YES Bank fiasco: Mutual funds to approach Sebi on 3-year lock-in

Worried over the 75 per cent three-year lock-in for YES Bank shareholders, mutual funds (MFs), along with stock exchanges, will approach the Securities and Exchange Board of India (Sebi) on how the impact of government’s notification can be mitigated on index funds and exchange-traded funds (ETFs). 

From March 27, YES Bank will be excluded from both the Nifty and Bank Nifty indices. Index funds and ETFs need to exit from the bank shares once the lender is excluded from indices. According to the data from RupeeVest, MFs’ equity exposure to YES Bank stood at Rs 492 crore as of February 29, with 62 per cent of the exposure held in various index and ETFs, which track underlying index. As many as 50 index and ETFs held YES Bank into their schemes as of February 29.

“Some of the exposed schemes are large in size with assets of between Rs 40,000 crore and Rs 60,000 crore. For them, the issue can be much larger. We will be taking up the matter with Sebi,” said senior executive of a fund house.

“We are in talks with exchanges and industry body Association of Mutual Funds in India. Both will seek clarity from the Sebi on this issue,” said an industry official, part of the industry body’s committee on ETFs and index funds. 

On Friday, the government notified the YES Bank scheme. In section 8 of the gazetted notification, it has been stated that there shall be a lock-in period of three years from the commencement of scheme to extent of 75 per cent. Industry participants are worried, as this means both existing and investors coming in with fresh capital will not be able to sell more than 25 per cent of holdings for at least three years.

Lock-in is also expected to hurt investors’ faith, who bought bank’s shares on Thursday or Friday. Institutional investors that lent shares in stock lending and borrowing mechanism might not be able to get back all shares, hedged positions or cash-future arbitrage strategies can face losses.


To be sure, an index or ETF needs to have 95 per cent of assets replicated in-line with the underlying index. “However, typically index and ETFs use remaining 5 per cent room for cash holdings to deal with any redemption pressures. Also, holding YES Bank shares for three years, after it is out of indices, can lead to huge tracking error,” a fund manager said, requesting anonymity.

While YES Bank is being excluded from Nifty and Bank Nifty, new stocks are being added to these indices. “Bank Nifty-linked funds could find it difficult to have enough room to include Bandhan Bank, which is a YES Bank replacement, while still holding YES Bank shares partially. Similarly, Shree Cement is replacing YES Bank in Nifty,” said a fund manager. According to industry sources, MFs and exchanges can propose to Sebi that index re-balancing date be deferred from March 27 to another month so that government can clarify the issue in meantime.

Further, industry participants say creation of segregated portfolio to hold YES Bank exposure separately and giving separate units of the schemes to unitholders can be a workable solution.


“However, Sebi will have to allow exemptions for such an exercise as under current regulatory framework, side-pocket can only be created in a debt scheme when there is a rating downgrade to below-investment grade,” said chief executive officer of a fund house.

Over Rs 2,100 crore of retail money could be locked

Apart from MFs, other existing shareholders stand to see a significant share of their funds getting stuck in YES Bank, if the current government notification is not amended or clarified.

Retail investors (individuals up to Rs 2 lakh of investment) hold Rs 2,839 crore worth of shares in YES Bank; calculated based on current share price and shareholding as of December 31, 2019.  

While it is difficult to gauge the impact on retail investors as the provision is applicable to only investors holding more than 100 shares, 75 per cent of retail investment getting locked-in could amount to Rs 2,129 crore worth of shares. Overall, more than 1.6 million public shareholders have investments in bank, as of December 31, 2019.

Among other investor categories, foreign portfolio investors hold Rs 986-crore investments in the bank, while high net-worth investors (HNIs) hold Rs 280 crore worth of shares. 

A 75 per cent lock-in on investment would amount to Rs 209 crore for HNIs. Similarly, the lock-in for FIIs could be Rs 739 crore worth of investments.



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