The Banker Who Crushed His Diamonds

by Furquan Moharkan

  However, the bank’s then management, from the interviews I have conducted through the course of this book, revealed that they didn’t take these allegations seriously. ‘There was talk about his bankruptcy and failing marriage,’ said a top executive from the bank, who was at the centre of things.

  SPGP Holdings, meanwhile, was based out of Hong Kong and is still a mystery. At a time when many bankers that I spoke to still fear that it is a front for a powerful politician from India, the whereabouts of the company remain unknown. The bank’s former management claims it to be an entity owned by Braich.

  Two different directors of the bank, who attended that call, confessed that no binding term sheet was provided to them. One of them, Uttam Prakash Agarwal, also went public about it. ‘We were not given any binding term sheet. We were only told verbally,’ another director vetted Agarwal’s claim, though he didn’t wish to be named.

  Now who was the merchant banker who had brokered a deal with such shady entities? It seemed like Rana Kapoor was trying to wrestle control over the bank. ‘The deal was brokered by Rana Kapoor himself. That is what the feeling inside the bank was. In fact, there was no term sheet in this case,’ a senior executive said in an interview to me.

  However, there was an alternative story which a member of the erstwhile management team told me about: ‘As for the SPGP offer, when the binding term sheet was received, it was immediately shared with the lawyers to ascertain that it was indeed binding. The lawyers opined that the term sheet not only was a binding one, but also constituted unpublished price sensitive information (UPSI) and should therefore be immediately disclosed to the exchanges. When the team informed me about that, I told them to first speak with SEBI in the matter. SEBI informally concurred with the view expressed by the lawyers that disclosure was warranted.’

  This conversation with SEBI was conducted by the head of investor relations at YES Bank and the head of regulations.

  Thereafter, Ravneet is said to have done two things: convening a meeting of the board’s capital-raising committee and appraising them of the situation. A decision was duly taken to go ahead with the disclosure, and informing RBI about the impending disclosure and also sharing a copy of the binding term sheet with them. All this is duly documented and the relevant papers are on file.

  The management’s account more or less matches that of the different directors of the bank who I interviewed during the course of this book: that there was a call over which offer was conveyed and there was no mention about giving the binding term sheet to the board members.

  This could have, the fear was, by no means, been approved by the RBI. But the question to ponder over is how the bank’s board even considered such a proposal. It raises questions on Ravneet’s leadership skills as well. After the bailout of YES Bank, when I asked one of the image management executives, who had worked closely with him at YES Bank, I was told: ‘He was being misled. It is embarrassing.’ If the CEO of the bank, at such a crucial stage, is vulnerable to being misled, then the bank should have ideally rethought its leadership team.

  Despite this, everyone — from banking reporters to market analysts — was now awaiting 10 December, when the bank had committed to finalizing the fund-raising plan.

  What was the result of the 10 December meeting? The bank decided to shelve the decision until the next meeting, doing the opposite of what it had committed to. ‘The board is willing to favourably consider the offer of US$500 million of Citax Holdings and Citax Investment Group and the final decision regarding allotment to follow in the next board meeting, subject to requisite regulatory approval(s),’ it informed the exchanges. It also said that it was in talks with Braich with regard to raising funds, despite the fact that his credentials were under serious question.

  The bank on its part is said to have hired Kroll — a corporate investigations and risk-consulting firm — to investigate the credentials of Erwin Singh Braich. The delay in decision-making was because of the delayed due diligence process.

  This was the time when I started investigating the bank yet again. It was, after all, the third meeting where the bank had done nothing but postpone the decision. That is when I came to know about the depleting deposits of the bank. But there was yet another piece of information that the executive told me: ‘How would RBI even approve it? They are talking of European investors. The investors they are talking of won’t be approved by RBI.’1 I posed this question to the bank’s communication team, about disclosing the names of actual owners and the ultimate beneficiaries of the European investors that they were talking about. They, till now, haven’t got back on that.

  On 10 January, the bank’s board met again. Two things to note here: the top-tier fund house, whose name the bank had said it would disclose in the first week of December, was still kept hidden like some treasure; and Braich, along with many others, were still in contention. The bank’s statement to the exchanges made things more vague. Other than declining Braich’s offer, the bank didn’t come clean on the remaining $800 million. The bank said that it has decided on a plan that would look at ‘raising of funds up to Rs 10,000 crore, in one or more tranches, on such terms and conditions as it may deem fit, by way of issuance of securities including but not limited to Qualified Institutions Placement (QIP)/Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)/Foreign Currency Convertible Bonds (FCCBs)/or any other methods on private placement basis.’ Who were the suitors, when would it happen? There was no clarity.

  Many governance experts raised an alarm. ‘The days of discussing are over. It is time to raise the money and put all this behind them. If the board had decided to raise money four months ago, I am not sure why they need to meet each month. They need to line-up investors and approach them for approval,’ Amit Tandon, founder and MD at IiAS told me during the course of one of my stories after this meeting.

  But this meeting would always be remembered for the resignation of the chairman of the audit committee, Uttam Prakash Agarwal, and the board-room tussle becoming public. More on that in the next chapter, but let’s see what happened next at YES Bank.

