The Banker Who Crushed His Diamonds

by Furquan Moharkan

  As the bank started looking for fresh funds, there was something that was scaring away potential investors. Contingent liabilities at the end of the June quarter for YES Bank stood at an astounding Rs 6.7 lakh crore. A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is likely and the amount of the liability can be reasonably estimated.

  The contingent liabilities of the bank were 1.8 times of its balance sheet size, which had seen a decline of 2.5 per cent in the first quarter of the current financial year. At the end of June 2019, the balance sheet size of the bank stood at Rs 3.71 lakh crore, declining sequentially from Rs 3.80 lakh crore for the quarter ending in March 2019. Since March 2017, the bank’s contingent liabilities had increased by Rs 2.9 lakh crore.

  Despite this pile of woes, the bank managed to secure Rs 1930 crore by 14 August 2019. The fund-raising was in lieu of the qualified institutional placement (QIP) of shares worth Rs 83.55 a piece. A QIP was initially a designation of a securities issue given by the SEBI. The QIP allows an Indian-listed company to raise capital from domestic markets without the need to submit any pre-issue filings to market regulators. SEBI limits companies to only raise money through issuing securities. This saves the company looking for funds a lot of paperwork. The institutional investors who had bought shares of YES Bank in that QIP saw their holdings dwindle two-thirds by the end of April 2020. Prominent names like CLSA India Private Limited, JM Financial Ltd, Motilal Oswal Investment Advisors Private Limited and Prime Securities Limited were the global coordinators and book running lead managers to the QIP issue.

  But was that enough? Not at all. It was less than one-tenth of what the bank needed to sustain operations. The bank needed US$ 3 billion (about Rs 21,000 crore) for survival as it had a huge pile of bad loans that needed to be written off.

  So, the search continued. Within days, the bank increased its authorized share capital — the maximum amount of share capital that the company is authorized by its constitutional documents to issue to shareholders. Part of the authorized capital can remain unissued — by Rs 300 crore to Rs 1100 crore with a face value of Rs 2 per share on 27 August.

  By mid-September, almost all the fund houses had given up on the bank. Top-level officials at three different fund houses that YES Bank had approached for the bailout told me, in the course of the story, that they were unwilling to put any of their money in the bank, as the ambiguity over its contingent liabilities made it difficult to value. One of them even confessed, ‘We don’t know what shit lies in the books of the bank. It is suicidal to even touch it.’

  In that backdrop, the bank sent my publication and me a legal notice — a toned-down version of which was placed on the BSE as clarification. ‘Since the last capital raise, the bank has had no discussions with any domestic mutual fund houses to raise the additional capital, and therefore, the whole foundation of the article is factually incorrect,’ the bank said. However, within two days, on 26 September, the bank sent another update to the exchanges. ‘The bank has received strong interest from multiple foreign as well as domestic private equity and strategic investors for this capital raise and remains firmly on course to raising growth capital subject to the necessary approvals,’ it said.

  With these two contradictory statements issued in a span of just three days, there are two permutations that would have been in place: either the bank’s management and the communications team was lying and manipulating share prices on one of the two occasions, or the article forced the bank to meet ‘multiple investors’ in just two days. It might be time for SEBI to investigate the issue.

  As I was in the middle of my story on Friday, 20 September 2019, another development shook the markets. Rana Kapoor had parted with his ‘diamonds’ and sold a part of his stake. Morgan Credits, a company controlled by Rana Kapoor’s daughter, had sold 5.5 crore shares held at YES Bank for Rs 58.16 per share, in a transaction worth Rs 320 crore.

  ‘As has been publicly disclosed, one of the promoter entities of YES Bank sold a part of its stake yesterday. This sale was affected purely to deleverage the debt of this entity. The board of directors of YES Bank would like to state that the financial position of the bank is sound and stable, its operating performance continues to be robust and its growth plans stay firmly on track,’ the bank claimed.

