Yes bank shareholders dilemma

"Terlepas dari mulut buaya, masuk ke mulut harimau"

Few years ago, I was on vacation in Malaysia. At a Buddhist temple in an island off the Langkawi coast, came across a famous Malaysian proverb as above. It essentially means : Escaped from a Crocodile’s Mouth, Entered a Tiger’s Mouth.  

Yes bank shareholders are in a similar situation today.

With the new reconstruction scheme released by the finance ministry this morning, some new things came into the light.

Multiple banks will invest in Yes bank with SBI being the major investor with 49% shareholding out of which 26% needs to be kept for minimum of 3 years. This was conveyed earlier and almost every major private bank backing it is slightly assuring. Depositors and AT1 bond holders don't need to worry (though a confirmation from RBI is awaited on the bond thing, the notice did say that "all liabilities" need to be carried of as it is). This is the crocodile mouth part.

From the basic understanding of the notification, it appears that BOTH the new and existing shareholders cannot sell 75% of their shares for 3 years. This comes into action effectively from tomorrow 6 pm. Markets open on Monday. The moratorium ends on Wed, 6 pm next week.This is the tiger's mouth part.

This sounds bizzare, unrealistic, inappropriate at so many levels and likely to be challenged legally. But before Monday 9:15 am, some questions will be bothering traders and investors.

Sample these :

(a) Yes bank is still part of benchmark indices - Nifty and Bank Nifty. How will index funds and ETFs account for selling of the share when it goes out of the index at the end of the month. Technically, they can sell only 25% of the shares and 75% will be blocked by the depositories as per Friday's holding. Tracking error in such cases will be inevitable. A clarification to resolve this will be required by SEBI and Exchanges.

(PS : If you try and sell more than 25% of the cash holding, it will not be delivered and will go into auction and you could end up having more losses. So beware)

(b) Yes bank is still part of F&O. It goes out of the derivative segment only in May'20. There won't be any lower circuit on this as stock declined more than 80% earlier in the month when it was put on a moratorium. If everyone will be inclined to sell at least 25% of their holding in cash, derivative traders virtually get a free hand and can once again beat the stock down. Option traders may not even get an exit as prices become illquid.

(c) The new shareholders (banks, LIC et.al) are making an investment at 10 rs/share. They know the risks of such a deal. But the previous shareholders may have just took a position for speculation as early as Friday assuming that it is free market and will be given an opportunity for exit under SEBI regulations. Without any prior notice or warning, their partial holding is now stuck for 3 years in the stock!

(d) Those who have bought on Friday in cash will be delivered on Tuesday. How will brokers and exchange settle those deliveries? Will they be considered as "old" or "new" shareholders? In any case, they can't sell more than 25% of the total shares and have to take compulsory delivery

It is clear that RBI is now involved in fire fighting and minimizing damage after their earlier decision on putting the bank accounts on Moratorium. Since the equity value is in any case getting eroded, they are better off preserving "something"' for equity shareholders and possibly avoid a run-off. Only time will tell how much they will be able to succeed. The only loser seem to be equity shareholders now!

PS : This is only an elementary reading of the Finance Ministry notification. Yes bank did not declared result today and cancelled the scheduled press conference and analyst call for Q3 earnings. One can hope some more clarity will come along by Monday morning from RBI, SEBI, NSE and Finance Ministry.

PPS : No stock position (long or short) are meant to be recommended by this article. I do not hold any personal positions in the stock(s) mentioned nor we do for our clients portfolios. This is strictly a personal opinion and do not reflect opinions of my employer. Equity investing is risky and do consult a financial advisor before taking any positions.