Mumbai: The markets regulator is examining a Yes Bank Ltd communication directing UBS Group AG’s Indian arm to drop coverage of the bank for potential violation of securities laws, three people directly aware of the development said.

Yes Bank, in an email, asked UBS in the last week of June to drop coverage of the bank following a 21 May UBS research report on eight Indian banks for its clients which claimed that Yes Bank had the highest credit exposure to the troubled power sector. The private lender alleged that the Swiss firm and its equity analysts were “biased", “motivated" and unrealistic in their research.

Yes Bank also threatened the Swiss company with legal action for publishing reports based on the bank borrowers’ filings with the Registrar of Companies (RoC), unless UBS corrected the report according to data and a deadline chosen by Yes Bank. Yes Bank is also preparing to file a complaint against UBS with Sebi.

For its part, UBS is yet to formally approach Sebi, although the securities firm, over conference calls during May and June, had asked Yes Bank to settle the matter bilaterally without involving any regulator or law firm, said one of the three people, who is directly aware of Yes Bank’s discussions with UBS on the issue.

A spokesperson for Yes Bank said the lender “has been engaging with the UBS management team in connection with their recent research report dated 21 May 2018. The report contained gross inaccuracies in computations and inferences without any prior discussions with Yes Bank management. UBS has subsequently modified their inaccuracies by issuing an erratum, but only partially".

“To protect the interests of its stakeholders, Yes Bank would take appropriate steps", added the bank spokesperson.

Emails sent to Sebi and UBS remained unanswered.

In the 21 May report, UBS used RoC data to state that Yes Bank’s total fund-based plus non-fund based working capital loans/exposure in the conventional power space is 16.8% of its total loan book, while for other banks (in the report) it was estimated to be around 10%.

This was contested by Yes Bank. The bank warned UBS on 23 May that it would face legal action unless it corrected errors in the report. Subsequently, UBS modified the data for all banks and stated that Yes Bank’s exposure (fund-based and non-fund-based) in the power sector was 13.2% of its loan book, while for other banks it remained at around 10% (albeit with minor variations) as stated in the 21 May report.

This also did not satisfy Yes Bank and in June, UBS and Yes Bank management met to discuss the issue. Subsequently, in a letter on 21 June, Yes Bank said that reliance on RoC filings didn’t take into account the bank’s actual ability to recover money and such RoC data may lead to “distorted" outcomes since RoC filings were dated and reflected only sanctioned amounts (of loans) which, according to Yes Bank may not be disbursed and/or repaid.

Mint has seen a copy of the letter sent to UBS by Yes Bank.

According to the first person, a top regulatory official, Yes Bank being merely a regulated entity, does not have the power to direct UBS to “drop coverage" just because the bank feels its reports are prejudiced or biased. Also, the bank cannot warn or threaten a Sebi-regulated intermediary (UBS) with fiduciary duties towards investors or shareholders of the bank, added this person.

UBS had asked Yes Bank to settle the matter bilaterally without involving any regulator or law firm-

By stating that the bank would take “action" if the intermediary (UBS) failed to clarify and change its report within a deadline (set by Yes Bank), the bank was in potential breach of the securities law, according to the second of the three people cited above.

While Yes Bank’s statements and directives against UBS in the June letter are being seen as a potential breach of securities laws and Sebi’s norms for research analysts, the top management of Yes Bank is planning to seek appropriate legal recourse, either with Sebi or through courts, against UBS for allegedly disseminating reports aimed at maligning and tarnishing the image of the bank, according to the first and second persons cited above.

“Reports are aimed at helping investors/clients to take informed market decisions. Such powers to prevent a Sebi- recognized intermediary from putting out research reports (mentioning Yes Bank or any other entity) in any manner for the intermediary’s investors/ clients, are given only to Sebi or a judicial body," said the first person.

“Yes Bank cannot disregard regulatory bodies in this manner. The law says that if any regulated entity is aggrieved by any other entity or a regulation, it is required to approach the concerned regulator," said the second person.

According to three other people, since UBS had not sought Yes Bank’s views prior to the research reports and merely relied on RoC data, the bank feels the Swiss firm has worked in a biased and vindictive manner, forcing Yes Bank to direct UBS to drop coverage as a corrective measure to protect its interests.

“In case of corporate guarantees from third party on loans; in case of security interest created in favour of security trustee; cash collateral/fixed deposits from borrowers or third parties; bank having pledge of shares/mutual funds and so on, RoC will not show any records. RoC reflects only the sanctioned amount but not what the bank actually disbursed," said one of these three people.

On the other hand, according to a person close to UBS, there is no law in India which says that for advising clients, a research analyst cannot rely on RoC filings or other government data and is bound to seek views of the entity (Yes Bank in this case) being covered in the analysis before compiling its views.

“Terming a government body like RoC’s filings to be misleading or stating it to be unfair to rely on RoC data that results in “distorted outcomes" is another violation of securities laws since it amounts to questioning the credibility of the government body and the authenticity and reliability of the government data meant for the public and investors at large," said the second of the first three people cited earlier.

In its email, the bank alleged that analysts at UBS “use convenient and incorrect methodology" to ensure that Yes Bank is highlighted as the bank with the highest power exposure despite issuing an “erratum".

Yes Bank added in the letter that UBS analysts persistently put out negative reports on the bank and such reports were allegedly timed for issuance around certain market/ corporate events in a way that caused the maximum damage to Yes Bank.

For this, Yes Bank has cited an instance of a report by UBS immediately after the bank’s decision to defer its capital-raising plans in September 2016.

Close