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YES Bank Reconstruction Scheme 2020 – Revealed by RBI to tackle the Bank’s Crisis

Yes bank Ltd. has been facing various turmoil and financial disturbances from the year 2018, and the bank was looking for some investment options to control the business losses and rectify its assets-liabilities misbalance. For this, the bank has undergone so many changes to overcome from this crisis situation like the appointment of Ravneet Gill as MD and CEO, taking control from Mr Rana, obtaining bids from the foreign investors and more. However, unfortunately, the situation could not be improved owing to a number of problems due to regulatory and other issues. Moreover, the bank has lost its market value from Rs. 174 per share to 29 per share (currently around 17 per share after the issue of Yes Bank Reconstruction Scheme).

Intervention by RBI to present YES Bank Reconstruction Scheme

The continuous deteriorating financial structure of the Yes Bank Ltd. with regard to its liquidity, capital and other critical measurable financials has triggered the RBI to step into the matter. Also, the absence of any back-up plan for infusion of capital has compelled the Reserve Bank of India to take immediate action in public interest and particularly to protect the interest of the depositors. Ultimately, the RBI had to use its discretionary power under the Banking Regulation Act 1949 and has taken control over the bank since 5^th March 2020. After a day of placing Yes Bank’s business under moratorium and superseding its Board, the Reserve Bank of India (RBI) has brought forward a reconstruction scheme.

Highlights of YES Bank Reconstruction Scheme

The Reserve Bank of India bank has issued the reconstruction scheme for the Yes Bank Ltd. and major highlights of the scheme are as follows:

• 1 – The authorised capital of the company shall stand altered to Rs. 5000 crore only and the number of equity shares shall stand altered to 2400 crore shares @ 2 each and premium of Rs. 8 each.
• 2 – The investor bank must agree to invest in equity of the reconstructed bank to the extent of 49% of the shareholding, post-infusion of the reconstructed bank.
• 3 – There shall be a lock-in period of three years, meaning that the investor bank shall not reduce its holding below 26% during the period of three years from the date of funds’ infusion.

• 4 – Following points of the Article of Association shall be amended:-

Article 110(b) –  This relates to the rights of Indian partners to recommend the appointment of three “IP Representative Directors”

Article 127(b) – This relates to the right to Indian partners to recommend the name of the chairman and CEO.

Article 127A(a) – This relates to the recommendation of promoters to appoint the WTD.

Article 127A(b) – This related to WTD being necessarily to be out of the board members.

• 5 – The investor bank shall have two nominee directors in the board of the reconstructed bank.
• 6 – The Reserve bank may also appoint additional directors if so required.
• 7 – It will be open to the Board Of Directors of Yes Bank to co-opt more directors (excluding point 6 as mentioned above) subject to the maximum number of directors mentioned in AOA.)
• 8 – The appointment of the directors as above shall have an effect, notwithstanding non-fulfilment of the requirement as to minimum shareholding, qualification, etc. as other conditions for becoming the board member of Yes Bank Ltd.
• 9 – The member of the board so appointed shall continue to hold office for the period of 1 year or until an alternative board member is appointed by the Board of Yes Bank in accordance with the procedure laid down in MOA (whichever is later).
• 10 – Any defect in the constitution or any vacancy in the board shall not invalidate the meeting or any decision taken by the Board.
• 11 – It shall not be necessary to take third party consent to implement this scheme.
• 12 – All deposits and liabilities of the reconstructed bank except as provided in the scheme, and the rights, liabilities and obligations of its creditors will continue in the same manner and with the same conditions and terms as prior to reconstruction.
• 13 – The instrument qualifying additional tier 1 capital, issued by the Yes bank under Base III Framework shall stand written down permanently.
• 14 – No account holder shall be entitled to get any compensation from the reconstructed bank on account of any changes occurred in the reconstructed bank by virtue of the scheme.
• 15 – All suits, appeal, and decisions of the court or any proceeding pending will remain unaffected.
• 16 – All employees shall continue to hold office with the same terms and condition for one year. However, board members have the authority to discontinue the service of KMP at any time after following the due procedure.
• 17 – There will be no changes in branch and network of the Yes Bank, however, the reconstructed bank can open or close down any branch as it may deem necessary to do.
• 18 – The reconstructed bank shall submit information to RBI periodically.

Takeaway

It is an unprecedented move taken by the RBI wherein the Central Bank of the country has completely taken control to improve the financial position of a private sector bank. The YES Bank Reconstruction Scheme has been put into place in light of the view that the State Bank of India has wilfully shown interest in taking over. But there will be 30 days of the moratorium period. The RBI has used its discretionary power under 36ACA of the Banking Regulation Act 1949. Shri Prashant Kumar (ex-DMD and CFO of State Bank of India) has been appointed as administrator under Section 36ACA(2) of the Act. These steps are taken to quickly restore the depositors’ confidence in the bank.