India: Yes Bank Capital Injection, 2020

On March 5, 2020, India’s Ministry of Finance (MoF) announced a capital injection by the government-owned State Bank of India and other investors as part of its restructuring plan (MoF 2020a). The RBI had recommended the measure due to the lack of a “credible revival plan” for Yes Bank. Yes Bank’s financial position had been steadily declining, with a constant outflow of liquidity due to expected loan losses, ratings downgrades, triggering of bond covenants, withdrawal of deposits, and inability to raise capital from the markets (RBI 2020d).

The RBI preferred a “bank and market led revival” for Yes Bank, rather than a government-mandated restructuring. Since early 2019, the RBI had been facilitating discussions between Yes Bank and private equity firms to assess opportunities to help the bank raise equity capital. But Yes Bank’s continued outflow of liquidity and unsuccessful attempts to raise capital forced the RBI to seek a restructuring solution (RBI 2020d).

Yes Bank’s deposits came down by 34% between September 2019 and March 2020 to INR 1.4 trillion (Ghosh 2020b). Yes Bank only borrowed INR 500 billion of the total INR 600 billion offered by the RBI in a Special Liquidity Facility in March 2020 (The Tribune 2020; YESB 2020a). This liquidity of INR 500 billion from the RBI helped Yes Bank deal with the outflow of deposits after March 2020 (MS 2020).

Yes Bank’s loan book had grown from INR 556 billion in 2014 to INR 2.3 trillion in 2019, with the deposit base growing at a much slower pace to INR 2.1 trillion in 2019 (BS 2022). As early as 2015, UBS had stated that Yes Bank was the most vulnerable to a corporate default (BS 2015). In 2017, domestic brokerages such as Kotak had highlighted Yes Bank’s lack of adequate reporting and high divergence from the RBI’s guidance in reported NPLs (Kotak 2017a).

Yes Bank was deemed non-viable as a result of the announcement of a restructuring plan by the RBI. Yes Bank had also previously breached capital requirements in December 2019, which acted as a trigger to write-down INR 84 billion of Basel III compliant AT1 capital (YESB 2020a). As per Figure 1, Yes Bank had INR 152 billion of CET1 capital as of March 31, 2020, which included the INR 100 billion capital injection and INR 84 billion AT1 write-down. This implies that Yes Bank was effectively insolvent prior to RBI’s rescue plan.

The MoF imposed a 30-day moratorium on Yes Bank on March 5, 2020, to effectively give the RBI time to facilitate the bank’s recapitalization and restructuring (see Appendix B for a more detailed explanation) (MoF 2020a; RBI 2020c). During the moratorium, the MoF imposed withdrawal limits of INR 50,000 per depositor and per creditor without written permission from the RBI. The RBI replaced the bank’s board of directors, appointed an administrator while it recruited a new board, and issued a banking directive that prevented Yes Bank from incurring new liabilities, making investments, or disbursing payments while under the moratorium (RBI 2020b; RBI 2020a; RBI 2020c).

The RBI assured depositors that their deposits were safe during this period (RBI 2020a). To provide extra protection to depositors, the RBI increased the insurance limit in banks insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) from INR 100,000 to INR 500,000 in February 2020 (Dubey 2020; RBI 2020h). The RBI did not specifically refer to Yes Bank in its announcement on the increase of deposit insurance.

On March 13, 2020, the MoF announced the final restructuring plan and terminated the moratorium on March 18 (MoF 2020b; YESB 2020a). The RBI’s banking directive on March 5, 2020 prevented Yes Bank from incurring any liability by renewing any loan, making an investment, or disbursing a payment while under moratorium. The directive provided exceptions for payments of salaries, rent, taxes, printing, postage, and legal expenses not exceeding INR 50,000 per case. The RBI directive also exempted any premium payments to be made to the DICGC (RBI 2020b).

