RBI will not extend Rana Kapoor tenure at Yes Bank? There's bad blood among promoters; shares crash 73% in just 1 week

This is what the worst nightmares of stock market investors are made of. Only four months time have been provided to Yes Bank to search for a new Managing Director and CEO. Private lender Yes Bank is on hotbed since RBI ordered its chief Rana Kapoor to exit the top post in the bank by end of January, 2019. From September 19, Yes Bank share price has dropped by over 73% and has also touched a new low of Rs 184.45 per piece! Today, alone the share price tumbled by 9% by touching another all-time low. At around 12:19 hours, the bank was trading at Rs 187.70 per piece down by Rs 15.50 or 7.63%. Caught in an emergency situation, the bank has made a list of pleas and it is now being tabled before the Reserve Bank of India (RBI). 

Three decisions were taken by Yes Bank. 

Firstly setting up a Search & Selection Committee comprising of three existing nomination and remuneration committee board members plus two external experts to identify a new Managing Director & CEO as a successor to Rana Kapoor. 

In this committee would be Brahm Dutt, Independent Director, Ajai Kumar, Non-Executive Non-Independent Director, Mukesh Sabharwal, Independent Director. While 2 external experts to be chosen in due course. 

According to Deutsche Bank, “We believe RBI would be agreeable to this.”

The bank secondly is pleading for extending the exit deadline of Rana Kapoor till April 2019, as it believes the timeline of four months to decide on their founder’s successor is very challenging. 

Talking about the extension for Rana Kapoor, analysts have already raised a red flag - it is expected that RBI is unlikely to approve this demand. 

Manish Karwa and Abhishek Saraf Research Analysts at Deutsche Bank said, “ It is a bit uncertain whether the board can appoint new EDs, given it needs both promoters' consent; though an RBI approval may prevail.”

The duo hence added, “RBI has already specified a particular time period (up to Jan 2019) for the MD, and may not approve for more time. While clarity will emerge in due course, the near-term outlook still remain uncertain.”

Similarly Macquarie Research said, “We think 4 months is indeed too short a time frame to find a credible new successor and the board’s request to RBI for a short extension to Mr. Kapoor is a reasonable one, under the current circumstances. However, given the nature of the allegations quoted for his rejection, this request may not be entertained.”

Not only this, RBI is also unlikely to approve any internal candidate in taking over the Yes Bank. Since the reason of Kapoor’s exit is believed to be due to rising NPA divergence, RBI will not show mercy as these new internal candidates will be seen equally responsible in the way bank is being run. 

Let’s take few histories of some banks or companies having management trouble. Before Yes Bank, it was Axis Bank that witnessed the same kind of treatment from RBI. 

Axis Bank’s CEO Shikha Sharma on April 09, was asked to leave her post by December 2018. Her exit term began from June 2018. Later in July,  the bank has shortlisted three candidates as Sharma’s successor. They have submitted the names and details to RBI for a decision. 

Then there were other cases, although they had nothing to do with banks or the RBI. IT-giant Infosys, which bid goodbye to their CEO in August last year. However, the company  appointed an interim CEO in the form of co-founder Nandan Nilekani and under his leadership by end of 2017, the company had a new CEO - Salil Parekh took over effectively from January 2018.
 
Similar was the case of Tata Group and Cyrus Mistry, although the bad blood and controversies flowed freely in public sphere in this case, while in the rest, it was more in the nature of a silent coup. 

From these examples, it is clear that finding a new CEO should not be extreme challenging. However, even if Yes Bank finds a new CEO in 4 months time, an external candidate may not be able to quickly take over the reins of the bank from Kapoor effectively, given how involved he has been in the day-to-day management since it was founded.

Coming to the third request made by Yes Bank is of bringing two senior presidents on the board of executive director. These two names are Rajat Monga and Pralay Mondal. 

Now this can also be a complicating decision of Yes Bank and may not see approval of RBI, because of the bad blood between Monga and Kapoor’s family. 

In Macquarie’s view, Rajat has been with the bank since inception, also acting as its CFO when the alleged ‘incorrect accounting’ was done, the RBI may not be willing to grant him a board seat either. 

It is not only RBI, Yes Bank would also require Madhu Kapur, the second largest promoter-shareholder, approval for the appointments. 

A background check: Monga’s appointment appeal is not the first time. In 2013, Yes Bank had nominated three members of senior management (Monga, Sanjay Palve and  Mondal) as Executive Directors. 

Interestingly, that was opposed by Madhu Kapur & family, who are classified as promoters of Yes Bank, along with Rana Kapoor. In 2015 Bombay High Court passed a judgement which said that whole-time directors can only be appointed by a joint recommendation of both the promoter groups. This judgement has been appealed and the matter is still sub-judice. 

Even recently, Kapur wrote to the board expressing her dissatisfaction with Rana Kapoor, it is very unlikely that she agrees to let close colleagues of Kapoor, sit on its board, as per Macquarie. 

Analysts at Citi Research in their report said, “ We are not sure at this stage if both the promoter groups are agreeable to elevation of Monga and Mondal. We believe that considering their proposed elevation, these two could be the potential internal candidates for succeeding Kapoor.”

Hence, appointment of new ED could not be materialize due to differences in opinion between the promoter groups, just like in past. 

As on June 2018, Rana Kapoor has about 10,00,00,000 equity shares equivalent to 4.34% of the Yes Bank share capital. While Madhu Kapur has about 17,56,25,000 equity shares attributing to 7.62% of Yes Bank. 

From the above it is clear, that only RBI can shut down the chaos in Yes Bank and a wise decision would be expected, which may not be what the bank is hoping but at least RBI will get its way in strengthening the corporate governance.