The Reserve Bank of India (RBI) has informed Sumitomo Mitsui Banking Corp. (SMBC) that its voting rights in Yes Bank Ltd will be capped at 26% even if the Japanese bank acquires up to 51% of the private lender, two people with knowledge of the development said, in a setback for the Japanese conglomerate that had hoped to take full control.
SMBC officials have been in talks with the RBI for the past few weeks to discuss buying a stake in Yes Bank, which was rescued from the brink of collapse by a group of banks four years ago.
Special case
As a special case, the RBI has earlier expressed its willingness to allow any suitable buyer to acquire up to 51% of the bank.
“The Reserve Bank of India (RBI) has responded to SMBC saying that the Banking Regulation Act limits voting rights in private sector banks to 26%,” said one of the two people cited above. “Any change in this will set a wrong precedent,” the person said on condition of anonymity.
However, the RBI considers SMBC’s acquisition of 51% in Yes Bank acceptable as an exceptional case, as the private lender’s growth has been somewhat stifled by the absence of a stable, long-term promoter.
“SMBC believes that without the 51% voting shares, it will be treated as a mere market-marked portfolio investment,” the second person said.
Both SMBC and Dubai-based Emirates NBD are currently conducting due diligence on Yes Bank. In August, Mint reported that SMBC had appointed JPMorgan as its financial advisor and J Sagar Associates as its legal advisors for the proposed stake acquisition.
In 2020, Yes Bank was bailed out by a group of banks led by SBI, in a transaction overseen by the RBI. This came after the bank’s founder and CEO Rana Kapoor failed to get approval from the banking regulator to continue with the lender, after certain shortfalls were found in the bank’s basic liquidity requirements.
“The bank needs a new owner who can buy out SBI and others, enable the bank to compete more aggressively with other private lenders, grow the portfolio faster and put in place long-term growth strategies,” the first person added.
Exit route
The RBI’s approval for the acquisition of a 51% stake by a potential new owner opens an exit route for SBI and other lenders in Yes Bank, which has assets worth over ₹4 billion.
Several banks collectively own 33.74% of Yes Bank, including SBI (23.99%), HDFC Bank (2.75%), ICICI Bank (2.39%), Kotak Mahindra Bank (1.21%) and Axis Bank (1.01%).
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If Sumitomo does indeed acquire 51% of Yes Bank with a voting cap, it will be the only case after Catholic Syrian Bank where the RBI has allowed a single investor to hold a majority stake with voting rights limited to 26%. The central bank has set this limit to ensure that no single entity gains excessive powers to influence any corporate decision or block or pass any resolution without the consent of others.
If SMBC agrees to acquire 51% of Yes Bank despite its voting rights being limited to 26%, it will be for The only case from CSB that any strategic or institutional investor has ever held shares with differential voting rights (DVR) in an Indian private sector bank.
No DVRs allowed
Yes Bank is a listed entity and as per Sebi norms, DVRs are not allowed in any listed company unless specified by a regulator in special circumstances.
“Sebi’s Listing Obligations and Disclosure Requirements (LODR) Rules talk about parity of rights among all shareholders. However, the 26% limit on voting rights under Section 12B of the Banking Regulation Act would apply as any law takes precedence over a regulation,” said Abizer Diwanji, founder of Mumbai-based consultancy NeoStrat Advisors Llp Services.
Currently, in addition to the domestic banks mentioned above, state-owned LIC owns 3.98% of Yes Bank, while private equity firms CA Basque Investments own 8.74% and Verventa Holdings Ltd owns 9.21%.
“In this particular case, control seems inevitable if the bank is to get back on track, especially given that large portions of the shares are held by specific investors. The idea of a strategic sale seems difficult,” Diwanji added.
Another financial services expert said all foreign stakeholders will suffer the same fate as private equity investors if a serious investor is not allowed to have decisive voting rights even in such cases.
“Since two private equity firms already own about 17% of Yes Bank, the government’s intention to find a strategic buyer may be thwarted if no shareholder gets the controlling voting right even in such cases. In that case, Yes Bank would look like a bank controlled by private equity firms,” this person said.
It was first reported
Mint first reported in July that the RBI had approved the sale of up to 51% of Yes Bank’s shares to a suitable new promoter.
SMBC is looking at a valuation of about $5 billion for a 51% stake in Yes Bank. As of Thursday’s close, Yes Bank’s market capitalization was ₹73,439 crore rupees, or about $9.1 billion.
In an interview with CNBC-TV18 on Wednesday, UAE Ambassador to India Abdulnasser Alshaali revealed that an Abu Dhabi-based bank is in advanced talks to acquire a significant stake in an Indian bank.
Emails sent to Yes Bank, SBI, RBI and SMBC went unanswered.
Earlier in 2018, the RBI had allowed Canada’s Fairfax Holdings Ltd to acquire 51% stake in Kerala-based Catholic Syrian Bank, making the Prem Watsa-owned firm the first foreign investor to gain majority ownership in an Indian bank. In the case of CSB, the regulator also capped voting rights at 26% under the Banking Regulation Act.
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