The RBI also superseded^FNRBI has the ability to replace the board of directors of a bank with an interim administrator as per Section 36ACA of the Banking Regulation Act, 1949 (Lawgist 2023). the board of directors of Yes Bank on March 5, 2020, to restore the faith of depositors in the bank while a restructuring plan was being formulated. The RBI simultaneously appointed the former deputy MD and CFO of the SBI, Prashant Kumar, as the administrator of Yes Bank until a new board was formed (RBI 2020c). The RBI’s final restructuring plan on March 13, 2020 allowed the SBI to nominate two directors, while reserving the right to nominate additional directors to the board (RBI 2020e). As per this plan, the RBI appointed three non-executive directors to Yes Bank’s new board on March 20, including appointing Sunil Mehta as the former non-executive chairman. Additional directors to the new board of Yes Bank could either be appointed by the RBI or any shareholder who is allowed to hold voting rights of 15% (MoF 2020a).

The Covid-19 crisis coincided with Yes Bank’s restructuring. In late March 2020, the RBI reduced its benchmark rates by 75 basis points and provided a three-month moratorium on interest payments to all banks between March 1, 2020 and May 31, 2020, in line with the RBI's Covid-19 Regulatory Package (PTI 2020; YESB 2020a). As per the RBI’s guidelines, the repayment schedule for loans during this period will be shifted forward by three months and the outstanding amounts would continue to accrue interest (RBI 2020i).

The Government of India (GoI) and the RBI acted under section 45 of the Banking Regulation Act, 1949 (10 of 1949) (MoF 2020a). Under this clause, the RBI can in public interest take over the management of a bank or frame a restructuring plan. The RBI replaced the board of directors of Yes Bank and appointed an interim Administrator under 36ACA of the Banking Regulation Act, 1949 (RBI 2020c). The RBI provided additional directions to Yes Bank under 35A of the Banking Regulation Act, 1949 (RBI 2020d). The RBI could appoint additional directors to the restructured entity under sub-section (1) of Section 36AB of the Banking Regulation Act, 1949 (RBI 2020e).

The RBI is constituted by the Reserve Bank of India Act, 1934 (RBI 2020a). Yes Bank is a banking company governed by the Banking Regulation Act, 1949 (YESB 2023a). There was no new legislation passed to facilitate this capital injection and restructuring.

The RBI’s resolution plan also deleted certain clauses from the Articles of Association of the reconstructed bank – Article 110(b), 127(b), 127A(a), 127A(b). These articles were related to a bank promoter’s ability to appoint board of directors, a Chairman, and a CEO of the bank (RBI 2020e).

As part of the deal, the MoF agreed to exempt the investors who injected new capital into Yes Bank from capital gains taxes on any profits resulting from this participation (MoF 2020b, 6). The Central Board of Direct Taxes had to amend rules in the Finance Act 2019 to allow this exemption (Dhasmana 2020).

On July 26, 2020, the Ministry of Law and Justice (legislative department) disclosed a list of amendments to the BRA 1949 following an ordinance by the president of India, as per powers under clause (1) of Article 123 of the Constitution of India (GoI 2020). The bill to amend the BRA had been initially presented to the Lok Sabha (House of the People) on March 3, 2020 (GoI 2020).

The RBI authored and disclosed a draft resolution plan titled “Yes Bank Ltd. Reconstruction Scheme, 2020” on March 6, 2020, with a three-day public comment period. The Yes Bank Restructuring plan was announced by the Chief General Manager of the RBI and signed by the Joint Secretary to the Government of India (RBI 2020e).

The RBI was to appoint an administrator for the reconstructed bank, who was to leave his/her office within seven days of the end of the moratorium on Yes Bank (MoF 2020b, 6). Yes Bank was required to submit filings to the RBI, periodically (“from time to time”) to report on the implementation of the restructuring plan (RBI 2020c, 4). Any concerns regarding the execution of the plan were to be directed to the RBI, and the central bank had final say on the matter. Any suggestions or concerns about the draft restructuring plan were to be directed to the RBI’s Department of Regulation (RBI 2020e).

On March 20, 2020, the RBI appointed two additional directors to Yes Bank’s board—R. Gandhi (former deputy governor) and A.N. Gopalakrishnan (associate professor)—for an effective period of two years (RBI 2020f). The RBI and SBI nominees comprised 50% of Yes Bank’s reconstructed board in 2020 (YESB 2020a).

