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Life Comes Full Circle For Rana Kapoor

BloombergQuintOpinion

Back in 2013, Rana Kapoor, co-founder, managing director and chief executive officer of Yes Bank, was on a high. The bank was about to finish a decade in existence. By all means, it had proved to be a successful entrant into the private banking space, which has seen enough new licencees crash and burn.

Against that backdrop, when a brewing dispute between the bank’s two promoter families came out in the open, Kapoor acted from a position of strength.

At its core, the dispute was about the joint rights assigned to the ‘Indian Partners’ in the bank’s Articles of Association. Of the Indian Partners, Kapoor was the MD and CEO of the bank. The other partner, Ashok Kapur, had been tragically killed in the 2008 terror attacks in Mumbai. Kapur’s family argued that those rights, including the right to nominate three directors jointly, passed on to them.

But Kapoor was not willing to yield any ground. This, despite the fact that the two families had not only been partners in Yes Bank but were also closely related. The dispute eventually went to the Bombay High Court, which upheld the joint rights of the Indian Partners in a 2015 order.

“It is equally incorrect to suggest that the Plaintiffs have, only on account of Ashok Kapurs demise, transmogrified into some sort of non-promoter capacity,” said one part of the order.

Kapoor appealed. That appeal is still pending but there is no stay on the ability of the late Ashok Kapur’s family to exercise their joint nomination rights.

Five Years Later...

In 2018, it is Kapoor who now has little choice but to try and find middle-ground with the late Ashok Kapur’s family.

A failure to do so, will mean uncertainty not just for the bank he built, but his own rights as a promoter of the bank.

Kapoor’s position has weakened substantially over the past one month.

On Sept 19, the bank informed stock exchanges that the Reserve Bank of India had refused to give Kapoor another three-year term at the helm of the bank. A subsequent request by the bank’s board to extend his term till September 2019 was also turned down. Kapoor must now step down as MD and CEO by end of January.

A search process for the new CEO has begun. But the appointment can only be concluded with the agreement of both Indian Partners.

The bank’s board has also recommended two executive director appointments – Rajat Monga and Pralay Mondal. These will also need the consent of both partners.

Some uncertainty may emerge on Kapoor’s own directorship on the board of the bank as well. According to the Articles of Association, Kapoor has a non-retiring seat on the board of the bank.

Section 110 of the Articles says: So long as the Indian Partners hold along with any of their affiliates directly or indirectly, atleast 10 percent of the issued and paid up capital of the Company, the Indian Partners shall have the right to recommend the appointment of three directors collectively referred to as theIP Representative Directors.

Section 111 says that Ashok Kapur and Rana Kapoor are deemed as IP representative directors. Further in Section 121 pertaining to ‘Rotation of Directors’, the Articles say: Two of the IP representative directors as well as the Rabo representative director shall not be liable to retire by rotation.

But since the nomination rights are joint, Kapur’s family can choose to withdraw their support of Kapoor’s seat on the board as an IP representative, said a person familiar with the matter.

It is not clear why the family has not used this leverage in their dispute so far. If they choose to use it now, not only would Kapoor have to step down from the board, he will also not be able to appoint a nominee of his own. Incidentally, Ashok Kapur’s family has not been able to appoint their nominee until now.

To be sure, the bank has not disclosed any regulatory reservations regarding Kapoor’s position on the bank’s board.

The Attempt At Truce

After years of estrangement, the two sides have met at least three times in recent weeks, people familiar with the matter told BloombergQuint on condition of anonymity.

Early discussions have revolved around acknowledging the Kapur family’s joint nomination rights. Concerns raised by the Kapur family about inadequate information provided to them have also been noted and senior members of the management team have briefed the family about the bank’s operations.

But a formal agreement between the two sides is yet to be arrived at. To secure that decision, Kapoor who would have to climb down from the position he had taken back in 2013 and acknowledge the joint nomination rights of the Ashok Kapur family. Once that in-principle agreement is reached, the two sides would also need to agree on a nominee for the MD and CEO post and, subsequently, on the appointment of IP nominee directors on the board.

A longer term option for an amicable settlement between the two promoter families could be to amend certain provisions of the Articles, in particular, those that confer joint nomination rights on the Indian Partners.

In 2013, the Madhu Kapur side had suggested that nomination rights be rotated between the two parties, allowing them to nominate one director each and the third by rotation. However, the court did not permit this. “The suggestion that each group could nominate one person and a third IP Representative Director would be chosen for alternating terms is wholly outside the scheme and frame of these Articles. The right must be exercised jointly or not at all,” the order said.

The order, however, added: “I have very little doubt that there are Articles that require amendment, both for consistency going forward and also to resolve the present disputes...”

Such an amendment, with the agreement of both parties, is an option being considered, said one of the people who spoke on condition of anonymity.

A final option, also discussed in the 2015 order, was for both promoters to bring down their shareholding to below 10 percent. Kapoor, however, has said that he will never sell his shares.

Time is now short. The promoter families have three months to come to an agreement that is in the best interest of the bank, its promoters and its shareholders.

An email sent to a Yes Bank spokesperson seeking clarity on discussions between the promoters was not responded to. Rana Kapoor directed queries to a representative of the bank. Shagun Gogia, daughter of the late Ashok Kapur, said the family would not comment on the matter.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.

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