Yes Bank co-promoters Rana Kapoor and his family owned firm Morgan Credits Pvt. Ltd (MCPL) have been forced to pledge their entire 7.34% stake with Reliance Nippon Life Asset Management Ltd (RNAM), asset manager of Reliance Mutual Fund (MF). The move follows the mutual fund converting a previously unsecured loan into a secured loan.
As the bank’s stock has lost 80% over the past year, an unsecured loan availed by MCPL from RNAM through issuance of non-convertible debentures (NCDs) has been converted into a secured loan by creating a pledge on the entire 170.25 million shares held by Kapoor and MCPL.
The whole transaction lies shrouded in mystery. For one, it is odd for a mutual fund, which is a custodian of public funds, to lend unsecured funds to a private entity. Having secured the loans now, RNAM needs to disclose the structure of the transaction to the public shareholders because RNAM is a listed entity.
Kapoor and MCPL hold 4.31% and 3.03%, respectively, in Yes Bank. According to an exchange filing, Kapoor and MCPL have pledged their entire holdings in Yes Bank—100 million and 70.25 million shares, respectively—in favour of MCPL bond-holders.
Last year, MCPL had raised ₹1,160 crore by issuing NCDs to RNAM. A prepayment of ₹200 crore was made by MCPL to Reliance MF in November. The loan pact mandates that the value of Yes Bank shares (held by Kapoor and MCPL) should always be greater than double the loan outstanding.
It is not known whether there were other prepayments in the interim, or exactly how much MCPL owes Reliance MF as of 23 July. However, the value of the 170.25 million shares pledged on Monday is around ₹1,410.19 crore.
The Yes Bank stock has been falling steadily since the Reserve Bank of India (RBI) indicated in August that Kapoor’s term as the bank’s chief executive officer would not be renewed after January 2019. Since 20 August, Yes Bank shares have lost almost 80% to ₹81.75 as of Monday on BSE.
“Over the last eight months, MCPL has successfully prepaid NCDs in excess of 30% of the outstanding amount (along with prepayment of proportionate accrued interest) well before the stipulated maturity repayment date (both principal and interest on the NCD is due only on maturity in April 2021)," said an MCPL release on Tuesday.
“In order to enhance the credit structure of the NCD by migrating from unsecured NCD to secured NCD, MCPL and Rana Kapoor have now pledged their respective shareholdings in Yes Bank," said MCPL.
Both MCPL and Yes Capital (India) Pvt. Ltd are fully owned by Kapoor’s three daughters.
In September 2018, after Yes Bank’s other co-promoter Madhu Kapur sold a part of her holding, Rana Kapoor had posted on Twitter, terming his shares as “diamonds".
To be sure, there is nothing illegal about loans against shares. However, this particular form of secured lending by corporates, especially from mutual funds or insurance companies has drawn the attention of regulators after some defaults and delayed repayments hurt investors.
A Reliance MF spokesperson, while confirming that MCPL had prepaid certain amounts of the loan and the borrowing is adequately secured as per transaction documents, with no covenant breaches as on date, said: “The rating has been reaffirmed recently. A conversion to pledged structure strengthens the structure and is in fact in favour of Reliance MF investors. Given the nature of the transaction and the underlying security structure, the solution to a breach in covenants in this type of transaction is not liquidation."
The share pledge by Kapoor and MCPL might come in the way of the promoter group’s desire to either increase its stake in Yes Bank, or even retain it at the same level, if the bank decides to raise fresh capital.
Yes Bank is struggling to raise $1 billion to stay compliant with the RBI’s capital adequacy norms and to strengthen its loss-absorbing capacity arising out of loan slippages.
“If Yes Bank cannot raise the capital, its loss absorbing capacity and, therefore, financial profile will be under pressure," said US-based rating agency Moody’s Investor Services, while placing Yes Bank’s rating under review for downgrade on 11 June.