RBI Gives In-Principle Approval To Yes Bank To Hold 20% Stake In ARC

The Reserve Bank of India has given an in-principle approval to private lender Yes Bank to pick up 20% stake in JC Flowers & Co.'s asset reconstruction company, two people in the know confirmed.

With this, Yes Bank will be classified as a sponsor of the ARC. The bank would be required to spend approximately Rs 300-400 crore to acquire the stake, the people said, speaking on the condition of anonymity.

The approval was granted under the regulator's norms governing bank ownership of ARCs in India. A bank may acquire only up to 9.9% stake in an ARC without the regulator's express approval. Any stake acquisition higher than that will need permission from the RBI. Typically, the regulator is not in favour of allowing banks to hold more than 20% stakes in ARCs, because it could result in conflict of interest, the people quoted above said.

To be sure, the RBI does not allow bilateral sales of stressed between banks and ARCs where they are sponsors, which helps reduce the risk of any conflicted transactions between the two entities.

The acquisition of stake in JC Flowers ARC is a key part of Yes Bank's plan to transfer Rs 48,000 crore worth of stressed loans out of its balance sheet. BQ Prime had previously reported that Yes Bank was likely to sell its portfolio of 250 stressed accounts to JC Flowers ARC at around Rs 12,000 crore, ensuring 25% recovery. The consideration would be paid under the 15:85 structure, where 15% of the value would be paid in cash upfront, while the rest would be paid over time through redemption of security receipts.

Through its 20% stake, Yes Bank can now also get some of the upside on recoveries from this pool of stressed assets.

Queries mailed to Yes Bank, JC Flowers and RBI on Monday were not answered.

With the regulatory approval in place, the lender is expected to finalise the terms for a Swiss challenge auction this week. A Swiss challenge auction allows other ARCs to better JC Flowers' bid for the asset pool. If another ARC is able to quote a better price, JC Flowers reserves the right to match the new offer under the rules of the Swiss challenge auction.

Once the terms are decided, the bank will issue a public notice to all ARCs to participate in the auction through a newspaper advertisement, the first of the two people quoted above said. The auction process will be concluded over a month, with potential bidders getting a fair chance to conduct due diligence of the stressed accounts.

Once concluded, this would be the largest-ever sale of stressed assets by any single bank in India.

The sale is expected to clear much of the stress accumulated on Yes Bank's balance sheet. It would also make way for equity investors to come and pick up stake in Yes Bank, the people quoted above said.

Yes Bank was reconstructed under an RBI-approved plan in March 2020. A clutch of domestic lenders, led by State Bank of India, had infused funds as part of the plan.

PS: In a statement to stock exchanges, the bank termed the report as speculative and said it was not aware of the sources.

“The Bank would like to clarify that as informed earlier, the Bank had initiated a process for Partner Selection for an ARC vide calling a Public Expression of Interest. Currently, the process is underway and at this point of time, there is no binding / effective decision in this regard.”