  But there was some insight that a senior executive at the bank told me about Ravneet Gill’s way of functioning. ‘He is only bothered about the share prices, come what may,’ the executive told me. For this purpose, Ravneet was a frequent visitor in the newsroom of a particular business channel and a particular business paper. ‘Every other morning, he used to be in these newsrooms planting positive stories,’ one person who helped him in all this told me.

  But in hindsight, even if Ravneet can be alleged of oversight and judgement errors, he did it all to save the bank. His perception was that at least optics will bring in positive sentiments. Yes, I do believe that there was an error of judgement on his part, but he had limited options in a do-or-die situation. So, he probably adopted a ‘whatever it takes attitude’ to save the bank that was nearing insolvency.

  In the aftermath of that story, in the next seven trading days, even as the bank was trying to say all was well, YES Bank’s shares depleted by a whopping 42 per cent. Such was the hit on YES Bank’s shares that the Indian equity market exchanges asked the bank to explain the fall. Immediately, the bank replied that it didn’t know what had caused the crash.

  However, the biggest fall in the bank’s shares was on 1 October, when the shares crashed by 23 per cent. On that day, RNAM invoked a pledge and sold 10 crore shares of YES Bank for Rs 352.9 crore as part of the margin call. The shares, part of the Rs 950-crore issuance of NCDs by YES Bank promoter company Morgan Credit Private Limited (MCPL), were pledged by Rana Kapoor as security. MCPL was part of YES Bank’s promoter group that was controlled by Rana’s three daughters — Roshini, Rakhee and Radha.

  A margin call is the broker’s demand that an investor deposit additional money or securities so that the account is brought up to the minimum value, known as the maintenance margin. A margin call usually means that the value of one or more of the securities held in the margin account has decreased below a certain point.

  YES Bank’s management felt that this share sale, which happened close on the heels of the PMC Bank collapse, triggered the run on the bank. This is partly true. This also dented the final prospects of any new investor coming on board.

  To put facts into perspective, the faith of the customers was already dented by that time. In a sustained and gradual way, in the two quarters preceding the share sale, the bank had seen its deposit base erode by 8 per cent. What this share sale did was to exasperate the customers who were already disgruntled.

  The next day, as Rana Kapoor’s shareholding tanked to below 2 per cent, YES Bank did what was rarely seen in India’s corporate culture: they announced the key metrics of the financial performance of the September quarter, when otherwise a bank’s (or for that matter most companies) communications team blocks any queries from media houses on the pretext of price-sensitive information.

  The bank said that this fall was primarily ‘on account of the forced sale of 10 crore equity shares (3.92 per cent of the bank’s equity share capital) triggered by an invocation of pledge on the equity shares of a large stakeholder.’ It further reported a single-digit decrease in the bank’s advance book and deposit book. However, there were a lot of stressed assets that were to be written off and the bank decided to skip mentioning it continuously.

  ‘These were shares pledged by our father, Rana Kapoor, to support the borrowings of MCPL, a company owned by his three daughters... we are highly dejected that our family shareholding in YES Bank was sold at such dismal prices levels,’ said a MCPL statement on 3 October, completely disregarding the fact that the bank was in a mess because of the reckless le
nding that had happened under their father’s watch.

  There were two interesting observations in this stake sale. One was that RNAM started invoking the pledges of Rana Kapoor as soon as Anil Ambani exited from RNAM. This came a year after the YES Bank co-founder had boastfully declared that he would never sell his share in YES Bank and that ‘diamonds are forever’. The second was the fact that it expedited the run on the bank as spooked depositors played safe. By November, Rana Kapoor had exited almost all his shareholding in the bank after another holding company YES Capital (India) Pvt. Ltd — also controlled by his family — sold 2.04 crore shares worth Rs 142.75 crore.

  As Rana and prudent institutional investors exited the bank, retail investors — one of the most vulnerable lot in the Indian equity markets — picked up these supposed ‘diamonds’ and controlled almost half of the bank’s ownership till it collapsed on 5 March. At the end of it all, Rana held a paltry 900 shares in YES Bank, which he happens to still hold through YES Capital.