In 2021, Yes Bank’s board of directors still comprised two directors each nominated by the RBI and SBI. The SBI had replaced both its nominated directors in the second half of 2020 (YESB 2021b). The RBI- and SBI-appointed directors to Yes Bank’s board were not subject to any performance evaluation or salary (except for sitting fees). Yes Bank added three non-executive board members in August and November 2021 providing additional private and public banking expertise, expanding the total number of directors to eleven (YESB 2022d).

Yes Bank successfully formed an alternate board after restructuring on July 15, 2022 as per clause 5(7) of the RBI’s plan. The two additional directors appointed by the RBI vacated their post as of July 26, 2022. In 2022, Yes Bank added two independent directors, and increased the total number to seven, representing a diverse array of strategic, operational, and leadership experience. The two additional board members were each nominated by Carlyle and Advent International, as the latest significant equity holders of Yes Bank. SBI continued to nominate two directors to the new board of Yes Bank. Yes Bank’s new board replaced Sunil Mehta as non-executive Chair, with R.S. Gandhi, a former deputy governor at the RBI and member of BCBS. Prashant Kumar was reappointed as MD and CEO till 2025 for his success in turning around Yes Bank (YESB 2023a).

There was no other oversight requirement from the RBI for the administration of the capital infusion into Yes Bank.

The RBI Governor Shaktikanta Das on March 3, 2020, stated in a televised interview that the “overall banking sector remains safe and sound” and that the “RBI was committed to banking sector stability” (Bloomberg 2020). This interview took place a few days prior to the announcement of the Yes Bank restructuring plan on March 5, 2020 (RBI 2020e).

The RBI’s press release placing Yes Bank in moratorium states the reasons to be the “inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits” (RBI 2020d, 1).

India’s Finance Minister Nirmala Sitharaman on March 6, 2020, stated to journalists that the RBI had been monitoring Yes Bank since 2017 due to “governance issues, weak compliance, and wrong asset classification”. The FM repeated that she was in constant communication with the RBI to seek out a speedy resolution to the matter, assured the depositors of “no loss” and that depositor money was safe. Additionally, the FM indicated that the government had requested the RBI to look into the problem at Yes Bank and assign individual responsibilities (IE 2020).

Yes Bank, in its 2020 annual report, voluntarily disclosed that its authorized capital base had increased to INR 62 billion, following an announcement of the RBI's restructuring plan. Yes Bank reported that it was raising INR 100 billion by issuing 10 billion equity shares at INR 10 per share to SBI and other banks and financial institutions. It was further disclosed that SBI was to maintain a shareholding minimum of 26% and maximum of 49% for the following three years. Yes Bank also provided updates about its treatment of AT1 bondholders in its annual report (YESB 2020a). We could not identify any other communications from Yes Bank that were mandated by the RBI as part of the restructuring plan.

The RBI’s rescue plan ensured the continuation of all of pre-existing Yes Bank’s agreements, bonds, and contracts without any change. All deposits and liabilities of Yes Bank were to remain unaffected by the rescue plan, unless explicitly stated (RBI 2020c, 4).

The RBI’s plan increased Yes Bank’s authorised capital from INR 11 billion to INR 62 billion. On March 13, 2020, as per the restructuring scheme, Yes Bank issued 10 billion equity shares (of face value INR 2 per share) at INR 10 per share to the SBI and other financial institutions, completing a INR 100 billion capital infusion into the bank (YESB 2020). All new and existing investors (more than 100 shares) in Yes Bank were required to maintain 75% of their shareholding for 3 years from the date of the restructuring plan (MoF 2020b).

The RBI’s draft plan on March 6, 2020, required Yes Bank to permanently write down INR 84 billion^FNYes Bank had issued Perpetual Subordinated Basel III Compliant Additional Tier 1 bonds for INR 30 billion on December 23, 2016 and INR 54 billion on October 18, 2017 (YESB 2020a). in Additional Tier I (AT1) capital (RBI 2020e). On March 14, 2020, Yes Bank did so. However, Yes Bank’s 2019-20 annual report noted that the Government of India’s final resolution scheme on March 13, 2020, did not refer to the AT1 securities (YESB 2020a). Yes Bank received independent external legal counsel to write-down the AT1 capital, and that such an action was in line with the contractual terms of the debt at issuance (YESB 2020a). The Administrator of Yes Bank, acting under section 45 of the Banking Regulation Act, wrote down two tranches of AT1 bonds issued in 2016 and 2017, for a total of INR 84.15 billion on March 14, 2020 (YESB 2023a). As per Figure 1, Yes Bank had issued INR 2.8 billion of AT1 debt in December 2013, which was not written down for undisclosed reasons, and later excluded from Yes Bank’s regulatory capital in financial year 2022 and 2023 (YESB 2022d).

