Yes Bank shares fell 5.6% today, making it the last contributor on the NIFTY in the first hour followed by Zee Entertainment and IndusInd bank. Fund houses that have invested in Yes Bank have been finding it tough to do it. The stock market has dropped a massive 75% in the past five months and has effortlessly spooked all including Rana Kapoor, Yes Bank’s co-founder.
Tempted by high returns during the good times, fund managers had infiltrated into a layered deal that uses Kapoor’s Yes Bank shares as collateral for a loan. The loan has been unsecured since the shares were exempted. To put in simple words, investors cannot force Kapoor to sell his shares to make a proper repayment. Since the good times hardly trigger caution, fund houses were too happy to overlook.
Kapoor’s vehicles- Morgan Credit & Yes Capital
Kapoor’s investment vehicles are Yes Capital and Morgan Credits Pvt Ltd through which he owns shares in Yes Bank; both bound now.
The value of shares in Yes Capital, however, has to be 2.25x that of the loan as there is no pledge. In August, the outstanding bonds of Yes Capital rated by Care ratings were Rs 207 crore against Yes Bank’s stake of 2.97%. The fall in bank’s shares has brought down the cover to 2.37x from as high as 4x three months ago.
In the case of Morgan Credits, Care Ratings downgraded their bonds to BBB- from A- this Tuesday even though the fund houses had forced Rana Kapoor to secure the loan through pledging shares the previous week, which meant the collateral value could be lowered. In February, the collateral to loan ratio was 2.0. Since then the bank shares have dropped by 63%, resulting in the downgrade.
Kapoor’s stake sale
While Kapoor cannot be forced to sell his share, investors can ask him to make good shortfall in collateral value. According to reports, Morgan Credits would be repaying investor Reliance Nippon Asset Management Co as former CEO looks to monetize stakes in other companies. Meantime, the bank’s shares dipped over 1% on Wednesday, perhaps expecting Kapoor to sell off shares to repay investors.
J.N. Gupta, former SEBI executive, said that the best recourse for investors would be to invoke pledges. Unfortunately, where it not possible, they might end up taking a hit. He added that Mutual Funds didn’t anticipate these things when investments were being made in the innovative structures. They now must face reality.