The YES Bank rescue plan

The week gone by was tumultuous for investors in the YES Bank stock. Following the temporary cap on deposit withdrawals, the stock declined more than 50 per cent on Friday. While the RBI’s draft reconstruction scheme, announced after market hours on Friday, will bring some certainty, there could be further volatility depending on how the stock is likely to see more selling pressure in the week ahead.

The reconstruction scheme, on one hand, protects the interests of depositors, employees and other creditors, but on the other hand, holders of bonds qualifying as Additional Tier 1 capital and existing equity investors, have been left in the lurch.

For the former, the scheme calls out for a complete and permanent write-down of all instruments qualifying as Additional Tier 1 capital, after the scheme of reconstruction is approved.

For equity investors, the capital infusion by State Bank of India (SBI), works out to a straightforward dilution in earnings per share, to the extent of 49 per cent. The markets seemed to have priced in this dilution, already on Friday, where the shares of YES Bank tanked by more than 55 per cent to ₹16.2 per share.

The draft scheme also specifies that the price paid by SBI shall not be less than ₹10 per share (₹2 being the face value and the remaining ₹8 shall be the premium paid).

Quoting a minimum price, which is 38 per cent lower than Friday’s close of ₹16.2, could apply pressure on the stock on Monday morning.

If the scheme is approved as is, SBI would be required to pump in ₹2,450 crore as capital into the bank (at ₹10 per share), resulting in a dilution of 47 per cent in book value per share, as of September 2019, for existing equity investors.

Also, the scheme calls for revision in authorised capital of the bank to ₹5,000 crore from the current ₹800 crore that includes ₹200 crore of preference shares that are yet to be issued. This could be indicative of further dilution for equity investors in the near future, especially since infusion of ₹2,450 crore can only help the bank meet its minimum capital requirements. To be able to continue its business operations as usual, the bank would require additional capital.