In April 2021, the Securities and Exchange Board of India (SEBI, securities regulator) issued a fine of INR 250 million on Yes Bank for the mis-selling of AT1 bonds in secondary markets, as per Section 15HA of the SEBI Act, 1992. Yes Bank has filed a petition against the fine in the Securities Appellate Tribunal in Mumbai, with the case pending a final hearing (YESB 2023a).

AT1 investors challenged the write-down of their holdings in the Bombay High Court and Madras High Court (YESB 2020a). According to early media reports, the bank offered in out-of-court negotiations an 80% haircut on AT1 bondholders’ investment in the form of 10.7% equity stake in the reconstructed bank, locked in for three years (Nandi and Gopakumar 2020). In another account, Rajnish Kumar recalls that the “legal challenge” of AT1 dues was a concern for new investors. The AT1 bondholders had proposed converting the total amount of INR 87 billion into a 20% equity stake at an effective cost of INR 51 per share, which would increase the cost of acquisition by 20% for new investors. It was decided to leave the matter of the AT1 dues up to the RBI and its appointed director (Kumar 2021).

In January 2023, the Bombay High Court passed an order to stay the write-off of AT1 bonds. The ruling required Yes Bank to restore the full value of the AT1 bonds by imposing losses to equity (Krishnan 2023). Yes Bank is reported to have written off the AT1 holdings based on Clause 2.15 of the RBI’s Master Circular on Basel III Capital Regulations from 2015. The High Court ruled that Clause 4 of the information memorandum for Yes Bank’s AT1 bond offering provides seniority to the bondholders over the equity and perpetual shareholders of the bank. The High Court stated that the MoF’s final restructuring plan on March 13, 2020 did not authorize the write off of AT1 bonds, and that the RBI appointed administrator “exceeded his powers and authority”. The High Court also found that the RBI’s administrator did not write-off the first tranche of AT1 bonds valued at INR 2.8 billion, issued in 2013 at 10.5% interest, and did not provide an adequate explanation for this difference in treatment (Mohanty 2023).

In April 2023, the Government of India filed a special petition in the Supreme Court challenging the decision of the Bombay High Court on the write-down of Yes Bank’s AT1 bonds. The Supreme Court is seeking a response on the matter from the MoF and India’s regulators (Gopakumar 2023b).

Yes Bank disclosed that when the CET1 ratio dropped below regulatory requirements of 7.375%, the AT1 and tier II ratios were capped at 1.5% and 2.0% respectively (YESB 2020b).

Under the rescue plan, the SBI committed to invest in 49% of the equity of the reconstructed bank, while maintaining a minimum holding of 26% for three years from the date of capital infusion. The capital infusion was into the common equity of Yes Bank (RBI 2020e). SBI would also be able to nominate two directors to the new board of Yes Bank for a period of one year (RBI 2020e).

The investor bank was allowed to exercise its voting rights depending on the lowest of, (i) its shareholding, (ii) 9% of the total voting rights of the reconstructed bank, or (iii) as determined by the RBI. The RBI also reserved the right to conduct a “fit and proper” check on any investor holding voting rights in excess of 9% and allow such an investor to exercise its voting rights in line with its shareholding or up to 15% of all the equity of the reconstructed bank (MoF 2020b).

There were no other associated restrictions (dividend or compensation) on the capital infusion as disclosed by the RBI’s plan (RBI 2020e). On April 17, 2020, The RBI had temporarily halted the payment of dividend by all banks for the financial year ending March 2020 to conserve capital due to uncertainties arising from the COVID-19 pandemic (YESB 2020a).

