Yes Bank Bailout: Six Questions that SBI's Rescue Plan Raises

Why try to project SBI's decision to participate in Yes Bank's reconstruction as a very-nearly-ordinary, ‘pure’ investment course of action?

The dust from Yes Bank’s very public collapse is finally settling. The time is therefore perfect to critically look at the bailout plan that the Reserve Bank of India (RBI)I and the finance ministry have put together to reconstruct the private sector lender.

The draft plan was placed in the public domain on March, 6 2020, asking for comments and suggestions to reach the RBI by 9 March. As of now, the scheme seems to have been conceived of only in its broad outline. It proposes, among other things, the following:

Altering the bank’s authorised capital to Rs 5,000 crore (or 50 billion)

Having the State Bank of India as the anchor investor in the reconstructed bank, with SBI putting in up to 49% of the equity

Reconstitution of the Board of Directors, with SBI nominating 2 directors to the Board

Deposits and other liabilities of the reconstructed bank to continue in the same manner and with the same terms and conditions as existing

All the employees of the erstwhile bank to continue in the service of the reconstructed bank for at least one year with the same terms and conditions as existing now

The Additional Tier 1 capital of the erstwhile bank shall be written down in full permanently.

This looks like a bare-bones structure as of now, with the details required to be fleshed out after a fuller due diligence is carried out by the SBI, presumably in consultation with the RBI.

And yet, there seem to be quite many knots here, and the players involved are doing little to straighten them out.

First up, why does SBI’s chairman insist that the bank’s proposed investment in the beleaguered YB is going to be a ‘strategic investment’? Whoever heard of a ‘strategic’ investor who commits to subscribe 49% of the investee company’s equity at a significant premium? And here we are talking about a company whose net worth is largely impaired.

Two, why does the chairman talk about an investment of no more than Rs 2,450 crore (or 24.5 billion), when a back-of-the envelope calculation puts SBI’s likely stake at Rs 12,250 crore (or 122.5 billion)? (Clue: a premium of Rs 8 envisaged on a face value of Rs 2 per equity share). Indeed, the SBI Board has already given the go-ahead to an initial investment of Rs 7,250 crore (or 72.5 billion) in Yes Bank’s restructured equity.

Also read: How Yes Bank’s Finances Quickly, and Surprisingly, Deteriorated Over the Last 3 Years

Three, why does the scheme envisage new equity at substantial premium to the par value? Surely it is nobody’s case that YB’s fundamentals are strong enough to warrant a premium of 4 to 1? Let us recall that analysts’ take on the extant equity is that it is ‘near-zero’ in value.

Four, it is not clear if the extant equity is to be written down in full? If it is not, how will that rate vis-a-vis the new equity to be pumped in in terms of priority of charge over future profits?

Five, if the answer to the question above is indeed ‘no’, why does the reconstruction plan visualise the complete writing-down (to zero value) of the corpus of the Additional Tier 1 bonds of Rs 10,800 crore (or 108 billion)? Didn’t the Information Memorandum leading up to the placing/sale of these bonds talk, in the event of the reconstitution or amalgamation of the bank under section 45 of Banking Regulation Act, of write-down or conversion to equity for the AT-1 bonds? Why then is the extreme eventuality of a complete write-down being considered without making any allowance for the less harsh, and more realistic, option of a conversion to equity? (It is possible, indeed likely, that these bondholders will take the RBI and the SBI to court over this, throwing the reconstruction process into possible disarray.)

Six, and a corollary to five above, has the RBI factored in the likely impact of the above action on the market for AT-1 bonds? And on mutual funds, which are understood to account for Rs 2,800 crore (28 billion) of the AT-1 corpus?

Finally, why is SBI being coy about taking part in, if not actually taking control of, the management of the reconstructed YB? With its nominee directors on the bank’s Board, isn’t SBI bound to have a say in how the bank is going to be run? If nothing else, doesn’t the size of its stake in the reconstructed entity make it virtually obligatory for it to try and run the bank efficiently and profitably?

It appears that SBI is at pains to project its decision to participate in YB’s reconstruction as a very-nearly-ordinary, ‘pure’ investment decision. The anxiety may be to prove that it is not a move dictated by the finance ministry. SBI may also be trying to assure its own stakeholders that it is not taking up the responsibility of managing a bank that is clearly plagued by many problems.  Be that as it may, by doing what it is doing, SBI is not helping the cause of clarity and transparency at all.

Also read: Yes Bank: Another Crisis, Another Larger-Than-Life Promoter

Perhaps the best course for it would be to concede that its proposed participation in the reconstruction scheme is at the government’s behest, and that, since YB was perceived to be too valuable a financial institution to be allowed to go into liquidation, the help of the country’s biggest bank was enlisted to make a turnaround possible. This kind of messaging would help assuage the anxiety of the SBI’s stakeholders above all.

However, there are multiple issues involved in getting SBI to bail out a private sector bank, and these are unlikely to go away. The first of these is the question of the moral hazard implicit in using the taxpayers’ money (after all, the SBI is a public sector bank, funded in the main by the Indian taxpayers) to rescue a bank run mainly for the benefit of private stakeholders.

Another issue is that of messaging. In a year in which the government is looking to make major divestments in public sector enterprises (so as to shore up its budget deficit), it is surely not a healthy signal to prospective investors that public sector companies may be drawn upon by the government to address its other concerns. Equally importantly, it is essential to preserve the credibility and strength of our major financial institutions. By saddling the SBI, which has its own problems to take care of, with liabilities that it could well have done without, the government is unlikely to be seen as helping the SBI’s, or its own, cause in the long run.

And finally, there is inescapable irony in calling upon the much-maligned public sector to save a major private enterprise. Wasn’t it only the other day that the finance minster was venting her ire at public banks for what she called was the latter’s apathetic and unintelligent attitude to their job? Therefore, it may just be that those ‘experts’ who revel in running down the public sector may tone down their rhetoric somewhat, if only for a while.