Yes Bank Ltd has changed. In the past, the troubled Indian lender kept quiet rather than tell shareholders the truth about its bad loans.
Now, it can’t stop talking about an impending rescue. If the former approach nearly destroyed the bank, this latest strategy isn’t going to help fix it.
In early September, CEO Ravneet Gill said Yes was in “fairly advanced level of talks” with a top global technology company for a stake sale. Earlier this month, Gill said the white knight would be a tech firm, a deep-pocketed family office, a financial investor, or any two out of the three. “In future banks will become technology companies with a banking licence,” he said.
On Friday, after reporting a September quarter loss of almost $85 million, Gill said the bank has $3 billion in rescue offers, led by a $1.2 billion binding bid from a North American family office that hasn’t previously invested in India. The other eager parties include a couple of Indian mutual funds and global buyout funds that have made a $1.5 billion overture.
Another consortium has shown up with a smaller $350 million offer. Everyone wants a piece of Yes Bank, it seems, except those tech suitors.
Tearing hurry to get someone
They may not be able to participate immediately, according to media reports. And just like that, speculation that Microsoft Corp. would invest has gone out of the window. Gill’s hurry to close fund-raising by December is understandable: Yes is skating on a dangerously thin layer of capital. Gross non-performing loans jumped to 7.4 per cent of total assets in September from 5 per cent in June. The Reserve Bank of India is already getting flak for neglecting supervision of a small cooperative lender and then trapping depositors by limiting withdrawals. The central bank won’t take any chances — not with Yes losing 7 per cent of its deposits in one quarter.
If the regulator puts the private-sector bank into its correctional facility for wayward lenders, there will be limits on risk-taking. The value of the franchise to any potential investor will erode sharply. Gill says he informed the local stock exchanges about the binding offer of $1.2 billion because it was price-sensitive information. However, the disclosure had no details about how many shares will be sold and at what price.
The bank’s board is yet to weigh the plan. Regulatory approvals are far from certain. Will the RBI, which doesn’t normally allow a single investor to own more than 10 per cent of a bank, make an exception to save Yes?
It did allow Canadian billionaire Prem Watsa’s Fairfax India Holdings Corp. to buy 51 per cent of a small private bank based in Kerala, the first time it had permitted a foreign investor to assume majority control. That lender, now known as CSB Bank Ltd, has nevertheless been instructed to do an IPO and dilute Watsa’s stake.
For Yes, which is already listed, the approvals will be more complicated. The central bank will assess the suitability of the acquirer and the extent of its control.
Beyond this, though, the Securities and Exchange Board of India, the stock-market regulator, will have to bless the price at which new equity is sold. A two-week average of high and low prices, the floor for an institutional placement, is a meaningless number for a stock whose trading volatility is currently off the charts. What regulators seem to be missing is that volatility is being amplified by half-baked disclosures. News of the planned $1.2 billion rescue hit the market on the last Thursday of October, the day of expiry for monthly derivative contracts on the bank’s stock.
Bears got trapped by a near 24 per cent rise in Yes shares. The very next day, the shares slumped 5.4 per cent, in anticipation of poor earnings. If the previous management was guilty of hiding the lender’s tattered asset quality, the new lot’s premature hopefulness is thwarting orderly price discovery by giving rise to a cottage industry in loose talk.
This everyday excitement is unhelpful. It would be nice to have Yes’s board approve a concrete fund-raising offer — one that has at least a reasonable chance of satisfying the regulators. Then Gill can talk about a rescue as much as he wants.