I think there are clear policy benefits of wiping out AT-1 bond holders, massively diluting current stockholders, and also because of the lock in period imposed.
I am referring to these three things together because I feel it makes sense to look at the situation in totality, even though your point of disagreement (as of now :-))is about one of those things - the lock in.
By wiping out AT-1 bond holders, massively diluting current stockholders, and by imposing the lock up of shares, the government/RBI are signalling something important. The signal is this:
Some financial institutions are "too big to fail" and we will not let them fail but we will not protect equity (or quasi-equity AT-1).
We already know that a banking license in India, if utilised well is a license to print money - for stockholders. The upside is huge. But equity and quasi-equity should not be protected when the business is mismanaged and becomes insolvent.
There is another important angle here. We now know that the per-share book value of Yes Bank, before the new cash infusion by financial investors is zero, or close to zero. It may even be negative. And yet, large marquee financial investors are coming in at INR 10 per share.
That's a huge premium over current book value (before new cash comes in). Basically, these guys are bailing out the bank. If they had not done that then equity would have gone to zero in a merger with SBI (I think). Just as happened in the case of GTB.
The government/RBI has insisted that 75% of the shares of these financial investors (who are coming in at a huge premium to real book value) be locked up for 3 years. Under those circumstances, why should the lock not also apply to stockholders?
If Keki Mistri and Uday Kotak (and others) are agreeing to a lock up, then I think it's totally fair for them to ask for locking up the same proportion of shares of existing stockholders. Indeed, I won't be surprised if they insisted on it.
What if they hadn't insisted on it and the lock for existing stockholders was not imposed? Under those circumstances, the existing stockholders would have gotten a free ride on the backs of the likes of Keki Mistry and Uday Kotak.
That's because the market would have perhaps assumed that with these sort of backers there is only upside. And that may well turn out to be true - and I hope so.
But by putting a lock, the new investors are saying to stockholders: If we have to wait for 3 years to make money, then so must you. I think that's fair and makes sense from new investors's perspective and also from policy perspective to avoid this free-rider problem.
To be sure, the current stockholders have been hugely diluted because of the terms of the reconstruction. I think that aspect is different and is an outcome of their having backed a management team which ran the bank to the ground. The lock, deals with the free-rider problem
The lock not only deals the free-rider problem adequately, it's also equitable from the perspective of the new financial investors, who by bailing out the bank at a huge premium, give a chance to existing stockholders to not lose all of their money.
Because absent the lock, there may have been no deal and then we would have a merger the outcome of which for existing stockholders was almost certain wipeout.
I also see parallels between this policy and the thinking behind the Bankruptcy Code for non financial companies. The parallel is the same: If the business is insolvent, the equity will be wiped out or close to wipe out.
I do think these are powerful signals to entrepreneurs who were accustomed to think that by taking crazy risks they will create favorable asymmetric payoffs - when things go well they will keep the upside, but when things go bad they will be bailed out.
Those days are over - or close to over. At least I hope so!
No position in stock or derivatives of Yes Bank
