Over 100 people in Yes Bank's 'top management' may lose ESOPs, bonuses

The first-of-its-kind move will mark the activation of RBI's ironclad November 4, 2019 guidelines on the compensation

The Reserve Bank of India (RBI) is considering clawing back the employee stock options and bonuses issued to the entire top management of YES Bank to date. A closer look at how the beleaguered bank went about classifying its “top management” is also on the cards, given that there are more than 100 people in this category — several times the number in much larger private banks — and the sharp fluctuations in the same over the years.

The first-of-its-kind move will mark the activation of the banking regulator’s ironclad November 4, 2019 guidelines on the compensation of whole-time directors, chief executive officers, material risk takers, and control function staff in banks. In the case of YES Bank, these will cover designations ranging upwards from presidents to senior presidents, group presidents, and senior group presidents.

The intention behind the RBI’s move is to make the top management of YES Bank — those drawn from the immediate past and earlier — come clean on the mess within, and their role in it, even if this was under duress or top-down pressure.

All eyes are on the critical month-end meeting of the RBI’s Board for Financial Supervision — the first after the meltdown at YES Bank. While the central bank had said its November 4 circular would kick in only for pay cycles beginning from or after April 1, 2020, it can act on prior slip-ups by way of clawback or malus. 

This is because the circular finetuned an earlier set of guidelines issued on January 13, 2012. There is also nothing to suggest in both the RBI’s November 2019 and the superseded 2012 notifications that the clawback and/or malus will only be applicable to MD and CEO — as in the case of YES Bank’s founder and former MD Rana Kapoor in 2019; and ICICI Bank’s Chanda Kochhar for related-party transactions involving her husband Deepak Kochhar in 2018.

The objective of the revised norms of November 2019 on compensation was to better align these with the Financial Stability Board’s (FSB’s) “Principles and Implementation Standards for Sound Compensation Practices and the Supplementary Guidance” of March 2018 on the use of compensation tools to address misconduct risk. 

It was pointed out that the YES Bank blowout is the first clear -- and worst possible test -- for the RBI as the FSB monitors the global financial system, and was set up after G20 London summit in April 2009 as a successor to the Financial Stability Forum. The impact of the clawback in YES Bank, when executed, will be equivalent to the triggering of Section 35A of the Banking Regulation (BR) Act. This empowers the central bank “to examine on oath any director or other officer (or employee) of the banking company in relation to its business”. 

This provision in the BR Act has never been used in the central bank’s 85-year history. It is also surmised that there could be intense scrutiny of other private banks and the performance of their top management as well, and there could be a delay in the payout for FY19 and FY20.  The central bank took time to clear the stock options and bonuses of private bank CEOs in FY18 – it was settled after FY19 was over. The banking regulator has effectively signalled to the top management of all private banks that it means serious business, and their books of FY20 will be under intense scrutiny. 

It is also giving a signal to potential whistle-blowers to wake up. In the case of YES Bank, the full extent of the impairment in its books will be clear on March 14. SBI is expected to closely look into the books. This is of particular import as tax-payers money is going into the exercise, and the RBI had also detected a divergence of Rs 11,932 crore in bad loans reported by SBI for FY19. YES Bank, had a gross non-performing asset divergence of Rs 3,277 crore, and at 41 per cent of its reported gross NPA, was the largest such case among nine banks which fell into the same bracket.