Legal Aspects of Yes Bank Failure and How RBI is Helping Them Out

Submitted By:-

Archita Nayak

Stuti Tiwari

Editor By - Jayant Kashyap

-: Introduction :- The YES bank was founded in 2004, by Harkirat Singh, Ashok Kapur, and Rana Kapoor which gradually became the 4th largest private sector bank in India.It released its IPO (Initial public offering) and kept progressing until the global financial crisis of 2008. YES BANK, is a high quality, customer centric and service driven Bank. Since inception in 2004, YES BANK has grown into a ‘Full Service Commercial Bank’ providing a complete range of products, services and technology driven digital offerings, catering to corporate, MSME & retail customers. YES BANK operates its Investment banking, Merchant banking & Brokerage businesses through YES SECURITIES and its Mutual Fund business through YES Asset Management (India) Limited, both wholly owned subsidiaries of the Bank. Headquartered in Mumbai, it has a pan-India presence across all 28 states and 9 Union Territories in India including an IBU at GIFT City, and a Representative Office in Abu Dhabi. -: Background of the case :- YES bank turned out to be the go-to bank for private companies as the only banking partner for UPI transactions such as Swiggy, Phonepe, Flipkart, Redbus, etc. Looking at the growth of the bank people started depositing more and more , the deposits reached to 2 lakh crores gaining the confidence of the depositors. As the bank reached its peak of success, the bank (owing to the overwhelming response they received) started lending billions to companies.The bank also started lending to companies were already under financial stress – these included Dewan Housing Finance Corp. Ltd (DHFL) , Anil Ambani’s Reliance group, the Zee group, and Subhash Chandra’s Essel group and the likes. The Outstanding loans of YES bank grew from INR 55,000 crore in FY14 to INR 2.41 trillion in FY19.UBS, a global financial services company released a report mentioning the rising Non-performing assets (NPAs) of the bank which accumulated due to lending the financially unstable banks.The share price went down from INR 1400 per share to mere INR 5 per share.

On 3rd March 2020 , the Enforcement Directorate (ED) charge sheet-ed Rana Kapoor & his Family under Prevention of Money Laundering Act, 2012 for money laundering and receiving personal gratification in lieu of loans to borrowers. Rana Kapoor has been treated as a “public servant” by CBI under section 46A of the Banking Regulation Act, which provides that the full time chairman, managing directors and directors of a banking company are to be considered public servants. RBI ceased the control of the lender bank on the claims of ED of the value of the fraud being 5050 crore.On 5th March 2020 RBI put YES bank under moratorium. With this regulation, the people having accounts with the bank could withdraw only INR 50,000 and this continued till 3rd April 2020. -: Investigation Process :- During investigation it was found that an amount of Rs. 3700 crore was lent by YES Bank to the DHFL group & DHFL had sanctioned a loan of Rs. 600 crore to Doit Urban Venture which was a company owned by Rana Kapoor's daughters. The amount of 600 crores was a “kickback” to the Kapoor Family in lieu of the loans.Further the collateral for loan were 5 agricultural properties whose market value was inflated from 40 cr. to 735 cr. which was another financial irregularity In the ongoing investigations, various other facts have also been revealed about Ambani's nine group companies are stated to have taken loans of about Rs. 12,800 crores of the bank and claiming no exposure to Rana Kapoors family. While Essel Group has an alleged unpaid loan of Rs 8,400 crores from the bank and claims no direct or indirect contact with Rana Kapoor's family.A similar case against Indiabulls and the mortgaging of a tony property in Delhi to its housing finance branch for a loan of Rs. 685 crores as a part of an alleged dubious deal. -: Current Rescue Plan For The Bank :- The government took over the bank and came with a draft plan which said State bank of India (SBI) will buy 49% stake and bring in the needed capital.

The investing bank will not reduce its holding in the new bank below 26% before completion of 3 years. All the employees will continue to work at the same pay for at least for one year. RBI opened INR 60,000 crore as an emergency credit line for the bank. ICICI bank took 7.97% stake in YES bank. -: RBI Rescue Plan for the Bank :- It is hereby notified that on the application of the Reserve Bank of India under Sub-section (1) of Section 45 of the Banking Regulation Act, 1949, the Government of India has made an Order of Moratorium in respect of Yes Bank Ltd. under Sub-section (2) of the said Section for the period from 5th day of March 2020 and up to and inclusive of the 3rd day of April 2020. In order to effect a restructuring of Yes Bank Ltd., the Reserve Bank of India, in exercise of the powers conferred on it by Sub –section (4) of the said Section, has prepared a draft scheme of reconstruction. In terms of Section 45(6)(b) of the Banking Regulation Act,1949. Share Capital of Yes Bank RBI said, the Authorized Capital shall stand altered to Rs.50,00,00,00,000 (Rupees Five thousand crore only) and number of equity shares will stand altered to 24,00,00,00,000 (two thousand four hundred crore only) of Rs.2/- (Rupees Two only) each aggregating to Rs.48,00,00,00,000 (Rupees Four thousand eight hundred crore only).” The investor bank will have to agree to invest in the equity of Yes Bank to the extent that post infusion its shareholding is at 49% at a price which is not less than Rs 10/- and a premium of Rs 8/- only. The investor bank will not be allowed to reduce its holding below 26% till next three years from the date of infusion of capital. Constitution of Board of Director A new board will be comprised once the appointed administrators office stands vacated. The board will be constituted with One MD & CEO, three non-executive directors and two nominee directors appointed by the investor bank on the board of Yes Bank. RBI may appoint additional directors by exercising their powers conferred under Banking Regulation Act, 1949.

Rights and Liabilities of Yes Bank

RBI said, “All the deposits with 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 terms and conditions, completely unaffected by the Scheme.”

It further added “The instruments qualifying as Additional Tier 1 capital, issued by the Yes Bank Ltd. under Basel III framework, shall stand written down permanently, in full, with effect from the 4 Appointed date. This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework”

Account holders won’t be entitled for compensation from the reconstructed bank (Yes Bank) on account of changes occurred in the reconstructed bank shall remain unaffected by the reconstruction scheme.

Disclosures & Business Continuity

Yes Bank will have to submit periodic statements, information as required by the RBI time to time regarding the implementation of the reconstruction scheme.

The existing infrastructure will continue to function in the same manner without being affected by the scheme, they can open/close new offices, branches in compliance with RBI’s norms.

Employees shall continue in its service with the same remuneration. RBI in its draft said “Board of Directors of the Reconstructed Bank will however, have the freedom to discontinue the services of the Key Managerial Personnel (KMPs) at any point of time after following the due procedure.”

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