Yes Bank rescue – a key announcement no one is focusing upon !

It's unfair but can go a long way towards the bank's revival

Reproducing Clause 3(8)(a) of the Gazetted Notification dated March 13, 2020 on Yes Bank Limited Reconstruction Scheme, 2020 (document link) –

“There shall be a lock-in period of three years from the commencement of this Scheme to the extent of seventy-five per cent. in respect of––
     (a) shares held by existing shareholders on the date of such commencement;
    (b) shares allotted to the investors under this Scheme:
Provided that the said lock-in period shall not apply to any shareholder holding less than one hundred shares.”

Sub-clause (a) above as such is very unfair. Without any advance notice, an existing shareholder has suddenly been stopped out from selling 75% of his shareholding for the next three years. Investors/ traders, especially who had bought recently in the hope to make a quick buck would suddenly be helpless and rightfully feel aggrieved.

Needless to say the commencement date of the above scheme is March 13, 2020 – market opens on March 16, 2020 – and hence there is no window to sell out. However, with patience it might actually turn out better than they would have expected. Continue reading !

Why this is being done?

It’s a logical question that most should be thinking. I don’t recall a similar precedence (if someone does, please highlight in the comments). 

Effectively existing shareholders have been quarantined so as not to spread the speculation virus to the overall rescue plan.

I personally believe it’s based on the strong request/ advice of some veterans coming on board as bailout investors. The idea is to try putting in an overall co-ordinated effort to regain the depositors’ faith and trust.

Moratorium on deposit withdrawal will be lifted on Wednesday, March 18, 2020 at 6 PM. Every effort is being made to provide him the comfort to stay back.

  • Biggest of the institutional and investors’ names have been pulled in to provide their brand comfort (SBI, HDFC, ICICI, Axis, Mr Damani, Rakesh Jhujhunwala and counting).
  • Significant sums of money (exceeding Rs 30,000 crore) are purportedly being pooled in the form of equity and liquidity support to manage deposit redemptions.

Continuing same line of thought, the above action of locking in 75% of the existing shareholders would reduce the shares available for trading in the market and hence volatility. Let’s accept that under Yes Bank kind of situations, share price movements can play a big role on impacting public’s perception. It actually can help pass on a positive message and reduce the redemptions.

Intelligently the measure would be applicable from Monday (March 16, 2020) i.e., 3 full days of trading before moratorium is lifted on Wednesday (March 18, 2020) evening. Hopefully we will see a much more sane price movements over these 3 days and in turn soothing the nerves of the retail depositors somewhat.

For reference, Yes Bank’s current market cap is at Rs 6,500 crore and 25% of that amounts to Rs 1,625 crore. Under worst case scenario not more than Rs 500-600 crore of this will come to the market for selling which is a very small number for the long term believers in the bank’s revival story. Post this, you will have minimal trading float in the market and if the bank starts reviving, the stock price will see a steep increase. No wonder that Mr Damani and Mr Jhunjhunwala agreed to take the ride… existing shareholders under that scenario will rejoice too.

How all of this plays out is critically dependent upon the behavior of depositors once moratorium is lifted !

Disclosure: Above is not any recommendation to the reader. He should do his own research before taking any investment related decision.

Illustration Credit: Vecteezy.com

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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