The collapse of Yes Bank is the tale of a promoter who ran amok, treating a publicly listed bank as his private company. The sordid saga of the bank, launched in 2004, and its meteoric rise and fall, can be attributed to its founder and former Managing Director Rana Kapoor . The bank’s story is similar to many recent stories of large listed companies that went bust, companies that were treated like family firms by their promoters, companies that were household names. But what is astonishing in the case of Yes Bank is that though there were laws and regulations to abide by, like the Companies Act and those stipulated by the Securities and Exchange Board of India, the bank had another layer of compliance requirements under the oversight of the Reserve Bank of India (RBI), which has its own set of strict guidelines. It failed in spite of all these.
‘Independent director’ fallacy
There is a pattern in the failure of such promoter-run firms. Yes Bank is no exception. Listed companies are run by Boards. There is a CEO and Managing Director who runs the company but is answerable to the Board. But the Board of Directors is perfunctory. Therein lies the rub. The Board has ‘independent directors’ not just because it is a statutory requirement, but also because this adds prestige to the company and the promoter. Usually, retired top-level bureaucrats, former public sector heads, former diplomats and former Generals are given such positions, adding heft. This also opens, for the company and the promoter, doors to the government, where most licences and files are still cleared depending on who you know in the corridors of power. These independent directors rarely perform their function of questioning the decisions of the CEO, upholding probity, and protecting the minority shareholders’ rights. Nor are they expected to do so by the promoter or the controlling shareholders who appoint them. However, the moment these ‘independent directors’ raise concerns on any seeming impropriety, they are shown the door.
Data | The Yes Bank crisis explained in six charts
When instances emerge of family-controlled or promoter-run businesses dipping into the company coffers at will, to transfer funds to other companies where the promoters have stakes, even the minority institutional shareholders and the public who hold stock often do not complain — as long as they get attractive returns on their stock. On the contrary, the common shareholders treat such transgressions by the promoters approvingly — they consider the promoters ‘smart’ enough to have used some of these proceeds to have bottlenecks removed. All this is tacit understanding.
The public and institutions — be it private hedge funds and mutual funds, pension funds or government insurance companies who invest in stocks — instinctively identify the promoters who have these attributes and excel in bending the rules to their advantage. Such promoters are, in fact, looked up to as ‘dashing entrepreneurs’. They are lionised by media houses and bestowed awards and honours in annual jamborees by Ministers from parties in power. Some of those diverted funds can also end up in the private pockets of promoters. All impropriety on the parts of these buccaneering promoters and CEOs is forgiven by the public, the banks and authorities most of the times.
This is as long as the loans are ostensibly paid, serviced or evergreened, statutory dues are cleared, the company prospers and share prices zoom. It is all hunky-dory and everyone is happy till the cookies crumble. And they often do. And then all hell breaks loose. People lose jobs, customers lose their deposits, vendors don’t pay in turn, ancillary businesses downstream collapse or turn sick, livelihoods are destroyed, assets and machinery lay waste and the ripple effect also grinds other concomitant good businesses to a halt as the cycle of debtors and creditors freeze. The promoter is arrested, the Opposition trains its guns on the ruling party, and the ruling party counter attacks and says it inherited the problems from the Opposition which gave the licence or sanctioned the loans in the first place during its reign. And the media screams its head off.
Amidst all this din, the real malaise in the system that is causing these repetitive disasters, which will in all likelihood repeat itself, is overlooked. There’s always a tendency and temptation to treat the symptoms instead of the disease.
The market regulators, the RBI and other statutory authorities must now introspect and ask themselves some hard questions. One, should promoters, many of whom have been in the past found responsible for misdemeanours and have compromised the interests of minority shareholders, continue to appoint independent directors? Here, it needs to be pointed out that it is the boards that are responsible to the shareholders and also ultimately accountable to the statutory authorities. Can the directors be expected to remain truly ‘independent’ while serving at the discretion and pleasure of the promoter-CEO? Two, should the authorities overlook violations by promoters when they are successful and deified in the media because of their wealth and power? You cannot have one set of rules when companies have a bull run and another set when they are floundering.
Improving regulatory checks
Corporate transgressions happen in the West too but the regulators do not spare the promoter, howsoever iconic they may be. Elon Musk was recently punished and asked to step down as Tesla Chairman by the U.S.’s Securities and Exchange Commission and penalised for issues related to insider trading. And many others, whether Bill Gates or Mark Zuckerberg, have often been reined in, investigated and heavily fined. Can India learn from these and improve regulatory checks and balances without snuffing out the ‘animal spirits’ of entrepreneurs?
And, finally, how do we get politicians and bureaucrats to stop influencing and interfering with lenders and banks? There has existed, for decades, a cozy nexus between such officials and big family-promoted businesses.
There are probably one or two more lessons to be learnt from this episode. One, regulators should not punish the company for the sins of its promoters. All efforts must be made to save companies and jobs, as is being attempted with Yes Bank. Two, similar rescue plans must be put in place with other companies, not just banks, because they are politically sensitive. The devastation to the economy and impact on individual lives and collateral damage is as severe when large companies like Kingfisher Airlines, Jet Airways, Dewan Housing Finance Corporation, or Reliance Communications fold up.
The failure of Yes Bank also has lessons for those at the helm of affairs. It is never late to bring about the needed reforms to strengthen the autonomy of various regulatory institutions. This needs to be carried out now.
Captain G.R. Gopinath is a writer and founder of Air Deccan
