Yes Bank – A Shakespearean tragedy

Yes Bank story without rumors swirling around its epochal events too good to be true, the deal raised eyebrows.

If Shakespeare had to write the saga of Yes bank, he would start with Rana Kapoor’s first crime betrayal of his friend and colleague Harkirat Singh. Well, who exactly was Harkirat Singh? Harkirat Singh, Ashok Kapur, Rana Kapoor (brother in law of Ashok Kapur) start Rabobank India as a non-Banking Financial Company (NBFC) in 1997, under a sort of a Build Operate Transfer Model; each founder contributes Rs.9 crores for a 25% stake, Rabobank holds the remaining stake. Rabobank India as an NBFC does well and the management team gets full trust and confidence of Rabobank. After seven years of operation, the three founders in 2003 get the inkling that RBI might grant private banking license so they sit down with Rabobank and persuade them to support their bid for the banking license.

Harkirat Singh sues the Duo and Rabobank and wins an Award in the London arbitration court in 2006, but by that time it’s too late KKs have it by a mile.

The argument they use is that this will give Rabobank a free option to start a bank later on and Rabo agrees. The three of them are such skilled dealmakers that Rabo gives them a sweetheart deal – a deal that was almost too good to be true… Rabo will not only inject substantial equity into the new bank but they will also help the founder fund the new bank by

1. Allowing them to sell their stake in Rabobank India at a 3000% premium.
2. Lend to promoter entities (the now infamous Mags and Morgan) against the same Yes Bank share collateral.

Just as every Shakespeare play has mist swirling around it, you cannot do a Yes Bank story without rumors swirling around its epochal events. This too-good-to-be-true deal raised eyebrows but we shall move on to an even more surprising development. Three Founders, Singh, Kapoor, and Kapur manage to get RBI approval for a bank’s license; they are the only similar entity to get a banking license – RBI had handed license only to existing financial entities till then! How did team SKK manage to pull this off? As before, a lot of rumors and a lot of smoke, we again shall not comment because of its time for the first big tragedy, the time has come to eliminate Harkirat Singh – the KKs had been plotting against Harkirat for some time now.

Despite a binding shareholder and share purchase agreement, on a fine day when Harkirat was out of India, they launched their coup. Harkirat Singh was unseated and Ashok Kapur was installed as chairman and Rana Kapoor as Managing Director. Harkirat Singh sues the Duo and Rabobank and wins an Award in the London arbitration court in 2006[1], but by that time it’s too late as the KKs have it by a mile.

It’s no longer SKK, Its KK now. The bank begins operations and in 2005 does its Initial Public Offering (IPO). Yes Bank’s IPO is priced at Rs.45 and it lists at Rs.60, a 33% gain. Due to a stock split in 2017 of 5:1, the comparable current price would be 9 and 12, If you got Yes Bank shares at IPO price despite it going under you would have actually doubled your returns as per Friday’s Closing NSE price! (Don’t tell this to the current AT1 Bondholders)! As the bank launches operations, the first game plan of the Kapur and Kapoor was to build a bank that could be sold in 3-4 years to either Rabo or to other international banks like J P Morgan that didn’t have a large Indian presence.

Once again rumors swirl… With the passing away of Ashok Kapur and the elimination of his family from the board, Rana Kapoor is finally free from all restrictions – it is time for Rana Kapoor, the undisputed king to chart his next 10 years.

As the financial markets boomed in 2004-2007, the KKs went aggressively pitching Yes Bank to International Banks but a significant event overtook them. This is the second tragedy of this Shakespearean play – Ashok Kapur was killed in the Mumbai Taj Mahal hotel terrorist attack in 2008. This had 2 implications:

1. Ashok Kapur was always the conservative one – with him gone, it truly became a one macho man show with Rana Kapoor a veritable emperor now.
2. It also allowed Rana Kapoor to do his second betrayal. A third tragedy unfolds as Rana Kapoor betrays his sister in law Madhu Kapur and prevents her family from joining the board. Madhu Kapoor would later allege that Rabo conspired with Rana to backstab her – this is documented as per legal notices and case filings.

Once again rumors swirl… With the passing away of Ashok Kapur and the elimination of his family from the board, Rana Kapoor is finally free from all restrictions – it is time for Rana Kapoor, the undisputed king to chart his next 10 years. You will now ask the question, isn’t the prime objective of Indian banking regulation to prevent the rise of bank MD as promoter aka emperor? Should RBI now not step in to prevent what has effectively become a one-man bank? This too is a question we should not ask Rana’s plots and plans, these two events happen which make his first plan of selling to foreign banks unviable:

1. RBI rules for foreign ownership despite lobbying doesn’t change.
2. Lehman crisis decimates banking globally.

The big plan, however, is clear – to exit in 7 to 10 years. In multiple interviews, during this time he drops hints that he is a “professional entrepreneur” and will run bank till “at least 2015”. The plan is to pump and exit but for that, he must bide his time now, the market has to be in a state that rewards aggressive asset growth and that time will come in 2014.

