Mumbai: Yes Bank Ltd’s estranged promoters—Rana Kapoor and Madhu Kapur —have initiated moves to reach an out-of-court settlement, three people close to the development said. Both sides have begun preliminary talks to withdraw a long-drawn and bitter legal case against each other and put an end to their decade-old feud, they said. If taken to its logical conclusion, the move will remove uncertainties surrounding the bank’s succession plans, simplify the board’s functioning and possibly help burnish the bank’s stained credentials.

A person close to Rana Kapoor, one of the three people cited above, confirmed the development, saying it was in the best interest of the bank if the promoters could withdraw the cases and call a truce. When contacted, Shagun Gogia, daughter of Madhu Kapur, declined to comment on the developments.

The two other people familiar with the recent discussions between the two promoters confirmed this on condition of anonymity.

“Rana Kapoor has approached Madhu Kapur and her family and both parties are willing to opt for an out-of-court settlement, keeping in mind the long-term vision that was set by Ashok Kapur and Rana Kapoor for the bank, which has grown into an institution today," the second person cited earlier said. “Withdrawal of the legal battle will benefit the bank’s board, shareholders, employees and ultimately the customers."

“Rana Kapoor has approached Madhu Kapur recently to mutually agree on a plan to end the legal dispute," the first person cited before said. “A real meeting is expected to happen soon. Hopefully, both sides will agree to new terms and withdraw their suits from the court."

An email sent to Yes Bank remained unanswered.

The move follows the Reserve Bank of India’s (RBI) recent directive to Yes Bank to restrict managing director and CEO Rana Kapoor’s tenure till 31 January 2019. The central bank’s order has forced the bank’s board to enter into a tricky and lengthy search process due to the bank’s complex articles of association (AoA) which, among other conditions, require both sides to agree to any new appointment to the board.

Analysts say that if the settlement takes place, the appointment of directors on the Yes Bank board will be hassle-free in future.

“The move will be beneficial for the bank since the current disagreement over appointing whole-time directors on the board will no longer be present if the promoters put an end to their fight," said Suresh Ganapathy, head of financial services research, Macquarie Research

The turf war between the two promoters with AoA in the background has been preventing the bank’s board from functioning smoothly, the first person said.

“The settlement between the two promoters will enhance professionalism at the bank, improve the bank’s credibility and restore the confidence of shareholders as well as the employees," the person said.

In 2005, the two promoters of Yes Bank agreed on the AoA, which were amended in September 2017.

The contentious section 127(a) of Yes Bank’s AoA clearly mandates, among other things, that the board shall follow the recommendation made by the two promoters to appoint any whole-time director.

It also says the board may appoint one of its members as whole-time director, but even that would be subject to the AoA (essentially the consent of both promoters) and then an RBI approval.

The conflict between Yes Bank’s promoters began in 2009, a year after co-founder Ashok Kapur was killed in the 2008 terrorist attack in Mumbai.

The board had declined to appoint Gogia, daughter of Ashok Kapur, because it was felt she might not meet RBI’s fit-and-proper criteria.

In 2013, Madhu Kapur (widow of Ashok Kapur) and her daughter, Gogia, approached the Bombay high court, seeking greater say in appointing directors and wanted the court to uphold their right to jointly nominate directors.

Finally, in June 2015, the Bombay high court quashed the appointment of certain directors to the board, ruling that Madhu Kapur and Rana Kapoor have the right to jointly nominate director. The ruling has been challenged before a division bench, where it is now pending.

Problems were compounded on 17 September when the banking regulator rejected the Yes Bank board’s request for a three-year extension in Rana Kapoor’s tenure, giving the bank until 31 January 2019 to find a successor.

Amid uncertainties, the bank’s stock, between 20 August and 28 September, tumbled by a staggering 59% from its high of 404 to 166.15 on BSE. The stock has slightly recovered now but is still trading about 45% down from its 20 August levels.

Even as the bank has formed a search committee on Friday to appoint Kapoor’s successor, the AoA conditions may make the selection process tough and long-drawn because any candidate selected by the committee will still need approval from both the warring sides. Any disagreement will force the search panel to restart the process, until such time that both promoters agree on three common names to succeed Kapoor. There are further complications: a corporate lawyer says that if the board ignores the AoA and directly sends names of potential candidates to RBI, without taking consent of both sides, the bank could be in violation of the high court’s ruling.

The uncertain legal terrain ahead was highlighted when the board on 25 September decided to promote Rajat Monga and Pralay Mondal as executive directors, subject to approval from RBI. In a 28 September letter to the Yes Bank board, Madhu Kapur said the appointment of Monga and Mondal as whole-time directors had been struck down by the June 2015 Bombay high court ruling. She added that these earlier appointments were done without consultation with the co-founders.

Madhu Kapur has requested the board to not take any action contrary to the RBI directive and the court judgement, so that the “challenging situation presently faced by the bank is redressed without suffering any long-time setback to the bank and its stakeholders". She also appealed that the board expedite the process of finding Rana Kapoor’s successor to insulate the bank from long-term damage.

The board on 5 October, appointed the former chairman of the Insurance Regulatory and Development Authority, T.S. Vijayan, and former chairman of State Bank of India, O.P. Bhatt, as two external experts in a five-member search and selection committee tasked with shortlisting Kapoor’s successor. The bank said it has also invited proposals from global leadership advisory firms to assist the search panel.

At the end of June, Rana Kapoor’s stake in Yes Bank stood at 4.34% while Madhu Kapur’s was 7.62%. Kapoor’s associate firms Yes Capital (India) Pvt. Ltd and Morgan Credits Pvt. Ltd hold 3.28% and 3.05%, respectively, while Kapur’s associate firm Mags Finvest Pvt. Ltd held 1.7% in the bank.

Meanwhile, analysts are viewing the unfolding saga with caution.

On 25 September, analysts at Morgan Stanley said in a note to their clients: “We await more clarity around the strategy after the new CEO appointment and capital-raising. As of now, we see divergent potential outcomes and hence prefer to stay on the sidelines."

“The board has not been able to give a clear picture on the succession and further course for the bank. The timelines and uncertainty on approvals from RBI for both MD & CEO (should be difficult) and EDs will keep near-term stock performance muted," said analysts at research firm Prabhudas Lilladher in a 26 September note.

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