Yes Bank: 4 warning signs retail investors ignored

'Human nature is such that unless there is major panic, you hang on to hope that things will improve. If you have five negative signals and two positive signals you prefer to hang on to those two positive signals and ignore the five negative ones.'

Independent market analyst Ambareesh Baliga points out the red flags that retail investors should not have ignored and lists three scenarios -- two of these scenarios offer a glimmer of hope to retail shareholders of Yes Bank -- that could play out in the coming days.

"In the first scenario, there is nothing left for retail investors. The second scenario is the best scenario for Yes Bank shareholders. In the third scenario there is at least something left for investors. They may get something back over the next five-eight years," Baliga tells Rediff.com's Prasanna D Zore.

What were the warning signs that retail investors ignored while buying Yes Bank after first signs of trouble became evident?

1. The first sign was evident when Yes bank began reporting NPAs and then there was a clear differential between the RBI-reported NPAs and the company-reported NPAs.
2. Later, when the RBI said there was a divergence between their figures and what Yes Bank was reporting was also a major sign that trouble was brewing at Yes Bank. These were the initial feelers that everything was not okay with Yes Bank.
3. When CEO Rana Kapoor was asked to step down was another major pointer to investors as well as depositors. But then there was a glimmer of hope when the new CEO (Ravneet Gill from Deutsche Bank) took over.

1. Again, with the sort of investors that he (Gill) was trying to get in (to buy a stake in Yes Bank), or he was promising to get in, especially the guy (Erwing Singh Braich of Canada; external link)who wanted to invest $1.2 billion just because he liked the Yes Bank logo. That was a very clear giveaway that nothing serious was happening at Yes Bank (Yes Bank rejected the offer) as far as fund-raising was concerned. You can't take someone seriously when he says that he is investing $1.2 billion just because he liked the logo of the bank.

These were some of the major giveaways which retail investors kept ignoring.

But then human nature is such that unless there is major panic, you hang on to hope that things will improve.

If you have five negative signals and two positive signals you prefer to hang on to those two positive signals and ignore the five negative ones.

Today, even if you tell (Yes Bank's) depositors that their money is safe because government has stepped in and will ensure that a strong company will take over Yes Bank they will not believe you and they will queue up outside Yes Bank (to withdraw the Rs 50,000 that they are getting).

So, what could happen now to Yes Bank?

There are talks that the State Bank of India will step in, but that is still speculation. Have they said (officially) that they are buying Yes Bank?

The way I see it, three different scenarios can emerge.

1. In the first scenario, the SBI takes it over just like Global Trust bank was taken over by Oriental Bank of Commerce (in 2004), in which case the shareholders of Yes Bank get nothing. Shareholders' share is zero and everything else is taken over. However, if it is being taken over by SBI, it will be a bit negative for the SBI shareholder because you are taking over a complete liability.

2. In the second scenario, as per what the market is saying, both SBI and LIC together will take 51 per cent stake in Yes Bank. If they buy 51 per cent stake at Rs 2, it works out to around Rs 600-odd crore. But this paltry sum is not enough to revive Yes Bank. They need about Rs 10,000 crore.

How and from where will the balance Rs 9,500 crore come? That's the answer we don't know yet. But if that happens, it is a positive for Yes Bank shareholders.

It is also positive for SBI because in this scenario, SBI will only be a shareholder and manage Yes Bank from an arm's length.

In this scenario, the existing shareholders of Yes Bank could still own 50 per cent of the bank. Once Yes Bank revives, your equity will still hold some value. You are still better off than what you have today (as on March 6, 2020).

3. The third scenario is when SBI, LIC and whoever else brings in the Rs 10,000 crore required as equity to revive the bank. If equity grows to Rs 10,000 or Rs 13,000 crore, what happens is the existing Yes Bank shareholders become micro-minority. They hold about five per cent (of Yes Bank) only. The rest will be held by SBI, LIC and the rest. This is also a win-win for both sides but Yes Bank shareholders would be at a slight disadvantageous position.

But in all the three scenarios, the depositors' money -- about Rs 2 lakh crore or Rs 2 trillion -- will be safe. I think that is the main thing which the government is looking at.

