On Friday, March 13, 2020, the Union Cabinet approved the rescue plan for Yes Bank, backed by the State Bank of India – the Yes Bank Ltd Reconstruction Scheme 2020. According to this scheme, Yes bank will remain a private sector bank with the following probable shareholder structure:
- SBI might hold a stake of around 45-46%
- ICICI and HDFC Bank – 6.31%
- Kotak Mahindra Bank and Axis Bank – 3.5%
- AT1 Bondholders – 10.73%
- Existing shareholders – 14.73%
The Moratorium which was extended till April 3rd will also be lifted on 18th March as stated by the same circular.
What Investors Should Be Aware Of
- All shareholders (except SBI) will be subject to a lock-in of three years for 75% of their investments.
- Shareholders with less than 100 shares can sell their entire shareholding
This is a one-of-a-kind move in the history of corporate India. A total of around 16 lakh shareholders of the Bank are expected to get affected.
While you might be worried about the lock-in, the final capitalization structure of the bank will disclose if locking-in the shares would be positive for you or not. How the reconstruction plays out will determine if investors will emerge winners due to the lock-in.
Index Funds and ETFs
Yes Bank shares are a part of the Nifty Index, Bank Nifty Index, and several mutual fund portfolios. A total of 72 funds (including 35 ETFs) have Yes Bank shares in their portfolios. The total number of shares held by these funds is a little over 14 crore (140, 683, 843). Of these funds, the DSP Equal Nifty 50 scheme holds around 411,158 shares – around 1.53% of the total assets under management.
Since the shares will now be locked-in for three years, most of these index funds and ETFs will not be able to honor their mandates. For example, Yes Bank shares will exit the Nifty Index on March 27. However, the index funds and ETFs tracking the Index will not be able to follow suit due to the restrictions. Therefore, the tracking error of these funds will increase.
The Additional Tier 1 or AT1 Bondholders of Yes Bank found themselves abandoned after the reconstruction scheme. According to this scheme, the AT1 bonds are scheduled to be written off. The total worth of these bonds is Rs.8415 crore.
This is according to the Basel III norms accepted around the globe during such emergencies. Several mutual fund schemes have invested in these bonds along with a few retail investors too.
The Association of Mutual Funds in India (AMFI) has written to the RBI asking the AT1 bonds to be written off after equity and preference shareholders. AMFI has also stated that around 11 fund houses have invested close to Rs.3000 crore in these bonds and with this move the perpetual bond market will dry up.
A Look At What Went Wrong.
During the period of 2014-2019, Yes Bank’s advances (loans extended) rose by 334%. As borrowers started defaulting, the number of loans overdue > 90 days increased. The bank also could not make enough provisions for profits. As its performance dipped, customers started withdrawing large amounts. This resulted in the bank lending more than it received as deposits. According to a Press Release by the RBI,
“The financial position of Yes Bank Ltd. (the bank) has undergone a steady decline… …The bank has also experienced serious governance issues and practices in recent years which have led to a steady decline of the bank.”
As a result, the RBI placed Yes Bank under moratorium or ‘temporarily prohibited the bank’ from paying any depositor more than Rs.50,000 per day until April 3, 2020, without permission from the RBI. This is usually done to give time to RBI to find a way to safeguard the interests of all involved.
Also Read : Yes Bank Crisis: What Should Investors Do
While risks are intrinsic to investments, it is not until such situations arise that we actually see the other side of risks. While the government and the RBI are leaving no stone unturned to ensure that Yes Bank survives this period and all investors and depositors remain unharmed, keeping a close eye on the developments is what most investors should be doing. As the reconstruction scheme unfolds, the impact of the crisis will become clearer. While the stock prices are at rock bottom, a healthy reconstruction might be able to inject some life into the stock and help recover the losses.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.