bank.

  The government and the RBI may have found a suitor for YES Bank quickly after the crisis could no longer be ignored, but did that mean they, especially the banking regulator, acted in time? Hardly. If trust in the banking system has been broken due to the YES Bank fiasco, much of the blame lies with the regulator and the government.

  Let me explain why. The RBI was forced to place a moratorium on deposit withdrawals (a cap of Rs 50,000 for a month) after the unprecedented run on the bank. In the three months starting in October 2019, the bank witnessed its deposit base erode by 20 per cent (Rs 44,000 crore), a trend that accelerated in January and February. The current account–savings account (CASA) deposits, which were hit by these withdrawals, are the cheapest form of capital for any bank—way cheaper than borrowings and equity. The high rate of withdrawals was pushing the bank to the brink of insolvency, as it was already capital-starved. Also, it was clear from September 2019 itself that the bank wasn’t able to raise funds, as no fund house was willing to park their monies in it.

  The bigger question that the RBI needs to answer is: if everyone in Dalal Street knew that funds weren’t coming into the bank, how was it that the regulator gave the bank such a long rope, until it went right to the brink of insolvency?

  There should have been ‘tighter monitoring, more timely intervention, fixing accountability early, getting the incentive structure for senior management right and, most importantly, clear communication,’ Amit Tandon, founder and CEO of proxy advisory firm IiAS told me when I was covering the YES Bank fiasco. ‘The days of “central bank speak” are over. The fact that markets have the ability to spot these trends, even as regulators are slow to act, is worrying,’ he added.

  Since Urjit Patel’s exit, two big financial institutions (DHFL and YES Bank) have collapsed, casting serious doubts over the stability of the financial sector as a whole, and even of the banking sector within it. In both cases, there were alleged frauds by the top management, members of which were closely connected to each other.

  Indeed, the RBI should have raised red flags even earlier as the advances by the bank grew abnormally since 2014. Despite the investment rate in the country declining, YES Bank’s loan book multiplied by four times in a span of five years, indicating a clear disregard for risk assessment metrics.

  Rana’s successor, Ravneet Gill, has been accused of misleading investors on raising capital (a charge that we will discuss later in this book) by one of the whistle-blower board members at YES Bank. In fact, some of the claims by Ravneet were questionable, like claiming ‘funds are on the way’ after every board meeting on the issue—none of which materialized ultimately. Also, in an interview with the BusinessLine on 4 October 2020,4 he said: ‘Let’s take a share price of about Rs 50, I think the post-money dilution would be 32–33 per cent. When we brought up this issue at our last board meeting, the board was unanimous and every stakeholder was aligned to the fact that we must raise as much capital as the bank needs. We are in a silent period, and so it is difficult to give a timeline, but we should have capital very soon.’ However, as we will discuss in the following chapters, the audit committee chairman of the bank resigned after months of disgruntlement with the board. So, was the board actually united, or it was just a claim?

  The question being asked is, how is it that the RBI’s nominee on the board of YES Bank, Rama Subramaniam Gandhi, did not raise alarm bells? Or did he raise an alarm, but there was inaction by the YES Bank board and the RBI? Whatever the case may be, the depositors and shareholders of the bank—the pillars of any bank, were not informed about any of this.

  ‘As the RBI nominee, he should have been more circumspect and pushed for the credibility of the purported investors before giving false assurances to shareholders,’ Shriram Subramanian, MD of proxy advisor
y firm InGovern told me for one of my stories about the issue. The charge is more serious because Gandhi was appointed to the bank’s board as a move to give emphasis to the stabilization of the bank.

  Many large players—depositors and investors—in the markets saw the writing on the wall as early as the end of September 2019, as Rana Kapoor’s promoter stake (which he sold entirely between October and December 2019) was picked up by susceptible retail and small-time investors. At the time of the RBI’s crackdown on the bank, this group of investors had been left holding a whopping 48 per cent of the bank.

  The RBI could have acted far earlier on the issue, without causing much pain to depositors. RBI Governor Shaktikanta Das has been at pains to emphasize time and again that India has a ‘banks can’t fail’ policy. Had YES Bank collapsed completely, a large number of depositors would have lost their hard-earned monies, sending the economy into further chaos. But will that explanation satisfy those who trust the RBI and the government to do their job? The answer seems to be a resounding no.