  All this while, various board members told me that the board was now feeling that all was not right. Many had stopped making a physical appearance at the meetings. According to the chronicles of various board members, the dejected Brahm Dutt, the then chairman of YES Bank, in one such meeting snorted: ‘Why are we even reading out the names when nothing is happening at all.’

  Many board members had started to write mails of discontent to both Ravneet and Brahm by this time, stating that the uncertainty was denting their and their organization’s professional image. I personally know one such director who said on condition of anonymity, ‘They gave me some kind of assurance, but I stopped going to meetings physically afterwards. My organization was asking me questions. There was mistrust.’

  It was clear by now that the bank was unable to raise funds. On 22 January, I got calls from one of the two teams handling the media, pressing for carrying a release that they had sent that day, which according to them was a novel idea. In that press note, the bank said that it had ‘recently launched XL-rate savings accounts, in line with the bank’s endeavour of offering value-added products and initiatives, curated especially for customers looking for higher returns. This smart savings account transfers balances above Rs 1 lakh from the saving account automatically into a fixed deposit (FD), thereby offering a higher interest rate on the surplus funds. The amount in excess of Rs 1 lakh in savings account will be swept out into a FD for a tenure of one year, one day (minimum FD amount of Rs 25,000).’

  I sensed that something was off. The bank was clearly staring at a collapse and its deposit base was eroding. How on earth was it promising higher returns to investors then?

  Well, Dalal Street saw it as a desperate move by the bank to shore up its deposits, so that it could delay supposed fund-raising a bit more. Such was the condition of the bank by this time that while everyone was talking about it, no one
was willing to talk about it either. While most analysts were tracking the bank, no one was willing to come on record. One prominent brokerage house told me in January: ‘We have barred our analysts from commenting on YES Bank.’

  Interestingly, all these announcements were more or less placed near future and options expiry date. In the Futures and Options F&O market parlance, ‘expiry date,’ or simple ‘expiry,’ means the last day that an options or futures contract is valid. Once an options or futures contract passes its expiration date, the contract is invalid. And YES Bank stock is an F&O stock as well. Many in the markets saw it as a way of manipulating stock prices. That is why the regulators and exchanges conveyed to YES Bank their displeasure by the end of December.

  It was during this time that short positions on the bank jumped manifolds with many big-ticket investors feeling that they would make a huge fortune if the bank crashed. Short sellers bet that the stock they sell will drop in price and the difference will become the investors’ profit. Many of these short sellers, on the day YES Bank failed, made huge and unimaginable fortunes. Unfortunately, these were the people who were blamed by YES Bank for all the mess, despite the fact that these short sellers probably knew what was coming, even if the bank refused to accept it.

  THE MESS GOT REAL

  By January 2020, when it was clear that things were clearly headed south, Uttam Prakash Agarwal, the then chairman of the audit committee, resigned. But the way he resigned led to a lot of muck surfacing.

  In his resignation letter to then chairman of the bank, Brahm Dutt, Agarwal said, ‘There are serious concerns as regards deteriorating standards of the corporate governance, failure of compliance, management practices and the manner in which the state of affairs of the company are being conducted by Ravneet Gill — MD/CEO, Rajiv Uberoi — Senior Group President Governance & Controls, Sanjay Nambiar — Legal Head and Board of Directors.’

  While informing the public about the exit of the director, the bank said that it was reviewing a ‘fit and proper case’ against Agarwal. ‘In this respect, the bank had obtained legal opinions from eminent jurists. These opinions were to be considered by the Nomination and Remuneration Committee of the board (NRC)/ the board of the bank in their meetings scheduled for today, i.e. January 10, 2020. However, prior to the commencement of the proceedings of these meetings, the bank received the resignation of Agarwal,’ the bank said.

  The bank was indeed asked by the central bank to review Agrawal’s directorship. The RBI had asked YES Bank to re-examine the ‘fit and proper’ status of the lender’s audit committee chairman after it was found that he had failed to disclose details of criminal cases filed against him, Livemint had reported on 24 November.

  In fact, some of the bank insiders told me that Agarwal was allegedly doing this on Rana Kapoor’s behest. In one such conversation, he said, ‘The bank’s management is deliberately doing it so that they can sell the bank to Uday Kotak.’ This struck a chord with the blame-game technique YES Bank, in Rana Kapoor’s last days of leadership, had adopted.

  Amid this saga, an executive of one of the institutional investors at the bank told me that it was board-room muck playing out in public as everyone was trying to steer clear of what would be known as India’s biggest banking failure till date. ‘You see, everyone is trying to save themselves. And in all this we are seeing dirty linen being washed in public.’

  Interestingly, this was not the only letter by Agarwal that alleged malpractices by the bank. The other letter that was shot out on that day was addressed to RBI governor Shaktikanta Das. The letter alleged that the bank was misleading everyone on the capital raising, governance lapses, evergreening of loans and misrepresentation of facts. But one allegation that brings the role of the RBI an as administrator into question is that the letter alleged a 25 per cent erosion in the deposit base in the December 2019 quarter — information which was sent out to me by one of the bank’s executives. Incidentally, in her press conference after the fall of YES Bank, on 6 March, the finance minister did mention these letters.

