Yes Bank’s Fund-Raising Plan May Run Into SEBI Pricing Hurdle

Yes Bank Ltd. put off its third-quarter earnings as the beleaguered private lender is evaluating interest from investors to raise funds. But its plan to sell stake could run into the market regulator’s pricing hurdle.

Yes Bank has wiped off nearly 86 percent of its market value in a little over 10 months on bad loan concerns stemming from its exposure to struggling non-bank lenders. The bank needs capital urgently as its buffer has fallen below the regulatory requirements.

While its last attempt to raise funds failed, the bank on Wednesday said it received non-binding expressions from four investors. According to its filing:

• The lender would need the Reserve Bank of India’s approvals on the size of the stake to be sold.
• It will have to comply with the Securities and Exchange Board of India’s pricing guidelines for issuing new shares or convertible instruments.

There are two ways for the bank to raise funds—through a preferential allotment or a qualified institutional placement.

Preferential Allotment

According to SEBI norms on preferential issuance, investors have to pay higher of the two prices calculated based on:

• The average of the weekly high and low closing prices in the six months preceding the relevant date.
• The average of the weekly high and low closing prices in two weeks preceding the relevant date.

The relevant date, in this case, is 30 days prior to the general body meeting of shareholders. Yes Bank will have to conduct another EGM to seek shareholder nod once the lender identifies up to five investors. The relevant date would be the new EGM date.

But SEBI guidelines require pricing to be based on historical data. When the stock price is under pressure, the floor price of an issue could be higher than the current market price. And investors may not be willing to pay a premium.

Transfer of shares at prices lower than what SEBI mandates is allowed in a scheme of arrangement approved by a high court or conversion of a loan into equity, Sandip Bhagat, partner at S&R Associates, told BloombergQuint over the phone. Otherwise, “you need a special relaxation from the SEBI board”, he said.

“The only exemption to pricing is available when persons are acquiring shares in distressed companies pursuant to a restructuring scheme in terms of guidelines prescribed by the RBI,” he said. “Can SEBI relax regulations for Yes Bank? I think that will have to be discussed; whether there is something that special about this case. Why should SEBI give approval to this and not to others?”

QIP

If a preferential allotment is not viable, Yes Bank can consider a qualified institutional placement.

In August, Yes Bank raised Rs 1,930 crore at Rs 83.55 apiece through this route. But regulations don’t allow successive QIPs within six months. For Yes Bank, the six-month period ends by Feb. 15.

The price of shares issued in a QIP can’t be less than the average weekly high and low closing prices in the two weeks preceding the relevant date. For a QIP, the relevant date is the day the board meets to approve the share sale. The norms allow a 5 percent discount.

Yes Bank’s average stock price in the last two weeks was about Rs 37 apiece, nearly equivalent to its prevailing market price. So a QIP appears to be a better option, at least for investors.

But there is a catch. Only foreign portfolio investors can participate in a QIP. Other overseas buyers can invest only via a preferential issue as it’s considered a foreign direct investment.

Yes Bank, according to its filings, received non-binding expressions of interest from JC Flowers & Co. LLC, Tilden Park Capital Management LP, OHA (U.K.) LLP (part of Oak Hill Advisors) and Silver Point Capital. Most of these funds invest through structured products in companies with stressed balance sheets to preserve capital and generate risk-adjusted returns.

According to Bhagat, these investors can participate in a QIP, but through participatory notes. That won’t give them direct access to the company or the management, and they would have to rely on an intermediary, he said.

Not just that. There’s also a risk of Yes Bank’s shares falling below the floor price of the QIP.

One of the immediate triggers for the lender’s shares would be its earnings for the quarter ended December. If the results are better-than-expected, the stock could rise. But if they don’t meet expectations, shares may face selling pressure.

If the company does its QIP before the earnings and the results miss estimates, investors would face mark-to-market losses. That’s what happened after Yes Bank’s August QIP.