  But this involvement of the RBI in the functioning of YES Bank and the exit of Rana Kapoor revealed a very ugly side of the bank. Rana and his bank were known as media- savvy until then. However, as the RBI cracked the whip on the bank, the media started reporting hitherto unknown truths. This was something that the bank’s management wasn’t equipped to handle. They had only seen the media singing paeans for them. The bank started a new strategy to deal with it, which would become its mantra for the next one year.

  One of the newspapers that reported the episode, and dutifully so, was Business Standard—a newspaper owned by Uday Kotak. Kotak also happens to be the owner of YES Bank’s rival private sector bank, Kotak Mahindra Bank. So, the YES Bank management started training its guns at Business Standard, claiming that it was running these damaging stories at Uday Kotak’s behest.

  ‘We are concerned that Business Standard being a responsible media house has allowed its journalist(s) to have a free hand to malign, defame and disrepute the bank and its MD & CEO without any checks and balances. The pattern/sequel of articles published by Business Standard in the last two+ months would clearly indicate that there is explicit malice and prejudice, which the journalist(s) of Business Standard are trying to demonstrate. Probably they are doing it at the behest of our competitors (also given the inherent conflict of interest given the common Promoter ownership of Business Standard and Kotak Mahindra Bank) or market manipulators, which only an internal investigation by Business Standard would reveal the extra-motivation received by such journalist(s),’ YES Bank’s General Counsel Sanjay Nambiar wrote in a letter dated 4 December 2018, addressed to the editors of Business Standard—A.K. Bhattacharya and Shyamal Majumdar.

  Replying to the bank within three days, Majumdar rejected the charge, ‘especially since no factual errors have been pointed out by the bank’. ‘Most of the reports alluded to are of a routine nature, relating to press releases and other announcements by regulators, credit rating agencies or the bank itself. Wherever required, the paper’s reporters have taken the bank’s point of view,’ the newspaper said.

  Many business journalists at that point in time, who had an idea about Rana’s misdeeds, were flabbergasted with the approach. Many thought it was a one-off event arising out of desperation. But even as Rana left the bank, the legacy remained. And over the next one year, as the bank started to tumble, its marketing team started blaming everyone other than its own management.

  In fact, as soon as a journalist did a negative story on YES Bank, a bunch of anonymous Twitter accounts would jump in and troll the journalists—the prominent among these were the handles Stock Ki Baat and Himanshu Kumar. When I broke the story about the bank’s end on 20 September 2019, Himanshu Kumar tweeted to me: ‘Oh! This was unfortunate that Yes Bank didn’t reached Kotak Bank. And Kotak Bank said “NO” to Yes Bank is DayDream. I know you are follower of Uday Kotak sir. Why you are not following @RanaKapoor_? (sic.)’ I don’t know where this came from, as I haven’t ever met Uday Kotak, but this tweet seemed to be in sync with the bank’s year-old strategy to blame Uday Kotak.

  ENTER RAVNEET GILL

  By December-end, the bank had tried interviewing many people but was not able to hire anyone. It was on 26 December 2018 that the committee tasked with finding Rana Kapoor’s successor called up Ravneet Gill. The first contact was established.

  Within eight days, on 5 January 2019, Ravneet Gill was interviewed for the first time. On 8 January, there was a second round of interviews and YES Bank had found its new CEO, subject to the RBI’s approval. The RBI okayed the appointment on 23 January 2019.

  Rana Kapoor wasn’t part of any of the panels that interviewed Ravneet Gill. But Ravneet had met Rana separately to know the details about the bank. At this meeting, Rana, who still wanted to directly control the bank, asked Ravneet to make him the adviser. But Ravneet was clear, he didn’t want any interference in running the bank. ‘I will only come on board if I am not made the puppet face,’ Ravneet told Rana. And that is where Rana gave up his demand of being directly associated with the bank — at least in front of Ravneet.

