YES Bank F&O: No Futures & Options in YES Bank

| Published on 24th March 2020 | 303

YES Bank F&O: No Futures & Options in YES Bank

Yes Bank’s announcement earlier this month of  a record loss of over Rs. 18, 500 in the quarter ending on 31 December, 2020, resulted in the bank being placed under moratorium by the Reserve Bank of India. During this time, the bank suspended a lot of its activities and depositors were not allowed to withdraw more than Rs. 50,000. The RBI’s board also superseded that of Yes Bank’s during this same and were tasked with formulating a plan to prevent its failure. On March 19th, the moratorium was lifted and normal banking services were resumed, though the bank is still not in the clear.

Eight public and private sector banks were responsible for the resolution of the issue by investing in the bank’s equity securities. Among them, the State Bank of India was the single largest contributor and may possess a controlling stake in the organization at present. Under the reconstruction plan, SBI will likely have to maintain at least a quarter of the bank’s traded shares for a lock-in period of three years which is likely to witness further initiatives to raise capital for regrowth and rehabilitation. Additionally, the other banks contributing to this process as well as minority shareholders will also be required to maintain three quarters of their current shares to ensure some degree of stability.

The Fallout

The Bank’ share values have been in freefall since the announcement of its dire situation dropping by over 14% in the 24 hours following the lifting of the moratorium. During its moratorium period, Yes Bank possessed next to zero equity value, as the suspension of normal banking services meant that the organization had a lack of, and inability to grow, capital.

The end of the moratorium period was followed by the sale of  approximately 2.5 crore shares worth around Rs. 160 crore by Madhu Kapur, the widow of the bank’s founder and chairman – Ashok Kapur who was one of the organization’s major promoters. This resulted in another steep decline in equity value by nearly 25% to a price of Rs. 59. The share price as of March 20th of Rs. 45 is a whopping 81% below its value a year ago. The influx of cash through equity investments by banks was also carried out at reduced share prices.

The bank also had to pull all contracts on futures and options off the table as announced on the same day from May 29th onwards as a result of these disastrous developments. This eliminated any interest from investors as many short positions would result in these parties incurring losses. With this announcement, the stock rapidly lost nearly half of its value with shareholders scrambling to sell 24 crore shares at discounted prices of Rs. 20.25. Unfortunately for these investors, there were no takers. In the hours following this, the equity value plummeted by a further 35% marking the largest single reduction in price since the bank came into being.

Since then, the stock has continued to fall, but shows some signs of recovery after the resumption of its operations following the injection of capital from other banks. Nevertheless stock development is likely to remain negative for a while as most purchases will come at reduced prices because of their high risk status. Minority shareholders will now also find their influence diluted due to the drastic restructuring in the bank’s ownership. Yes Bank stock has even been marked as ‘Sell’ by the analytics of ICICI Securities which indicates that the stock will continue to have little real value for some time as rapid recovery seems like an improbable prospect.

Conclusion

The measures taken by the RBI will most likely be with a view to ensure the security of depositors as well as re-establishing some degree of trust in the reliability of the bank’s services in the wake of this catastrophe. Armed with the cash received through discounted equity sales to the eight banks taking charge of its rehabilitation, Yes Bank will now finally be able to meet the needs of its customers that have been facing difficulties during this time while dealing with a viral pandemic and are in more need of liquidity now than they have been for a long time.

It remains to be seen whether Yes Bank’s woes will see a smooth resolution with many financial institutions across the nation as well as the world facing hard times during the ongoing battle against a rapidly escalating pandemic. The influx of funds from the country’s other financial institutions was a vital first step in paving the road to recovery and only time will tell how soon Yes Bank’s stock will be able to come out of this crisis with its health fully restored.