Scheme of reconstruction of Yes Bank Ltd: some suggestions on the draft scheme, Banking - Finance

[shivaprasad chhatre]

Executive Summary:

A have carefully gone through the scheme of merger and as hardcore banker, I feel RBI may look at Sec 19(2) of Banking Regulation Act cover aspects like applicability of SEBI take-over code and Pricing of the shares of Yes Bank Ltd SEBI, tenability of RBI’s absolute right to interpret the provisions of reconstruction and overriding specific provisions under other different Act/Laws encompassing the other jurisdictions, absence of clarity over voting rights and synchronizing the applicability/effective date and gazette notification date.

Preamble:

Reserve Bank of India under Sub-section (1) of Section 45 of the Banking Regulation Act, 1949, the Government of India has made an Order of Moratorium in respect of Yes Bank Ltd. under Sub-section (2) of the said Section. To effect a restructuring of Yes Bank Ltd., the Reserve Bank of India, in the exercise of the powers conferred on it by subsection (4) of the said Section, has prepared a draft scheme of reconstruction. In terms of Section 45(6)(b) of the Act ibid, the draft scheme is placed on RBI’s website for suggestions and objections, if any from members, depositors or creditors of Yes Bank Ltd.

RBI sought suggestions or objections concerning the draft scheme, among other modes through email [email protected] , to reach not later than Monday, March 9, 2020, for consideration under clause (b) of Sub-Section (6) of the said Act.

It appears that everything was pre-decided but the attempt is being made to show that it was not. But it seems RBI is in a great hurry to show that it resolved such big crises in no time (even though Yes Bank is 25-30 times bigger than PMC bank) as it is not co-op bank. There are many issues RBI has assumed that it had considered but appeared not to have considered. It has already defined the name of investor bank and the stake it is likely to take and the rate at which it would take in the draft put on the public domain. SBI is finding hard time to deny that they are yet to decide on the proposal and examining it. SBI is a listed company and it has to observe all the protocols that a listed company has to follow in compliance with the listing agreement.

All directly affected parties will likely seek legal scrutiny through courts and seek an interim stay. The action of Govt u/s 45(7) is not free from this rather than facing an awkward situation let all aspects be thoroughly examined. RBI’s incorrect assumptions/overconfidence/assessment in the past landed the banking /financial system into problems. Some are stated in brief (below) for information.

I recollect a grave situation market face in the year 2005-06. RBI in July 1999 issued a circular on FRA / Swap and Derivatives. RBI assumed that it has powers to regulate the OTC derivative market in interest rates as well as FX derivatives. Thus OTC market perceived that Banking Regulator has powers to develop and regulate it. Post that market boomed between the year 2000 – 2005. A communication to RBI along with the legal opinion that RBI does not have the power to regulate this market was not responded positively. Without proper examination, this view supported by third party legal opinion was brushed aside by RBI and it went ahead. 5 years later RBI realized its mistake. The derivative markets started facing problems. Sometime in the year, 2005 RBI realized that it does not have absolute powers to regulate this OTC market. Had this news been spread in the market at that time there could have been panic and there could have been a jolt in the financial and lead to systemic risk. RBI & Government passed RBI Amendment Act 2006 in which Section 45 U(a) was introduced and section 45 (V)(1) and 45(V)(2) was introduced giving and retrospective effect contrary to the normal legal practice of making it applicable prospective. “Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of subsection (1) were in force at all material times”. Luckily all things were set right before Global derivative crises in the year 2008.

‘CBLO’, was the most popular money market instrument vehemently supported by RBI for many years. CCIL & RBI was rather forced to withdraw because of inherent serious defects in the product, evasion of trillions of Rupees Stamp duty etc.

Core suggestions in the case under reference:

It needs to be mentioned in the scheme of reconstruction 1 to 3 may be specified:

What would be paid-up capital of the bank after the reconstruction scheme becomes effective? Yes Bank has authorized capital of ₹ 600 Crs and paid-up capital of ₹ 463 Crs (on date). It appears it would have authorized capital of ₹ 5000 Crs and paid-up capital of ₹ 4800 Crs. If that be the case SBI may have to bring big chunk + other investors too have to bring in huge sums for 49:51 ratio (and a premium component of ₹ 8/- per share)

What RBI / Govt would do to give comfort to SBI and other investors investing over 25% of capital so that they can rest assured that SEBI takeover code [(Substantial Acquisition of Shares and Takeovers) Regulations, 2011] will not be applicable. Possibly SEBI may have to formally exempt this capital flow from SBI and /or others.

The Scheme to be notified in the gaz of India may state that pricing of shares will not be as per SEBI Regulations as the scheme of reconstruction will have superseding effect under 45(6)(b) or so.