  Internal red flags were raised by Agarwal in his letters to Brahm Dutt in the beginning of January. By the end of the month, Agarwal had shot out a letter to the then Department of Economic Affairs (DEA) secretary, alleging that the bank was staring at incremental bad loans worth Rs 45,000 crore in the next eighteen months based on an assessment of IDFC Securities. A report compiled by the brokerage was also shared with the DEA secretary. Despite this, on 24 January, a senior finance ministry official quipped in an off-the-record conversation that ‘YES Bank woes were just journalistic imagination. The government didn’t see any problems.’

  But then there is a problem in how the government officials see things, and how the markets see it. Markets want extraordinary solutions in extraordinary situations, but the RBI wants to follow the process. ‘We have to give enough number of chances to the bank and follow procedures. We can’t interfere into a bank’s operations like that,’ a former RBI official told me.

  Section 36ACA of the Banking Regulation Act lays the grounds for the RBI seizing control of the bank. It states: ‘Where the Reserve Bank is satisfied, in consultation with the Central Government, that in the public interest or for preventing the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or any banking company or for securing the proper management of any banking company, it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, supersede the Board of Directors of such banking company for a period not exceeding six months as may be specified in the order.’

  The takeaway here is that the RBI intervenes when it is satisfied that it needs to take such action, which in most cases is dependent on subjective assessment. In all this, the decision-making gets caught in the red tape of babudom.

  The ‘RBI is both the central bank and the regulator of scheduled banks. I have long felt that sometimes this dual role created a conflict. The answer is not to take away the role of regulator from the RBI because that will create a new set of problems. In such a peculiar situation, it is easy to find faults with the RBI and say that it acted too late or too quickly. On the facts of the YES Bank case, it appears to me that the RBI should have noticed that the total loan book was growing by leaps and bounds every year since 2014. That should have rung alarm bells. If the RBI, as regulator, had noticed that and acted earlier, no one could have found fault with it,’ P. Chidambaram told me.

  It was on the same day that State Bank of India chairman Rajnish Kumar made a reassuring statement about YES Bank. He said that the bank ‘will not be allowed to fail’ as it won’t be good for India’s economy. The head of India’s biggest lender said he was certain ‘some solutions will emerge’ to steady YES Bank. By this time, the RBI was coming up with a plan of action. On 17 December, at a conclave organized by Business Standard, two top bankers of India — Rajnish Kumar of SBI and Amitabh Chaudhary of Axis Bank — batted for Uday Kotak as the best suitor for YES Bank. Sources, back then, told me that it was done on the behest of the RBI, which was trying to send out feelers to the same effect. On 27 December, Arun Nandlal Agarwal, a shareholder in the bank, had written two letters to the RBI governor alleging that the capital raise plan of YES Bank was just a sham.

  While all of this was happening, another bombshell was dropped on 14 January 2020. An Indian billionaire, who was to face investigations soon, had escaped from India. Behold, almost everyone knew that Rana Kapoor had left the country. I called up my sources in the central bank and the reply was: ‘It is an open secret now (that Rana Kapoor has escaped).’

  I, somewhere, felt that it was the story of a lifetime. For me, everything seemed to connect at that point in time: Rana Kapoor had sold his stake in YES Bank and had gone abroad. But there was a legal hurdle in the story: Rana Kapoor, at that time, had no cases filed against him, so we couldn’t call him an absconder. I reached out to YES Bank where, a year back, not even a pin used to drop without his
permission. The bank, fearing the worst, was quick to distance itself from Rana Kapoor, an analysis which was vetted by many market players.

  But where was Rana Kapoor? Yes, he was in London.

  On 15 January, I got in touch with Rana Kapoor. In his classic style, Rana was courting questions and we had an amicable conversation.

  ‘Hello, Mr Kapoor! Hope you are doing good! Three sources in the know have confirmed to me that you have escaped from India after selling the shares of YES Bank. This comes at a time when the bank is staring at a bleak future. Can I have your comments?’ I asked him.

  ‘Most inaccurate,’ he replied.

  ‘You are in India?’

  ‘I am on a short trip overseas to visit my newly born grand daughter.’

  I didn’t relent. It was probably because of his image, during his time at YES Bank, which I was fully aware of. ‘When will you be back?’

  ‘By Republic Day,’ he replied promptly.

  As I thanked him, he courteously replied: ‘Thanks for your valued understanding.’ I realized that he had an idea about the rumours on the grapevine in India.

  I wasn’t willing to give up without delving further into what was happening. So, since I felt that Rana Kapoor might be guarded in front of me, I asked my colleague at Deccan Herald, Samiksha Goel, to check on him by 27 January. When she got in touch with him, it was confirmed that he was back in India, which was something many weren’t ready to believe even after the fall of YES Bank. I remember that on 6 March 2020, a journalist friend asked me, ‘Has Rana Kapoor fled to London?’