  On 1 March 2019, Ravneet Gill, the former boss of the Deutsche Bank in India, joined YES Bank. The markets welcomed him with caution — the shares of the bank, which were battered by 29 per cent by then, went up by 3 per cent on the day he joined. Life was coming a full circle here. YES Bank was going to be headed by a man whose top boss at Deutsche Bank had been Harkirat Singh — the man who had actually decided to start the bank that would ultimately be named YES Bank. Although Harkirat had no role in Ravneet’s hiring in 1991, Ravneet knew him as his CEO, despite not directly reporting to him.

  Now, the interesting part of the story lies in the fact that Ravneet, just like his predecessor Rana Kapoor, used to flaunt his connections with the who’s who of Indian banking. The son of a former Indian Administrative Services (IAS) officer, he grew up in Delhi’s upscale neighbourhood of Moti Bagh — considered to be a part of Lutyens’ Delhi. He had an interesting neighbour there whom he used to play cricket with — memories with whom he would flaunt years later. This was senior intelligence officer R. Govindarajan, one of whose sons, Raghuram Rajan, went on to become a celebrity-styled RBI chief years later in 2014. It was this memory that Ravneet used to talk about everywhere. ‘We were next-door neighbours for many years. We used to play tennis, ball, cricket every evening. One day he got me out and went on a celebratory run! This was at Moti Bagh in Delhi,’ he said in one of the interviews with Economic Times.1 He also claimed to be mentored by many industry stalwarts, including Anshu Jain, his former boss, among others. But why is Jain important to our story? Well, we will come to know in due course.

  Ravneet had his task cut out: to salvage the bank from the mess its founder and then promoter Rana Kapoor had put it in. Many, including some journalists, started predicting how Ravneet was going to save the bank. But that was not to be, as he essentially ended up making the mess messier.

  In his first result announcement, a little less than two months after taking charge of the bank, YES Bank reported a maiden loss of Rs 1500 crore — mostly on the back of an increase in the provision for bad loans. ‘Gross slippages of Rs 3481 crores 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,’ the bank said in its quarterly filings.

  While the bank didn’t name the ‘airline’ and the ‘infrastructure conglomerate’ publicly, it soon became clear that the reference was to the now-grounded Jet Airways and IL&FS. It was only after the fall of the bank that it emerged, from sources in the ED, that Jet owed the bank about Rs 1100 crore.

  But what is more interesting is the fact that the lending was the result of the relationship that Rana had fostered over the years with Naresh Goyal, going back to his stint at Grindlays Bank.

  In fact, to be fair to him, Ravneet made a good start by being transparent on as
set quality issues. In an analyst meet, he came out with a figure of Rs 29,000 crore for sub-investment grade, or BB and below-investments loans. The bank was trying to place checks and metrics, which weren’t previously there. During his tenure at the bank, Ravneet tried focusing on the clean-up by getting a new chief regulatory officer, chief operating officer, and chief financial officer. The bank also delegated the functions of chief risk officer and chief credit officer, which were earlier centralized under one authority. But the bank didn’t conduct any formal inquiry about the loans given out during Rana Kapoor’s time.

  Ravneet assured the analyst community that out of the below-investment grade book, Rs 10,000 crore was on the watch list for possible future NPAs. But in June, in the quarter of 2018–19, fresh slippages came from outside the watch list.

  While the loss would have been worrying for the bank’s retail investors, the more worrying fact for analysts on the street was the constant decline in the current and savings account (CASA) ratio. By 31 March 2019, the bank’s CASA ratio had dipped drastically to 33.1 per cent. The cheapest form of funds for any bank, the CASA ratio of a bank is the ratio of deposits in current and saving accounts to the total deposits. The more the bank’s CASA ratio, the lesser would be its cost of capital. In the meantime, the provision coverage ratio (PCR) — the ratio of provisioning to gross non-performing assets — had dipped by 6.9 percentage points during the calendar year of 2018–19 to 43.1 per cent.

  To add to the woes of the bank, it was staring at a pile of NPAs on the loans that were lent under the watch of Rana Kapoor. Among the many businesses that were staring at bankruptcy and had huge exposure to YES Bank were Reliance ADAG, Cox & Kings, CG Power, Omkar Realtors and Essel Group. This put the bank in a peculiar situation: it needed to create provisions, for which it needed money. The easiest source of money was CASA, but its CASA ratio was declining. This is why the bank decided to go to the markets for money. But the markets can be ruthless if they see their money sinking with you, and rightfully so.