Event update: Yes Bank (Underperformer) - Capital raise; RBI’s fit and proper approval is the key monitorable

YES has announced that 8 investors have agreed to infuse capital of USD 2bn in the bank. 85% is from 2 investors and 15% from the remaining 6. The bank has named all except one investor of USD120M possibly because there is a condition attached to that bid.

The two big investors who are keen to bring in 85% of the proposed money do not have well established backgrounds, have a history of legal proceedings and have failed to pay even small sums of earnest money for the companies they bid for under NCLT. As such they run the risk of not getting the fit and proper approval from RBI.

Post money, the largest bidder would hold 25% of equity shares of the bank and the second largest bidder would hold 11%. RBI rules require that any investor who wants to acquire 5% or more in a bank needs its prior approval. To qualify as fit and proper RBI checks 1) whether the investor has a clean reputation 2) The source of funds for the acquisition (A complete check list on the following pages). So it is important to note that RBI will not only test the ability of the investor to bring in funds but will also do strict checks on the source of funds. Whether for YES or any other bank, we expect RBI to be strict on the source of funds given the focus of global regulators on PML and in the aftermath of the PMC scam.

Of the total bids of USD 2bn there is clear visibility of only 180m USD of capital (from GMR, Discovery, Ward Ferry, Jhunjhunwala and Aditya Birla Family) that YES can raise without constraints. We will get confidence on the 120m bid by a top US investor once we know the name and the condition attached to the bid. The remaining USD 1.7bn from the two largest bidders - Erwin Singh/SPGP and Citax may find it tough to get RBI nod.

We believe with confirmed capital raise of only 180m USD (could move up to 300m once we know the name of 120m investor) and uncertainty on the background of the two large investors of 1.7bn USD, capital raise remains a risk for YES. YES needs 2-2.5bn of capital to provide for bad loans. On the earnings call mgmt had indicated that private equity investors had shown interest in putting capital into YES Bank. Media reports carried names of investors like Carlyle Munjals, Vikram Pandit and Hemendra Kothari. Against these high expectations, the list of potential investors does not carry any of these names which is disappointing. Reiterate Underperformer with TP of Rs35.

On the earnings call mgmt had indicated that private equity investors had shown interest in putting capital into YES Bank. Media reports carried the names of PEs like Carlyle and investors like Munjals,  Vikram Pandit and Hemendra Kothari. Against these high expectations, the list of potential investors does not carry any of these names which is disappointing.