Mumbai: Yes Bank Ltd is staring at a lengthy search for a new boss after the Reserve Bank of India (RBI) cut short the tenure of managing director and chief executive officer Rana Kapoor, who has led the private sector lender since its founding in 2004. Yes Bank’s knotty articles of association (AoA), which the Bombay high court ruled in 2015 must be followed by its warring promoters, will make the board’s task harder, as it meets Tuesday to discuss the way forward.
Task cut out for Yes Bank as it scouts for CEO Rana Kapoor’s successor
Yes Bank is now looking to appoint an independent search committee to prepare a list of CEO candidates before Kapoor’s term ends on 31 January, two people aware of the developments said.
“Even though RBI as the regulator has the power to approve or disapprove any bank CEO’s appointment, the bank’s board will seek satisfactory answers from RBI and reasons behind the regulator’s sudden change in stance,” added the second person.
What could come in the way is the face-off between the bank’s promoters Rana Kapoor and Madhu Kapur, and the AoA they signed and has been registered with the ministry of corporate affairs (MCA).
At the end of June 2018, Rana Kapoor holds a 4.34% stake and Madhu Kapur holds a 7.62% in Yes Bank. Other promoters include Yes Capital (India) Pvt. Ltd (3.28%), Morgan Credits Pvt. Ltd (3.05%) and Mags Finvest Pvt. Ltd. (1.7%).
The articles of association was agreed upon by the bank’s promoters in 2005 and amended in September 2017.
Section 127 (A) of Yes Bank’s articles of association says the managing director and CEO shall not be subject to “retirement by rotation” but be subject to the provisions of the contracts between them and the company. Retirement by rotation is a process whereby at each annual general meeting (AGM) one third of the directors must quit and seek re-election.
Kapoor is a director and this section of the articles of association protects him (or anyone who assumes the CEO’s position at Yes Bank) from automatic retirement.
Also, under Section 127A, to appoint any whole-time director, the board shall follow the recommendation made by the promoters.
It also says the board may appoint one of its members as whole-time director but even that would be subject to the AoA and RBI approval.
The conflict between Yes Bank’s promoters began in 2009, a year after co-founder Ashok Kapur was killed in the 2008 terrorist attack in Mumbai.
The board declined to appoint Shagun Gogia, daughter of Ashok Kapur, because it was felt she might not meet RBI’s fit-and-proper criteria. In 2013, Madhu Kapur (widow of Ashok Kapur) and her daughter Shagun Gogia approached the Bombay high court seeking greater say in appointing directors and wanted the court to uphold their right to jointly nominate directors.
In June 2015, a single bench of the Bombay high court ruled that both promoters must follow the articles of association . However, both Kapur and the bank have challenged the ruling before a division bench. Gogia told Mintover the phone on Thursday that the board can look for a successor and it does not require the approval of the promoters. However, if the board finds a successor to Rana Kapoor after appointing a search committee, it will nevertheless, have to seek approval of RBI before appointing the candidate.
She added that promoters can jointly suggest a successor but that too will need RBI approval. “In case Yes Bank wants to appoint a whole-time director, joint approval of the promoters will be required,” she said.
Corporate lawyers, however, have a different interpretation.
Mona Bhide, managing partner of law firm Dave Girish & Co. said, “Considering the Bombay high court ruling and the clauses in the AoA, the bank’s board has no option but to compulsorily take both the promoters’ consent for appointing a new CEO or a whole time director, whether the CEO is appointed through a search committee or otherwise. If the board ignores the AoA and directly sends the names of potential candidates to RBI without taking the Indian partner’s consent, the bank will be in violation of the High Court’s ruling.”
“Even though RBI is the banking regulator, RBI will not choose a name and force the bank to appoint that person as the CEO. If there is an inordinate delay in appointment, RBI may just informally ask the bank’s board and its promoters to either come to a common ground soon or at least name someone temporarily for a certain short period as the interim in-charge of the bank until a full-time CEO is appointed. Beyond that, RBI will not intervene,” added Bhide.
Sandeep Parekh, founder of corporate law firm Finsec Law Advisors and a former executive director of Sebi, agreed. “Due to the court ruling, the board is bound to take the consent of both the Indian promoters (Rana Kapoor and Madhu Kapur) before sending the names to RBI for the final approval on one name. It will be a three-stage process,” said Parekh.
“If any of the two promoters disagree with any of the three names suggested by the executive search committee, the whole process will need to be restarted, and that too after appointing a new search committee. RBI’s deadline is too short, especially keeping in view the high court’s ruling on the company’s articles. The appointment will certainly be a long-drawn process,” added Parekh.
Even if the board and the two promoters choose one of the non-independent directors to be the bank’s new CEO, it will be tough. This is because as per section 10B of the Banking Regulation Act, 1949, only a banker or an individual having “financial, economic or business administration” background can qualify for the post of a whole-time director or managing director of a bank.
“RBI had increased the retirement age for private sector bank CEOsfrom 65 to 70 years, and hence it is unlikely to approve a CEO who is over 65 years of age at the time of appointment. Pratima Sheorey, in her late 40s, has a marketing background and lacks banking experience. Hence she will not qualify for the post of bank CEO according to the Act. In a worst case scenario, despite their advanced age, the two former government bank officials, Ajai Kumar (65) and Subhash Kalia (67), both of whom have commercial banking background, can qualify as CEOs to succeed Rana Kapoor,” said the first person.
Yes Bank’s gross bad loan ratio stood at 1.31% in the first quarter of FY19, primarily on account of large loan growth in the March quarter of FY18 (53.9% y-o-y).
A recent report by India Ratings & Research pointed out that the bank’s total impaired assets (net non-performing assets + standard restructured assets + 5/25 + S4A + SDR outstanding + security receipts outstating) to net worth ratio as of March 2018 was 13.6% (16.9% in December 2017).
Analysts pointed out that Yes Bank had reported a divergence in asset quality in the last two years of FY16 (₹ 4,176 crore) and FY17 (₹ 6,355 crore) and that RBI had been quite vigilant on these divergences in the asset quality review (AQR) for all banks.
On 30 August, Yes Bank informed exchanges that RBI has approved Kapoor’s re-appointment till further notice. Kapoor’s tenure was supposed to end on 1 September 2018.