Buy YES Bank, but you can’t sell in ‘Hotel California’ rescue

By Suvashree Ghosh

India’s unprecedented bailout of YES Bank comes with an unusual rider: investors who hold more than 100 shares cannot sell 75% of their holding for at least three years.

The caveat means anyone who has more than Rs 2,555 ($35) invested in the lender -- an amount based on Friday’s price and one so small that it covers roughly the cost of a quarterly rail pass in Mumbai -- has limited trading options. Investors including Desjardins Global Asset Management and local funds such as ICICI Prudential Asset Management Co. and Aditya Birla Sun Life Asset Management Co. are among those possibly impacted, according to disclosures from earlier this year, compiled by Bloomberg.


“This kind of lock in reminds me of the song Hotel California, where you can enter but can’t exit,” said Gaurang Shah, vice president at Geojit Financial Services. “With such forced orders, no one will now want to buy YES Bank shares.”

The perceived penalty on equity holders may temper optimism about a revival in India’s fourth-largest private bank, which authorities seized last week to effect the nation’s biggest bank rescue. The reason for policy makers’ urgency became clear late on Saturday, when YES Bank finally announced its much-delayed results: core equity capital plunged far below the regulatory minimum as its bad-loan ratio surged.

YES Bank results highlights:

• CET1 ratio 0.6% end-December versus regulatory minimum 7.375%
• Gross bad-loan ratio 18.9% in December versus 7.4% September
• Slipped to a loss of Rs 18,560 crore for October-December from a Rs 1,000 crore net profit a year earlier; had reported a Rs 630 crore loss for April-September

While speculation of a bailout had been swirling for months, the dramatic move to seize YES Bank unnerved markets, particularly a proposal to write down YES Bank’s additional tier 1 bonds -- hybrid securities, which can be written off if certain triggers are breached.

The bank believes AT1 bonds amounting to some Rs 8,700 crore “can be utilised to enhance the common equity,” YES Bank said in a statement Saturday. With capital infusion by new investors “and consideration of the AT1 bonds, the concerns around the liquidity and capital adequacy will be mitigated and the bank’s ability to grow its business will substantially improve,” it said.

YES Bank rescuers:

• State Bank of India will invest Rs 7,250 crore; stake capped at 49%
• ICICI Bank Rs 1,000 crore; about 5%
• HDFC Rs 1,000 crore; about 5%
• Axis Bank Rs 600 crore
• Kotak Mahindra Bank Rs 500 crore
• Bandhan Bank Rs 3 crore
• Federal Bank Rs 3 crore

YES Bank shares rose 2% in Mumbai on Friday to Rs 25.55 a share, paring its decline this year to about 46%. The price is higher than the Rs 10 State Bank will pay for each YES Bank share.

State Bank will have to hold at least 26% of YES Bank for three years. The rules were officially notified late on March 13 and curbs imposed on YES Bank -- including a limit on withdrawals and servicing of liabilities -- will be lifted within three working days.

While Finance Minister Nirmala Sitharaman flagged the lock in on Friday, investors had presumed it would only apply to institutions rescuing YES Bank and were dismayed when the written notification indicated existing shareholders were subject to the rule, too. YES Bank issued a statement advising investors holding more than 100 shares to “exercise utmost caution” while trading.

“I would like to think this is a goof-up in drafting the scheme, which they will correct once the full impact is understood,” Deven Choksey, managing director at KR Choksey Securities, told BloombergQuint.