Press releases from early March 2020 indicate that the RBI was working on a public-private-partnership model to infuse a total of INR 120 billion in Yes Bank (Shukla and Rebello 2020). The SBI, as lead investor, had agreed to purchase 6.05 billion shares of Yes Bank at INR 10 per share (RBI 2020e). RBI was negotiating with the other private banks and high net worth individuals to invest between INR 5 and INR 10 billion each into Yes Bank (Shukla and Rebello 2020). RBI did not directly infuse any capital into Yes Bank.

Under the final restructuring scheme on March 13, 2020, Yes Bank was to issue 10 billion equity shares at INR 10 per share, resulting in a total capital infusion of INR 100 billion (YESB 2021b) (Figure 3).

The largest capital infusion of INR 60.5 billion (USD 803 million)^FNPer Yahoo Finance, 1 USD = 75.3 INR as of March 12, 2020. was from SBI, which is the largest public-sector bank^FNPublic sector banks are defined as those banks in which the Government of India has more than 50% ownership. in India (YESB 2021b). The other seven entities are private-sector banks and represent one third of all the scheduled^FNScheduled banks are those listed in the second schedule of the RBI Act 1934. Clause 42 of the RBI Act provides the qualifying parameters and privileges of a scheduled bank, such as a cash reserve ratio set by the RBI, a minimum equity capital of INR 500,000, and the ability to borrow funds from the RBI. There are 12 scheduled public sector banks and 21 scheduled private sector banks in India (Byju’s 2023; RBI 2023). private banks licensed by the RBI in India (RBI 2023). The largest private capital infusion into Yes Bank was from HDFC Ltd. (parent company of HDFC Bank) and ICICI Bank at INR 10 billion each. The RBI had classified the SBI, HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs) in 2018 (RBI 2021). Rajnish Kumar, the former SBI chairman, states in his book that he contacted other private banks, including Bandhan Bank and IDFC Bank, to help “bridge the gap between the offers and the required investment” for Yes Bank (PTI 2021). Kumar notes that there was a limitation to not allow more than a 49.9% ownership by public institutions in Yes Bank after the capital infusion (Kumar 2021).

RBI’s capital injection and restructuring plan was announced on March 5, 2020, and the amount of INR 100 billion was injected into Yes Bank on March 14, 2020 (YESB 2021b). RBI had been monitoring Yes Bank since 2017 due to “governance issues, weak compliance, and wrong asset classification” (IE 2020). In January 2019, the RBI had refused to extend the tenure of Yes Bank’s founder Rana Kapoor as CEO of Yes Bank due to concerns of corporate governance lapses and inadequate reporting of NPLs (Fortune 2019). In May 2019, the RBI had appointed a former deputy governor R. Gandhi to the board of Yes Bank after the bank reported a INR 15 billion loss for the quarter, an increase of about nine times in provisions, and credit ratings downgrades of the bank’s long term debt (Mint 2019).

In March 2020, the RBI Governor Das stated to the press:

In May 2020, Yes Bank received approval from its board to raise equity capital of INR 150 billion from investors via a rights issue, follow-on public offering, or qualified institutional placement. Yes Bank was expected to maintain a CET1 ratio of 10% versus its reported 6.3% level in March 2020 (MS 2020).

Please refer to the Resolution and Restructuring module on Yes Bank (Gupta 2024).

The RBI replaced the board of directors of Yes Bank and appointed an interim administrator on March 5, 2020, to restore the faith of depositors in the bank while a restructuring plan was being formulated (RBI 2020c).

On March 20, 2020 the RBI appointed two additional directors to the board of Yes Bank (RBI 2020f). On March 26, 2020, Yes Bank notified the exchanges that the RBI’s Administrator role was effectively vacated given the formation of a new board at the bank. The new board comprised eight members, including the former Administrator Prashant Kumar serving as the new Managing Director and CEO of Yes Bank, two directors nominated by SBI, two additional directors nominated by the RBI, and three other non-executive directors (YES Bank Limited 2020).

The RBI reserved the ability to nominate additional directors to the board for oversight as per sub-section (1) of Section 36AB of the Banking Regulation Act, 1949. The new board was to continue for one year until Yes Bank Ltd was able to construct a new board based on its existing Articles of Association (RBI 2020e).

