Underneath the “yes mess” are some stark truths

There is a pattern of failure of promoter-driven entities that regulators need to stop

There is a pattern of failure of promoter-driven entities that regulators need to stop

Collapse of Yes Bank is the story of a promoter who ran amok and treated a publicly traded bank as his private company. Launched in 2004, the bank’s sordid history and meteoric rise and fall can be attributed to its founder and former CEO
Rana Kapoor . The history of the bank is similar to many recent stories about large public companies that went bust, companies that were treated like family businesses by their founders, companies that were well known. But what is amazing in the case of Yes Bank is that although there were laws and regulations that had to be complied with, such as the Companies Act and those of the Securities and Exchange Board of India, the bank had another layer of compliance requirements under it overseer was the Reserve Bank of India (RBI), which has its own strict guidelines. Despite everything, it failed.

Error of the “independent director”.

There is a pattern in failure from such companies managed by the developer. Yes Bank is no exception. Listed companies are managed by boards of directors. There is a CEO and a managing director who runs the company but is accountable to the board of directors. But the board is superficial. Therein lies the catch. The board has “independent directors” not only because it is required by law, but also because it gives more standing to the company and the founder. Typically, such positions are entrusted to retired senior bureaucrats, former public sector heads, former diplomats and former generals, giving them weight. This also opens doors to the government for the company and promoter where most licenses and files are still wiped out depending on who you know in the corridors of power. These independent directors rarely fulfill their role of challenging the CEO’s decisions, upholding probity and protecting the rights of minority shareholders. Nor is it expected of the founder or the controlling shareholders who appoint them. However, the moment these “independent directors” raise concerns about apparent impropriety, they are shown the door.

data | The Yes Bank Crisis Explained in Six Charts

When cases arise of family-run or founder-run companies digging into the company’s coffers at will to transfer funds to other companies in which the founders have an interest, often not even the minority institutional shareholders and the public holding stocks – as long as they earn attractive returns on their shares. On the contrary, the ordinary shareholders are sympathetic to such violations by the founders – they consider the founders “smart” enough to have used part of these proceeds to eliminate bottlenecks. All of this is tacit understanding.

The public and institutions—be they private hedge and mutual funds, pension funds, or government insurance companies that invest in stocks—instinctively recognize promoters who have these traits and excel at bending the rules to their advantage. Such promoters are indeed considered “dashing entrepreneurs”. They are revered by media houses and presented with prizes and honors at annual jamborees by ministers from the power parties. Some of these diverted funds may also end up in the promoters’ private pockets. Any impropriety on the part of these privateering promoters and CEOs is mostly forgiven by the public, banks and government agencies.

This applies as long as the loans are allegedly being paid, serviced or continued, statutory dues are paid, the company is prospering and stock prices are rising. Everything is fine and everyone is happy until the cookies crumble. And they often do. And then all hell breaks loose. People lose jobs, customers lose their deposits, vendors don’t pay, downstream ancillaries collapse or become ill, livelihoods are destroyed, assets and machinery are devastated, and the ripple effect also shuts down other associated good deals of debtors and creditors as the cycle progresses freeze. The promoter is arrested, the opposition turns its guns on the ruling party, and the ruling party counters, saying it inherited the problems from the opposition, which licensed or sanctioned the loans in the first place during its rule. And the media scream their heads off.

In the midst of all this noise, the real malaise in the system that is causing these repeating disasters that are likely to happen again is overlooked. There is always a tendency and temptation to treat the symptoms rather than the disease.

Market regulators, the RBI and other regulatory bodies now have some tough questions to ask themselves. First, should founders, many of whom have been blamed for wrongdoing in the past and the interests of minority shareholders compromised, continue to appoint independent directors? At this point it must be pointed out that the corporate bodies are accountable to the shareholders and ultimately also to the statutory authorities. Can the directors be expected to remain truly “independent” while serving at the discretion and discretion of the promoter-CEO? Second, should the authorities overlook violations by organizers when they are successful and idolized in the media because of their wealth and power? You can’t have one set of rules when companies are on a bull run and another set of rules when they falter.

Improvement of official controls

Corporate transgressions happen in the West too, but regulators don’t spare the promoter, iconic as they may be. Elon Musk was recently fined by the U.S. Securities and Exchange Commission, asking him to step down as Tesla chairman and fined over insider trading issues. And many others, whether Bill Gates or Mark Zuckerberg, have often been reined in, investigated and heavily fined. Can India learn from this and improve regulatory checks and balances without snuffing out the “animal spirit” of entrepreneurs?

Finally, how do we get politicians and bureaucrats to stop influencing and interfering with lenders and banks? For decades there has been a cozy association between such officials and large, family-sponsored corporations.

There are probably a further lesson or two to be learned from this episode. First, regulators shouldn’t punish the company for the sins of its sponsors. Every effort must be made to save businesses and jobs like Yes Bank is trying to do. Second, similar bailout plans need to be implemented with other companies, not just banks because of their political sensitivity. The devastation to the economy and impact on individual lives and collateral damage is just as severe when large corporations such as Kingfisher Airlines, Jet Airways, Dewan Housing Finance Corporation or Reliance Communications collapse.

Yes Bank’s failure also has lessons for those at the helm of the business. It is never too late to initiate the necessary reforms to strengthen the autonomy of various regulatory institutions. This must be done now.

Captain GR Gopinath is a writer and founder of Air Deccan

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