  By this time, the qualified institutional investors who had parked their bets on the bank just one month earlier were feeling uncomfortable. And their discomfort was justified. In a span of one and a half months, they had incurred losses of over 65 per cent. They had invested Rs 1930 crore on 14 August in the bank, and had they sold their shares by 1 October they would have collected just Rs 671 crore for that amount. Though the bank, all this while, including in the legal notice issued to me, portrayed these qualified institutional investors as a validation of their stand, the story on the other end was different. At that point in time, I spoke to three different people: one of them had brokered the deal and the other two had invested their monies in YES Bank. Their consensus was that they were ruing the investment made in the bank. One of those fund managers told me, ‘What are we even supposed to do? We have lost our money. This is now taking a toll on our books as well.’

  However, even as Ravneet initially tried to come clean on the bank’s financials, the probable murkier side was seen in the months that followed, something we will dwell upon in the next chapter. Although, unlike Rana Kapoor, there were no concerns of conduit and financial impropriety.

  STRETCHING IT TOO LONG

  As the bank’s shareholders were witnessing a beating in the exchanges, the once ‘diamonds’ were being sold at throwaway prices and the bank started to lose the confidence of its depositors.

  But there was a catch. The bank had huge bad loans to write off and the investors had lost all confidence in the bank and were not ready to bet on it. The only thing that could have helped the bank sail through was high level of deposits.

  But then things were not to be so. By October 2019, the bank’s deposit base had started eroding heavily. I was having a conversation with a senior bank executive, who is still with the bank, in early December. ‘The situation is getting worse. The deposit base has eroded by Rs 38,000 crore in two months,’ the official said. Of this, Rs 20,000 crore was by the retail depositors — funds deposited using various financial products (current accounts, sight deposits) by physical persons (as opposed to corporates or other legal entities) that can be withdrawn arbitrarily with little or no penalty. The bank, in its internal meetings, was hopeful that the year-end payout of bonuses to employees would help it shore up its deposit base at the end of the quarter, which could then be used to make the books look good.

  On 7 October, it was reported that the bank was in talks with global tech giant Microsoft to sell 15 per cent stake in a bid to raise funds. The news report was quoting sources. When the exchanges sought a clarification from YES Bank, the bank gave vague, open-ended answers. ‘The bank is not aware of the source, which resulted in the abovementioned news item, and as a matter of policy the bank would not like to comment on such article,’ it said in an exchange filing, neither confirming nor denying the report. The idea behind the bank not denying it was said to be a bid to gain credibility. ‘We thought it would have helped us. So, we decided not to deny this development,’ a member of the erstwhile board at YES Bank said.

  Again, on 16 October, there was a news report stating that Indian billionaires Sunil Mittal and Sunil Munjal were interested in YES Bank. And when the exchanges sought a clarification, guess what the bank’s reply was? The same template as its previous reply. These two episodes happened in a span of ten days, and then stopped. On the first occasion, the bank’s shares surged by 8 per cent in one day, while on the second occasion, they surged by an astounding 25 per cent in two days.

  On 31 October, around 11 a.m., Ravneet Gill called up the bank’s board, informing them that the bank had received a binding term sheet from ‘global investors’. At a time when no one was willing to touch the bank, it issued a statement that it had received a fund-infusion offer worth $1.28 billion (almost Rs 10,000 crore). ‘In this regard, and under Regulation 30 of SEBI LODR, the bank would like to inform that it has now received a binding offer from a global investor for an investment of US$ 1.2 billion in the bank through fresh issuance of equity shares, subject to regulatory approvals/conditions as well as bank’s board and shareholders approvals,’ the bank said in its statement.

  Note that the key word here was one global investor, not a group of investors. Based on the day before’s market price, an investment of $1.2 billion through the issuance of fresh equity would mean that the investor would end up holding about 33 per cent stake in the bank. Under normal circumstances, RBI rules restrict a sole investor from holding more than 10 per cent in a private sector bank. However, according to updated rules released in 2016, there might be exceptions to this rule. For instance, a ‘regulated, well-diversified and listed/supranational institution/public sector undertaking/government’ can hold up to 40 per cent, as per a circular dated May 2016. Now, the RBI’s approval depended on the credibility of the suitor, which the bank had not named in its letter to the exchanges.