The “pro-business” Modi Government comes to power and a new bull run, especially in small and medium financial firms start in 2014, when Yes bank advances were Rs.55,000 crores ($8Billion), whereas in 4 years that would go 4X to Rs.203,000 crores ($29Billion)! Never in the history of modern Indian banking have we seen this type of asset growth. How did Rana do it? (Remember Yes Bank is now effectively just Rana Kapoor). Would it be through a secure retail lending strategy like say an HDFC or Kotak? I met Rana when I was a 27-year old in JPM when he was trying to sell Yes Bank to JPM, he had told me “Retail is all about detail”. Rana was always the big picture guy who never liked the detail – he would not, maybe even could not do detail, so he went the alternate route – the corporate loan book route, with nearly all growth in loans coming in from loans to promoter-driven corporates. He lent to Anil Ambani, Thapar’s, Wadhawans, Ajit Kerkar, Sameer Gehlaut, Subhash Chandra, etc., which are very very difficult to credit risks, but Yes Bank kept lending even taking overexposure of other banks in these accounts; unbelievably the NPA’s were “kept” at 0.5% of loans when all peers who had lent to the same companies showed NPA’s of around 5-10%. How did Yes bank/ Rana Kapoor do it? Once again the rumors swirled cut through the maze, this article by Tamal Bandhopadhay, “What ails India’s Private sector banks” is suggested reading the Indian banking industry equivalent of Fredrick Forsyth’s Dogs of War.[2]

A step-by-step guide as to how to hide your NPA’s to give a simple example – let’s say a company you have lent to is about to default… You will tell them don’t default, will lend to your subsidiary; transfer funds from that subsidiary and pay after you pay me. I will renew the loan and you can transfer money back to your subsidiary they will pay me back and the company and loan doesn’t show up as NPA in your books despite it showing as NPA in SBI, PNB, ICICI banks books. Evergreening aside, there was also misreporting (A banker’s way of saying lying through your teeth) where was RBI you will again ask? That too is a Shakespearean riddle.

A crucial question in light of today’s arrest of Rana Kapoor is: Was it just aggressive lending, or were there Chanda Kochar type of kickbacks? While we have to leave it to the courts, transactions of the below nature abounded. Let’s take the case of Yes bank and another roaring company IndiaBulls – Yes Bank lends to shell company of India Bulls promoter without collateral, Indiabulls in turns lends a part of the original loan disbursed to shell companies owned by Rana Kapoor’s wife and daughters, forget collateral, often no interest is mentioned in loan agreement and the repayment schedule is just a single bullet payment, again where is RBI you might ask?

Rumors and lack of RBI action are perhaps the only two constants in this Yes Bank saga. Now let’s come back to what I said earlier remember the 5 to 7 years exit plan Rana Kapoor had in 2010, once he realized he couldn’t sell Yes Bank to foreign banks? Well… the time for Grand Exit had come; Rana had pumped up the balance sheet 400% and share price by 800% in 4 years. Rana realized that a simple have-to-sell-share-and-go-home can arouse too much suspicion, might even fall foul of regulators so he planned his grand exit in 2 innovative ways:

1. He started appearing on TV talking about how his daughters who were starting “fintech” ventures, funds and capital would be needed for these ventures and unfortunately, Rana would have to sell his shares, diamonds as he famously liked to call them to fund.
2. He pledged his shares and that of the Mags and Morgan (remember them?) and borrowed against them.

Why they woke up now and not earlier nobody knows – maybe the simplest explanation is that witches had foretold a sad ending for Rana Kapoor.

These pledged share loans had an auto liquidate feature if the share price fell below a certain level, the institutions would automatically sell the shares. So in impression, Rana was able to sell his Yes Bank shares without actually showing he was selling it. The grand exit plan was taking spectacular shape. What you will ask here is what was RBI doing? Well… there is no good way to say it – Yes bank was a regulatory failure however surprise surprise, RBI finally woke up in mid-2018. Why they woke up now and not earlier? Nobody knows maybe the simplest explanation is that witches had foretold a sad ending for Rana Kapoor. RBI issued an asset divergence report which basically said Yes Bank was lying about its NPA and RBI also removed Rana Kapoor’s Yes bank shares, now the shares started tanking in just one day it fell 30% when the story of RBI removing Rana Kapoor broke.

Unbelievably, a host of Indian brokerage houses on cue came on television and started saying, “What a great buy Yes bank was”, “Buy the dip” they said (I am here reminded of David Bowie, Jump they say), maybe somebody will investigate this coordinated pump or maybe they won’t (I am sort of sure they won’t) a lot of people started their story at this point, while rating downgrades followed bank analysts who were predicting stratospheric share price levels dramatically changed their view, the share price continued to tank, then the new CEO came in fundraising fiasco happened. You will find a lot of articles that will explain these in great detail but for me the day RBI asked Rana to leave the story was over the Prophecy had come true.

Note:
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

References:

[1] Harkirat Singh vs Rabobank International Holding – 20 January 2015, Indiankanoon.org

[2] What Ails (Some Of) India’s Pvt Banks? – Apr 9, 2018, Linkedin.com