RBI may have to carefully examine below-mentioned aspect where the investor is a banking company (and is subjected to Indian laws):

Section 19(2) in BANKING REGULATION ACT,1949

(2) Save as provided in sub-section (1), no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent. of the paid-up share capital of that company or thirty per cent. of its own paid-up share capital and reserves, whichever is less

Please note below-mentioned rider in the sub-section will not apply to the new stake taking either by SBI or any other bank as Central Government has no powers to remove this anomaly unless such powers are in-built in the Banking Regulation Act. The Govt May have to amend the Act in advance to give effect to such matter (prospective application of the amended law may not be appropriate)

Provided that any banking company which is on the date of the commencement of this Act holding any shares in contravention of the provisions of this subsection shall not be liable to any penalty therefor if it reports the matter without delay to the Reserve Bank and if it brings its holding of shares into conforming­ity with the said provisions within such period, not exceeding two years, as the Reserve Bank may think fit to allow.

Similarly, there may be a need (where Insurance or MF investors are roped in) some relaxations to their investment norms that be facilitated through the appropriate authority and not through omnibus mention in the Gazette of India.

Point 11 from the preamble of the draft scheme-Scheme to affect any other law:

The provisions of the Scheme shall affect anything to the contrary contained in any other law or regulations or directions or agreement, award or other instrument for the time being in force - may be in line with Banking Regulation Act,1949 [ Sec 46 (14) which reads as The provisions of this section and any scheme made under it shall affect anything to the contrary contained in any other provisions of this Act or any other law or any agreement, award or another instrument for the time being in force], may not hold good as some of these sections are open-ended and investors should have absolute clarity about their rights.

Point 13 from the preamble of the draft scheme-Removal of difficulties:

If any difficulty arises in giving effect to the provisions of the Scheme, the Central Government may, in consultation with the Reserve Bank, by order, as occasion arises, do anything not inconsistent with the provisions of the Scheme, which appears to it as necessary for removing the difficulty; maybe in line with Banking Regulation Act,1949 [ Sec 46 (10) which reads as If any difficulty arises in giving effect to the provisions of the scheme, the Central Government may by order do anything not inconsistent with such provisions which appears to it neces­sary or expedient for removing the difficulty.

Point 12 from the preamble of draft Scheme- Interpretation of the provisions of the Scheme

If any doubt arises in the interpretation of the provisions of the Scheme, the matter shall be referred to the Reserve Bank and its views on the issue shall be final and binding on all concerned. (It is not legally tenable)

I don’t think Section 45(3)(d)(i) in Banking Regulation Act,1949 gives all-encompassing powers over all existing specific laws in an omnibus manner right/s to Central Govt and/or RBI individually just to facilitate the reconstruction of a banking company unless such power is explicitly given to CG/RBI under the law.

I request you and central Govt to revisit this aspect so that RBI /Govt will not face awkward moments in courts, soon.

As many investors would come-in, the effective date to implement can be decided which could be different from the date of Gazzate notification.

What about exit by other than SBI investor who is going to be as big as SBI. What is the lock-in period in such cases

Voting rights is one important matter not addressed to / specified in the scheme. A Bank can normally take a stake of 10%. In this case, this bank may be owned by many banks. RBI may allow acquiring bank to have an increased stake in exceptional circumstances, such as restructuring or in the public interest etc subject to prescribing / following proper process as laid down. However, if you allow full voting rights say 26% or 49% as the case may be to SBI or similar entities RBI’s stand/action as in case of Kotak Mahindra Bank promoter Uday Kotak may appear to be inconsistent so if RBI and Govt wants to curtail voting rights of new bank/institutional entrants (through this reconstruction route) it may have to curtail it to 15% (even during the period of holding 49% or 26%) like in case of Kotak Mahindra Bank promoter, Uday Kotak who is allowed to continue to hold 26% stake after 1st Apri,2020 but have voting rights capped at 15% as per the arrangement before HC of Bombay.

Last but not the least RBI may relook at the action concerning perpetual bonds (AT-1) i.e complete write down (abruptly) completely as the terms of these issues were silent about this kind of event. In future, RBI may look at the aspect that banks include a suitable clause to enable bond issuer banks unquestionable write down in such cases.

Conclusion:

I am sure Tier-I bondholders and existing shareholders those are affected would challenge it in the court and the matter is open for courts scrutiny. To stand in the court of law (on firm grounds) RBI may not keep many loose ends. To show that RBI resolved the matter in shortest possible time RBI may attempt to close this matter it in a week. The system can get real benefit if the reconstruction sails through smoothly. However, larger public impact and credibility of RBI also cannot be overlooked.

Shivaprasad Laxman Chhatre

Land: 020 22947152

Posts / Replies

[Dinesh Shirvaikar]

Sir,

What will be the effect of the capital res-structuring (fv reduction from 10/- to 2/-) on existing shareholders? Is the 8/- going to be written off from the equity capital? If that is the case, then will the existing shareholders see their shareholding reduced by 80%?

[shivaprasad chhatre]

FV of shares held by current shareholders is ₹ 2/- as such no change in FV is going to happen in their cases.