  But despite these hindrances, the bank’s share prices surged by 35 per cent within two hours of this announcement. The shares closed with a gain of 24 per cent, at Rs 70.45. The share prices of the bank were now two and a half times more than what they were at the beginning of the month, despite the markets witnessing a run on the bank. Why were the share prices surging? The continuous buying was happening by retail shareholders.

  By the end of the December 2019 quarter, the shareholding pattern of the bank had completely changed. As discussed in the earlier chapters, the once all-powerful Rana Kapoor was now just a minority shareholder at the bank, owning a paltry 900 shares through a privately held firm by this three daughters. The Kapoor family, at the beginning of the quarter, had over 12 crore shares in YES Bank.

  The majority shareholders at the bank now were the retail individual shareholders, who had 47.96 per cent shareholding in the bank, amounting to 120 crore shares. Three months ago, the retail investors had controlled just 29.84 per cent of the bank. The retail investors are mostly individual shareholders with share capital up to Rs 2 lakh.

  During these months, as foreign portfolio investors, mutual funds and Rana Kapoor sold 51.9 crore shares in YES Bank, the retail investors picked up 46 crore of those shares, leaving them vulnerable to the biggest banking failure in India’s banking history. It won’t be a hyperbole to say that retail investors, who are the most vulnerable part in the melee called stock exchanges, picked up dimes marketed as ‘diamonds’ by the owners who sold them.

  In the following three figures, I will try to graphically explain the level of churning the ownership at YES Bank witnessed in the last nine months of 2019.

  But for now back to the bank’s fund-raising plans. The announcement on 31 October got people guessing in the markets. Everyone I spoke to back then was keen on guessing who the investor was. Many who had dealt with Rana said that they wouldn’t be surprised if Rana himself was doing this through some off-shore entity. While the markets were busy doing this, on 19 November the bank reported divergence in bad loans worth Rs 2018 crore. ‘The bank would like to clarify that the incrementa
l gross NPA of Rs 2018 crore is across four accounts, of which exposure of Rs 1041 crore across three accounts was internally rated and disclosed as “BB & Below” as on September 30, 2019,’ it informed the exchanges.

  Figure 1:

  Source: Company Filings

  Figure 2:

  Source: Company Filings

  Figure 3:

  Source: Company Filings

  The next day, on 20 November, the bank called a meeting of its board on 29 November to discuss fund-raising. On 29 November, the bank announced the name of the mysterious ‘global investor’ as Canadian investor Erwin Singh Braich and SPGP Holdings. ‘Discussions with investor ongoing and expected to be concluded shortly, the meantime the Binding Term Sheet extended till December 31, 2019,’ the bank said in that filing.

  The bank also said that an unnamed ‘Top Tier US Fund House’ was willing to invest in it. Other than that, Citax Holdings Ltd and Citax Investment Group were also expressing interest in the bank. The bank, however, didn’t take any decision in this meeting.

  In that meeting, the bank committed to finalizing a fund-raising plan by 10 December. ‘The board of directors shall reconvene on December 10, 2019 to finalize and approve the details of the preferential allotment and convene an extraordinary general meeting subsequently, to obtain the approval of the shareholders. Such preferential allotment shall be subject to receipt of all regulatory and statutory approvals, as may be applicable,’ it informed the exchanges.

  Now who was Erwin Singh Braich who was willing to risk so much money on a bank that was collapsing? According to a Bloomberg report on 2 December, Braich was based out of Canada and was involved in many bankruptcy suits with creditors and family members. ‘In 1999, Braich was petitioned into bankruptcy by unidentified creditors and declared zero assets, according to bankruptcy records. KPMG, the trustee, estimated his liabilities at more than C$20 million ($15.1 million), a figure Braich has hotly contested, court documents show. It took four years for creditors to recover C$60,000 in cash and shares, and a decade to discharge the bankruptcy, according to court filings and bankruptcy records,’ the report said.