Rana Kapoor, the founder of Yes Bank, was arrested in March 2020 by the Enforcement Directorate (ED), which is a federal law enforcement body for economic and FX related crimes as a subsidiary of the MoF. In July 2020, the ED froze assets of Rana Kapoor worth INR 14 billion, including luxury cars, jewelry and high-end properties across Delhi and Mumbai. The ED estimated that Rana Kapoor’s crimes could be attributed to over INR 50 billion, utilizing over 100 shell companies to channel money out of the bank (Jagannath 2020). The case Rana Kapoor vs Directorate of Enforcement is currently being tried at the Delhi High Court (DHC 2022).

All the existing employees of Yes Bank were to continue with the same compensation and conditions of service, as those prior to the restructuring plan, for a period of one year (MoF 2020a). There were no other associated restrictions (dividend or compensation) on the capital infusion as disclosed by the RBI’s restructuring plan.

The banks that participated in Yes Bank’s capital infusion were also exempt from capital gains tax on profits from the sale of shares after the lock-in period under Income-tax Act 1961 (MoF 2020b). This rule was intended to encourage new investor participation and required the Central Board of Direct Taxes to amend rules in the Finance Act 2019 (Dhasmana 2020). In his book in 2021, Rajnish Kumar recalls the issue of income tax exemption was a “pre-condition for investment”, for new capital injected into Yes Bank (Kumar 2021).

In March 2020, after the RBI’s rescue plan and capital injection, Yes Bank’s CET1 ratio of 6.3% was still below regulatory requirements including a CCB of 7.375%. Regulatory breaches of CET1 typically trigger a fine as per the RBI’s framework on ‘Prompt Corrective Action’. RBI did not impose a fine on Yes Bank for its regulatory breaches and continued to remain in contact with the bank about its regulatory ratios (YESB 2020a).

The RBI’s plan included a lock-in holding period of three years for both existing and new investors as a part of restructuring plan announced in March 2020. The lock-in period expired on March 13, 2023 (YESB 2022e). Former SBI Chairman Prashant Kumar has stated that three years was the minimum time expected from capital infusion for Yes Bank to stabilize (PTI 2021). The SBI, as lead investor, was not allowed to lower its post-infusion equity shareholding below 26% during the lock-in period (MoF 2020a).

In July 2022, private equity firm JC Flowers agreed to purchase a stressed loan pool from Yes Bank for INR 480 billion via a Swiss Bidding Process. As per this bidding process proposed by the RBI, the highest bid from the first round becomes the base price for bidders in the second round (MC 2022).

Later in the same month, Yes Bank approved proposals from two private equity groups, Carlyle and Advent International, to sell a 10% equity stake in the bank for INR 88.9 billion (USD 1.1 billion) (Sen 2022). In December 2022, the RBI gave conditional approval to both Carlyle and Advent, both of whom are evaluating the conditions. The funds raised would be infused by issuing new shares of INR 53 billion (USD 640 million)^FNPer Yahoo Finance, 1 USD = 82.8 INR as of December 31, 2022. and warrants for INR 39 billion (USD 475 million) (Reuters 2022). On December 9, 2022, Yes Bank officially disclosed proposed investments by CA Basque Investments (Carlyle group’s holding) and Verventa Holdings Limited (Advent’s affiliate fund) through equity shares of face value INR 2/share and share warrants (YESB 2022b). On December 13, 2022, Yes Bank notified the exchange of a successful equity investment by the holding companies of both Carlyle and Advent (YESB 2022c).

As of March 2023, when the lock-in period for Yes Bank expired, the investors in the capital infusion had made 70% returns on their investment in three years. The RBI has asked the investing banks to sell down their stake gradually to avoid disrupting the bank. SBI’s shareholding in Yes Bank has fallen to 26.1% as of March 2023, from 48.2% in March 2020, after the capital infusion by Carlyle and Advent (Gopakumar 2023a). The bank consortium reduced its total shareholding by more than half from 78.5% in March 2020 to 36.1% in March 2023 (please see Figure 4).