Having said that the disclaimer is these are just talks and tentative scenarios and nobody knows what will happen finally.

How do you look at the Yes Bank Reconstruction Scheme, 2020, which the RBI has kept in public domain Friday evening (this happened after the interview was done and so this question) as per which SBI shall pick up 49 per cent stake in the reconstituted Yes Bank for a price not less than Rs 10?

As per this scheme, Yes Bank's authorised share capital will increase to Rs 5,000 crore from the existing Rs 600 crore. Given that Yes Bank's current equity is about Rs 500 crore, which will be increased to Rs 4,800 crore, and then SBI will apply for 49 per cent stake at Rs 10, at a premium of Rs 8 premium (on a face value of Rs 2). 

Now the question that arises is, if 49 per cent goes to SBI, the existing shareholders would be holding around 12 per cent (in the reconstituted Yes Bank as per this scheme), then who will subscribe to the remaining 39 per cent equity in the reconstituted Yes Bank? 

Will they make a rights issue to existing shareholders at Rs 10 or will they be getting new investors to subscribe to the 39 per cent equity?

The last set of foreign investors who had shown interest in Yes Bank had put forth a condition that they would invest only if SBI or any other PSU bank buys 49 per cent equity.

One needs to get clarity on would these foreign investors buy the 39 per cent equity or will there be a rights issue (which will give the right to existing shareholders, including retail shareholders, to buy shares at Rs 10)?

If they go for a rights issue for the rest 39 per cent, then only scenario number three, which I mentioned above, becomes better for retail shareholders because instead of 5-6 per cent they will be owners of 12 per cent equity in the reconstituted Yes Bank.  

A lot of retail investors would actually go for the rights issue because if somebody has bought Yes Bank for Rs 100, Rs 200 or Rs 300, why won't they buy it for Rs 10!

On March 5, eight crore Yes Bank shares were bought for delivery after news came in that SBI was taking over Yes Bank and the stock price shot up from Rs 28 to Rs 37. Who were the buyers? Who is trapped here? (On March 6, after the RBI imposed a moratorium on deposit withdrawals the stock price plummeted more than 50 per cent and closed the day at around Rs 16). Were these small retail investors, the foreign institutional investors or domestic institutional investors?

Retail investors!

The FIIs and DIIs have all been exiting Yes Bank right through (when the first signs of trouble became evident). A stock which is moving from Rs 28 to 37 when suddenly there is news that SBI is taking over, there are enough suckers in the market.

Was this a trap to ensnare retail investors?

(There is) No doubt about that.

Who laid this trap and shouldn't the market regulator, the Securities and Exchange Board of India, SEBI, come down heavily upon these operators with an iron hand?

We can't say for sure who laid the trap but it is quite possible that over the last few months some of the operators must have been getting into this stock (hoping to sell it at higher price) and they themselves must have got trapped (by buying it at a higher price; in April 2018, Yes bank shares were trading around the Rs 286 level). So, they must have been watching out for bigger fools.

Basically, whoever sold (on March 5) in large quantities needs to be investigated because clearly it (SBI taking over Yes Bank) was a planted story.

What should retail investors who have bought Yes bank at higher levels do now? Should they hold, add or exit?

There are three scenarios.

In the first scenario, there is nothing left for retail investors. The second scenario is the best scenario for Yes Bank shareholders. In the third scenario there is at least something left for investors. They may get something back over the next five-eight years.

Your advice for Yes Bank's retail investors...

There is nothing much to lose. You have already lost most of it.

If you look at the three scenarios above and work out the probability, there is 66 per cent chance (two out of three scenarios) that you will at least still get something back.

33 per cent chance (one out of three) that you will get nothing. So, possibly, they can hold on.

If you are still a shareholder of Yes Bank after the takeover (the second and third scenario), then your wait could be well over three-four years.

I wouldn't recommend buying Yes Bank at this stage because we don't know which of the three scenarios will play out. But if one has already bought it at Rs 200-300, then you have already lost most of it. You can hold hoping things work out.

Photograph: Danish Siddiqui/Reuters