Rule that tripped YES Bank's QIP

An LODR requirement for prior intimation derailed the year's biggest QIP but the Street also smells pricing issues

An innocuous provision in the Securities and Exchange Board of India’s regulations of 2015 on listing obligations and disclosure requirements (LODR), is said to have derailed the $1 billion (Rs 6,700 crore) Qualified Institutional Placement (QIP) of YES Bank.

Regulation 29 of LODR deals with prior intimation. Under this, subsection (1) said: “The listed entity shall give prior intimation to the stock exchange about the meeting of the board of directors in which any of the following proposals is due to be considered: (d) fund raising by way of further public offer, rights issue, American Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds, qualified institutions placement, debt issue, preferential issue or any other method and for determination of issue price.”

Regulation 29 (2) adds: “The intimation required under sub-regulation (1), shall be given at least two working days in advance, excluding the date of the intimation and date of the meeting.”

This is the only instance where QIPs come into play in the entire regulation, which deals more with regular disclosure requirements and other listing conditions. Initially, securities law experts were wondering at the change in the QIP framework, as it had not been amended for years.

YES Bank, through interviews by chief Rana Kapoor, had claimed that this LODR, which came into force in December, meant the QIP had to be kept open for three days even if it was fully subscribed. This led to speculation that it did not find any takers, which saw prices plummeting. While the QIP price band was fixed at Rs 1,350-1,410, the price tanked below the lower end in Thursday’s trade. In the ensuing panic, the issue was deferred.

In response to an e-mail seeking comments, YES Bank said, “There was a misinterpretation on the period for which the QIP had to be kept open and, therefore, there was some uncertainty, as a consequence of which there was unusual volatility in the stock.” A dozen top investment banks, including YES Securities, merchant banking arm of the issuer, were handling the issue.

Goldman Sachs, Citic CLSA and Motilal Oswal were global coordinators and book running lead managers (BRLMs). While JM Financial, HSBC, Nomura, Religare Capital, Edelweiss Financial, SBI Capital Markets, Investec Capital, and Inga Capital were joint BRLMs. Most merchant bankers and their legal advisors were tight-lipped about Thursday’s events.

According to exchange filings, an array of institutional investors participated in the road shows. On two days, August 30 and 31, as many as 32 institutions participated. Some prominent names include Janus Capital, Indus Capital, Premji Investments, New Horizon, Moore Capital Asia and a clutch of mutual funds and insurance companies.

But, market participants found it hard to fathom how despite their combined might and institutional experience, these giants were caught off-guard by the LODR requirement. They also point to how smaller issues handled by smaller merchant banks managed to sail through. According to data from Prime Database, seven QIPs have raised Rs 795 crore in 2016. Another 22 QIPs, cleared by the respective boards in 2015, did not hit the market but these had nothing to do with the Sebi framework.

An investment head of a foreign fund manager hinted the pricing might have been a bit aggressive. He said, “QIP is a straightforward process. Everyone in the market has a fair idea of it. The issue here was that demand was not coming at that price. It is futile to blame the (merchant) bankers. They don’t make or break the stock. It is often the fund manager’s call. The stock had run up quite a bit. It is already 2.8 times the price to book (estimated ratio) for FY18. That worried investors. The market gauged that.”

Between last September and February, the stock had been trading in the range of Rs 650-800. However, the QIP price was exactly double of the late February level of Rs 670 a share. On Friday, it closed at Rs 1,227.25 on the BSE, down four per cent.

YES Bank said: “The price range we had proposed in the course of the transaction was well within guidelines..It is not that we were way out. There was a fair amount of demand and literally the book was quite comprehensively filled up in the morning, and the bank had to defer because of the outright and exceptional volatility that crept into the stock.”

J N Gupta, a former Sebi official and head of proxy advisory firm SES, said: “To say it was deferred is a bit misleading. The issue has been withdrawn and whether the book was initially subscribed or whether bidders withdrew after volatility are matters for investigation.”

While the bank said it would consider moving Sebi for reconsideration of the LODR requirement for QIPs, it was confident of getting the QIP through “sooner than later”.