Yes Bank’s aborted QIP under Sebi scanner

Mumbai: The Securities and Exchange Board of India (Sebi) is examining whether its listing norms were breached in Yes Bank’s aborted $1 billion qualified institutional placement (QIP), said five people familiar with the matter, including officials of the capital markets regulator.

Sebi is also looking into the possibility of entities trading the stock on the basis of insider information, the people said on condition of anonymity.

The Economic Times first reported this on Thursday.

On 7 September, Yes Bank said it was launching a $1-billion QIP only to withdraw it a day later, citing “extreme volatility during today’s trading because of misinterpretation of new QIP guidelines”. Yes Bank didn’t say what these misinterpretations were. The bank’s stock fell 5.32% on 8 September.

In an interview to television channels after the pullout, Yes Bank’s managing director Rana Kapoor said he had been advised by merchant bankers “that the QIP—and ours is a global QIP —had to be kept open for three days. So therefore, in the process, the volatility sinks in, which I believe is not a very good policy, so I am going to represent that over the next few days”.

On 9 September, Sebi called Yes Bank’s merchant bankers to find out what had gone wrong with the QIP, the people referred to above said. After the meeting, its preliminary findings suggested that disclosure requirements had not been correctly followed in the QIP, the people said.

According to Sebi’s listing obligations and disclosure requirements, or LODR norms, a company has to inform the stock exchanges at least two days in advance that it is holding a board meeting to consider fundraising (including QIPs). It also has to give a two-day notice for a meeting that will decide the price of such fund raising.

On 7 September, Yes Bank’s notice to stock exchanges said the issue price would be decided in a 12 September board meeting. This part met the norms. The problem seems to be in its 27 April board meeting, when, along with an announcement of fiscal 2016 earnings, Yes Bank said that the board approved raising $1 billion of capital.

“The issuance may be by way of Qualified Institutions Placement (QIP) or any other international offering like Global Depository Receipts (GDRs)/American Depository Receipts (ADRs), or by any other appropriate mode as decided by the Board or Committee thereof,” the 27 April notice said.

According to two people familiar with Sebi’s thinking, this notice may not have been sufficient to meet listing norms since the bank literally proposed to keep all possible options open to raise capital.

“QIP was merely one of the many options. And, the bank said in the announcement that it could raise capital via any appropriate mode. Since the book-building for the QIP was started on 7 September, the intimation about the mandatory board meeting specifically for the QIP consideration should have been given to the exchanges latest by 5 September, 2016. This was not done,” one of the people said.

Emails sent on Tuesday to Yes Bank, Sebi and the three lead merchant bankers—Goldman Sachs, CLSA and Motilal Oswal—remained unanswered.

“To the extent that it was a board decision, two days prior notice is required to be given under the regulations. However, the decision to raise capital would be a shareholder item and it was probably disclosed as a board item previously based on the previous shareholder decision. Therefore, what remained was only reporting before the actual issuance of shares—as only the board can issue shares. If the assumed hypothetical is correct, there would be no violation of the disclosure norms,” said Sandeep Parekh, founder of law firm Finsec Law Advisors and a former executive director at Sebi.

On 7 June, Yes Bank’s shareholders approved the fundraising through a special resolution at its annual general meeting, and the lender sent a notice to the stock exchanges on 14 June.

The second misinterpretation of the norms seems to have arisen from the merchant bankers asking Yes Bank to keep the issue open for three days.

“There really isn’t a concept of book as is understood in a public offer concept. The book being referred to is only the internal books which show interest of potential investors. These are not final offers, and therefore it cannot strictly be called a book,” said Parekh.

“Investors can back out any time they like; for instance, if the market price is lower, it would not make economic sense for investors to buy in the QIP. There is no requirement as to how long the roadshow is or how long the interest of investors is collated, as the investors can walk away from the issue till the final offer is made by them and which is accepted by the company,” said Parekh.

Sebi is also examining whether there had been any price manipulation in the shares of the bank. Yes Bank shares had gained 116% since their lows of 25 February to reach Rs1,440.90 on 6 September.

On 7 September, the shares fell 2.53%. The QIP announcement was made after trading closed for the day, followed by the 5.32% drop the next day before Yes Bank called off the sale.

“A number of large, well networked bankers were running the QIP. All these entities were fully aware of the QIP’s status and its possible future,” said one of the people familiar with Sebi’s thinking.

“Since these entities have connections with a large number of brokers and sub-brokers, it is necessary to examine if any exclusive or insider information regarding the QIP or the company’s decision on the QIP was passed on from the bankers to the brokers,” this person said.

The regulator’s surveillance department is investigating the issue.

On Thursday, Yes Bank shares fell 2.5% on the BSE while the benchmark Sensex index gained 0.14%.