In all, banks will jointly infuse close to Rs10,600cr. In addition, private investors will also chip in to take this capital contribution closer to the $2 billion mark. This will be sufficient to operationalize the bank and give comfort to depositors. The government may be looking at infusing additional $2 billion into the bank from PE investors at a later date. This move largely covers the depositors and that should give them room for comfort. But what about the shareholders? That is the real puzzle!
Why is the Yes Bank reconstruction a puzzle for shareholders?The principal investor in Yes Bank, SBI, currently will hold 49% in the reconstructed Yes Bank. SBI will not be allowed to reduce its holding in Yes Bank to below 26% over the next 3 years. Even the other major banks and investors who will be putting in their money into Yes Bank will be locked in to the extent of 75% of their holdings for the next 3 years. Till this point, the story is fine. The problem arises when this rule is extended to retail investors.
According to the scheme of reconstruction, any shareholder holding more than 100 shares on the effective date of reconstruction (13th March 2020) would be subjected to this 3 year lock-in. Even in the case of retail investors holding more than 100 shares, 75% of their holdings will be locked in and investors will be free to only sell the balance 25% shares. For example, if you hold 90 shares of Yes Bank as on 13th March, you can sell your entire holdings. However, if you hold 1000 shares of Yes Bank, then you can only sell 250 shares and the balance 750 shares will be locked in for a period of 3 years.
Lock-in creates a challenge at 3 levelsThe mandatory 3 year lock-in for 75% of the shares held on 13th March 2020, creates a practical challenge at 3 levels.
- The announcement of lock-in was made on 13th March evening giving no opportunity for any trader / investor to exit the stock. This is unprecedented in Indian capital market history and could create legal issues.
- Secondly, the logic for the cut-off at 100 shares is hazy. For example, even if an investor had bought 100 shares of Yes Bank at the peak in August 2018, the investment would have been Rs.39,300. That is almost 1/5th the amount that SEBI has defined as retail investments in the case of IPO applications.
- Ironically, on 14th March Yes Bank reported a quarterly loss of Rs.18,564 crore. This could lead to a deluge of exits, wherever possible to the extent of 25% of holdings.
The bigger hit could be on hedged positions
- Look at hedged positions first. If an investor is holding lower put options against his Yes Bank holdings, this becomes a challenge. F&O contracts on Yes Bank are banned from 28th May. This could leave cash market positions un-hedged as they cannot be unwound. Covered calls pose a real risk in the event of spurt in price as equity holdings are locked.
- There is a bigger challenge in arbitrage positions. When the last futures contract expires on May 28th this year, the cash leg of the Yes Bank arbitrage position will still be locked in. Cash positions cannot be unwound and futures positions cannot be rolled over.
- Finally, there is a problem where investors have pledged shares of Yes Bank with a financier or have offered the shares as margin. Normally, financiers only accept shares that are not encumbered. Now, financiers and brokers will put pressure on investors to either repay the loan or bring in fresh collateral.