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YES Bank's Independent Directors Must Learn To Say NO

Published on Tue, Jul 07,2015 | 09:12, Updated at Wed, Jul 08 at 11:12Source : CNBC-TV18 

The recent Bombay High Court’s judgement highlights behaviour that befits neither a bank, nor its board or its ‘promoter’. The judgement points to convenient interpretation of the Articles of Association and inconsistency in action that, in our opinion lace the governance quality of the bank. IiAS believes that YES Bank’s Independent Directors must assert themselves and take actions that are in the interest of the bank, and not just of one promoter. Also, the bank must consider modifying its Articles of Association to remove the privileges of both sets of promoter shareholders.

The Bombay High Court’s judgement on Madhu Kapur’s appeal to be allowed to assert her rights  to appoint a nominee to board of YES Bank Limited (YES Bank) raises concerns over  some of the  actions of the bank’s promoter, Rana Kapoor, and questions the independence of its board. The judgement suggests that the bank’s board allowed Rana Kapoor unbridled decision-making in dealing with a dispute that affected its composition.  At this juncture, it is prudent to mention that IiAS is not picking a side in this battle of two promoter factions:  we are focussing on the role played by YES Bank’s Independent Directors and their inability to bring reason to this dispute.

Trust is a critical pillar of banking and only gets built over the years. The judgment suggests that both YES Bank, and Rana Kapoor have not only been inconsistent, but also furtive in their actions. While continuing to assure Madhu Kapur and Shagun Kapur Gogia that “their rights would receive recognition in the fullness of time”, YES Bank, in 2010, wrote to RBI asking it to declassify Ashok Kapur’s share ownership as a promoter. YES Bank followed up with RBI on this in May 2011, and Rana Kapoor wrote a reminder e-mail in February 2012 to the same effect. It appears that Madhu Kapur and Shagun Kapur Gogia were kept in the dark on these actions and these “came to light in as recently as June 2014.” The Bombay High Court ruled that the “applications to the RBI to this end are motivated, self-serving and prima facie unlawful”, and has stopped “Rana Kapoor and YES Bank from following up on that application or pursuing it”.  

The circus over the rejection of Madhu Kapur’s nominations perhaps showcases the eagerness of the board to yield to the wishes of Rana Kapoor. It also raises concerns on the quality of processes followed by YES Bank’s board committees. In April 2009, YES Bank’s Nomination and Governance Committee (NGC) rejected the ‘nomination’ of Madhu Kapur as a Director of YES Bank. But, Madhu Kapur had not been proposed as a director of YES Bank: “YES Bank separately accepted that there was no letter of request for the nomination of Madhu Kapur to YES Bank’s Board.”  Once again, Ashok Kapur’s heirs “knew nothing of these meetings. They first learned of this so-called nomination and rejection only on 7th June 2013”.

The rejection of Shagun Kapur Gogia’s nomination is yet another instance of the board apparently conceding to Rana Kapoor’s wishes. The Bombay High Court described this rejection as “churlish or even vindictive.” IiAS believes that boards have a right to reject a director nomination, but as a matter of good governance, boards must have a legitimate reason for such rejection.  Notwithstanding, the “rightness of this decision can be debated ad infinitum, but to no end.” Consequently, the Court decided not to intervene in this matter.

YES Bank has also been accused of making selective disclosures to the RBI regarding Rana Kapoor’s reappointment.  RBI’s approval forms require a disclosure of “who is the competent authority to make the re-appointment in question and to fix the terms thereof.” What YES Bank sent to the RBI was “materially defective” and not an accurate reproduction of the relevant portions of the Articles of Association (AoA). “Indeed, it entirely omits the all-important Article 127(b), but only includes copies of Articles 127(a) and (c).” The Bombay High Court observed that “YES Bank and Rana Kapoor went to great lengths to withhold disclosure of this document and it was only pursuant to (my) order of 12th June 2014 that this document was disclosed.” It is naïve to assume that RBI was indeed misled by the selective disclosure. But, did YES Bank make an attempt to mislead RBI, or was this just an innocuous error? The ‘defective disclosure’ could cast a long shadow over the bank.

Abject disregard for the spirit of the law is evident in the bank re-classifying Ravish Chopra as an Independent Director, when he was earlier appointed as a promoter nominee. IiAS had recommended voting AGAINST Ravish Chopra’s reappointment for this very reason. This, along with the appointment of M. R. Srinivasan, who was earlier an advisor to YES Bank, as Chairperson supported a board composition that favoured Rana Kapoor. A consequently obliging board allowed YES Bank to participate in a dispute that was essentially between two promoter factions.

The Bombay High Court has suggested that both sets of promoter shareholders reduce their stake to below the 10% threshold. This ensures that neither sets of shareholders can exercise their “proprietary and participative rights” listed in the AoA. This is a reasonable solution.  Alternatively, YES Bank should consider modifying its AoA to remove the privileges given to Rana Kapoor and Ashok Kapur and their heirs.

But, let’s take a step back and ask a more fundamental question: why does Rana Kapoor and YES Bank want to deny Ashok Kapur’s heirs rights established by the AoA? Ashok Kapur’s heirs have been described as a disruptive influence – but, the consequent ”prediction of a corporate and financial Armageddon is more than somewhat misconceived.”. What then can explain the actions on the part of YES Bank’s board and Rana Kapoor?  The dispute has been long-drawn and has consumed the time and energy of the bank, its promoters, and its board: surely, they must have other more pressing items on their agenda. Without doubt, this could have been handled better – in a manner more befitting of a bank.

Undeniably, Rana Kapoor has been instrumental in YES Bank’s success, and therefore his “pre-eminence or dominance in the affairs of YES Bank does not per se show illegality or unlawfulness.” But the board has a role too, and it may have failed its responsibilities. The board has allowed Rana Kapoor and YES Bank to violate processes, allow furtive actions, and make selective disclosures – which violates the fundamental principles of good governance. It is time for YES Bank’s board to stand-up and learn to say no to its CEO.

The full report is available here…

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Attachments : IE_YesBank_IDMustSayNo_3Jul2015.pdf

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