This article has been authored by Sanya Shukla, a fourth year student at Amity Law School, Delhi.
Over various decades, financial crimes and multifarious criminal activities within the corporate sector have been witnessed, the very first being the Mundhra Scam, which came to light in 1957 and is considered to be the first big financial scam of independent India to the present day Yes Bank crisis.With the advancements in technology and the complex nature of legislations and institutional frameworks, corporate crimes are increasing and the graph seems to be rising continuously.
It is a cumbersome task for concerned authorities to recognize the fraudulent activities that go behind in an organization, let alone prosecute them as per due process of law. This becomes possible because of concepts such as corporate veil that are misused to reduce accountability and affords protection hence shielding the members from liability. It is no news that there is lack of legislation in the corporate sector along with poor implementation that leads to huge scams taking place without knowledge. To illustrate this point, the insufficiency of the Indian Penal Code, 1860 in the financial sector had led to the enactment of a separate law, that is the Prevention of Corruption Act, 1988. The Yes Bank crisis is one such intricate and convoluted plot.
In the year 2004, new guidelines came into place in connection with entry and licensing of private sector banks. Yes Bank was one such bank constituted by Harkirat Singh, Ashok Kapur and Rana Kapur and went on to become the 4th largest private sector bank in India. Before the three partners constituted Yes Bank, they were partners of a Dutch multinational banking and financial services company. Both the brothers-in-law, Ashok Kapur and Rana Kapoor sold their shares worth millions of dollars and invested it into their envisioned Yes Bank.
The bank established a customer-centric and service-driven atmosphere and became a role model for future corporates in the country. Of the three partners, Harkirat Singh left early on and rather abruptly citing non-mutuality of objectives as the reason, whereas Ashok Kapoor died in the 26/11 Mumbai terrorist attack.
After its institution in 2004, Yes bank gained popularity and introduceda range of technological advancements in the banking sector. It worked aggressively to achieve its goals and soon became the go to bank for all; a bank that bankers wanted to work for and a bank people wanted to bank with. During this time, a lot of clients came onboard, moreover for some of these clients such as Flipkart, Swiggy, Phonepe etc., Yes bank was the sole banking partner for UPI transactions.
The Bank’s progress became a luring factor increasing their customer base uniformly with people depositing more and more going up to 2 lakh crores and the value of shares went as high as Rs 400/share and non-performing assets valued at a paltry 0.31%. In 2017, Rana Kapoor was noted to enter the Billionaire club.
It is most unfortunate how one of the most prosperous and trusted private sector banks in the country finds itself engaged in a financial scam of such magnitude. As the saying goes, the calm before the storm, Yes Bank too is caught in the whirlwinds of its storm. Once the bank attained its peak, owing to the immense response they received, started lending in billions to companies. The problem here was, some of the clients to which the bank was lending were already under financial distress, including Zee group, Essel group, Dewan Housing Finance Corp. Ltd (DHFL), and Infrastructure Leasing and Financial Services (IL&FS).
Since 2014, the loan book of the Yes Bank has steadily increased four folds and stood at Rs 2.25 trillion on September, 2019 due to exposure to troublesome borrowers. The deposit rate could not keep pace with the debts and the quality of assets also decreased. As a result, it came under the RBI’s scanner.
Reasons for the collapse
· Non-Performing Assets: The troubling increase in impaired loans ratio and significant lapses in governance led to a complete breakdown of management. There was a massive increase in gross non-performing assets in a matter of 5 months (April-September, 2019).
· Non-Banking Financial Company crisis: exposure to troublesome borrowers started with Infrastructure Leasing & Financial Services and then to Dewan Housing Finance Ltd.
· Governance: Issues in governance severed the performance of the bank. Uttam Prakash Agarwal resigned as an independent director citing “serious concerns” on “deteriorating practices” and the state of affairs at the private sector lender. Further, the bank under-reported its NPA’s to the extent of Rs 3277 crores, which led to the deployment of R Gandhi by the RBI, to the board of the bank. In January 2019, Rana Kapoor was asked to step down from the post of CEO.
· Excessive Withdrawals: The financial crisis that plagued the bank discouraged most depositors to keep their money in the Bank and the books show proof of steady withdrawals that only made matters worse for the once golden bank.
The Enforcement Directorate (“ED”) arrested Rana Kapoor on charges of money laundering and setting up of shell companies for laundering money and creating tainted assets under the Prevention of Money Laundering Act, 2002. Moreover, the Sessions Court in Mumbai has registered a case against Rana Kapoor and several others in connection with alleged cheating, criminal conspiracy, fraud for taking huge amounts of kickbacks particularly the scam hit, Dewan Housing Finance Corporation Limited.
Apart from Rana Kapoor, the ED also registered complaints against his wife and three daughters as the companies receiving kickbacks are in the name of his daughters.
All banking firms in India are regulated by the Banking Regulation Act, 1949. Section 45 of the said Act is a powerful tool in the hands of the RBI and details the “power of the Reserve Bank to apply to Central Bank for suspension of business by a banking company and to prepare a scheme of reconstruction or amalgamation”.
When RBI was given the sanction, it -:
· Took over the management of Yes Bank
· Imposed a moratorium on the lender: a temporary suspension of activity until future events warrant lifting of the suspension or related issues have been resolved. A moratorium of 1 month was imposed on Yes Bank.
· Formulated a draft scheme for the reconstruction of Yes Bank Ltd: Under the scheme, State Bank of India will pick up a 49% stake of the equity. Further, the new board of management is to consist of at least 2 directors from SBI. It was also stated that SBI could not reduce its holding below 26% prior to the completion of three years to provide time for stabilizing and revival of the bank.
The decision of the Reserve Bank to bring in State Bank of India seems to be sensible in light of the circumstances and it is truly a test of time to see whether both the banks come out as winners or not.
However, with the increasing need to bail out private sector banks in case of a crisis, it is high time that the Government and RBI take steps that are fundamental in preventing such crisis with the help of policy reforms and change in the manner of governance.