Lack of marquee investors, fear of RBI refusal hit YES Bank shares, bonds

Topics YES Bank | Bond investors

Lack of marquee investors and fear that the Reserve Bank of India (RBI) will not clear the investments by the new investors hit the share price of YES Bank on Monday. The bank’s stock closed 6.2 per cent down at Rs 64 a share. The bank’s dollar bonds due in February 2023 also fell the most in two months. 

On Friday evening, the bank had announced that its board had agreed to raise $2 billion from an assortment of investors. Of this, $1.2 billion will come from Canada-based businessman Erwin Singh Braich and SPGP Holdings. The second big investment was coming from CITAX Holdings.

The bank had not revealed Braich’s name for nearly a month, saying it had received a binding offer from an investor. While there was speculation over several big, marquee names, investors were disappointed with Braich, who is virtually unknown in India. 

When he was 20 years old, Braich, now 62, had left Simon Fraser University in Burnaby, British Columbia, to assume control of his father’s businesses. According to a media statement issued on January 2, 2013, he built his family businesses into a multi-million dollar conglomerate, expanding what his father, a migrant from India, had begun. 

The statement was issued after Braich filed a lawsuit against the Public Prosecution Service of Canada and the Royal Canadian Mounted Police after the latter threatened to arrest him on minor charges related to bankruptcy proceedings.
This was not the first time that Braich had alleged that the process had been abused by the Crown and the Royal Canadian Mounted Police. Both settled out of court with Braich, in different pieces of litigation, in Seattle in 2007, the statement had said.

In 2013, Braich’s lawyer Jamshed Mistry was quoted as saying the net aggregate value of Braich’s trusts makes him the second-richest person in Canada and one the top three wealthiest Indians in the world, along with Mukesh Ambani of Reliance Industries and Lakshmi Mittal of ArcelorMittal.  

But like Ratan Tata, Braich also conducts his business activities through various trusts and does not appear on in any list of  billionaires, Mistry had said. 

Other court filings in Canada show that in 1999, Braich was sent to bankruptcy court and had declared zero assets. 

YES Bank’s other big investor, CITAX Holdings, which has promised to invest $500 million, had only $26,000 as 
shareholders funds, according to its last balance-sheet filed with UK regulators, Bloomberg reported.

The family office of GMR Group promoters has also promised to invest $25 million into the bank even as several group companies have defaulted on loans to Indian lenders and several power projects of the group are seeking loan-restructuring from public sector banks. “Given the kind of names anticipated to pick a stake in the bank, what has actually come through is a disappointment,” said an analyst with a foreign brokerage. The larger worry, as Suresh Ganapathy of Macquarie Capital said, is whether these investors will get the regulator’s nod to buy such large stakes in a bank. 

Regulations permit an investor to acquire 4.99 per cent stake in a bank through the automatic route, while an investment of 10 per cent or more will require the consent of the RBI. These investors generally get a place in the board of a bank and hence passing the “fit and proper” criteria is important. 

SPGP Holding, Braich, and Citax have opted to buy 60 per cent and 25 per cent of the shares of in the current round of $2-billion fundraising. Citax also did not bring in Rs 10 crore as security for Nagarjuna Oil, which is also facing insolvency proceedings. Ganapathy said the financials of Citax based on regulatory filings in the UK was not very encouraging.  One of the reasons analysts have given for YES Bank not getting marquee foreign investors as it did in the past, is the uncertainties around the asset quality plaguing the bank for at least a year. At 7.4 per cent gross non-performing assets ratio, YES Bank’s asset quality is the weakest among top private banks. 

“Large investors may prefer to stay away from the YES Bank stock until they can take a view that the worst is behind the bank,” said Nilesh Shah of Envision Capital. 

Also, as the current round of fund raising increased from the earlier proposed 

$1.2 billion to $2 billion analysts see it to be consumed for another round of asset quality clean-up. The RBI’s inspection revealing Rs 3,277 crore of divergence in NPA reported for FY19, of which Rs 632 crore is expected to be made in December quarter could keep provisioning costs higher for FY20. Ganapathy anticipates the bank to raise another $3-3.5 billion in the next 18 months. This means that investors of the bank could be faced with another round of huge capital dilution.

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