The Reserve Bank of India has asked private sector lender Yes Bank to find a replacement for Chief Executive Officer Rana Kapoor by 31 January, 2019. In doing so, the regulator rejected a proposal by the Yes Bank board to reappoint Kapoor as CEO for another three years.
The regulator’s action is similar to what it did in the case of Axis Bank, where it had asked the board to reconsider a proposal to appoint Shikha Sharma as CEO for another three year term. While similar, the two cases are also very different.
Kapoor And Yes Bank’s Articles Of Association
Kapoor is one of the founders of Yes Bank and he and his family still own 10 percent stake in the lender. He is also listed as an ‘Indian Partner’ in the bank’s Articles Of Association.
The Articles say: Ashok Kapur and Rana Kapoor are collectively referred to as the “Indian Partners (IP)” and each of Ashok Kapur, and Rana Kapoor is individually referred to as the “Indian Partner.”
Section 110 of the Articles further says: So long as the Indian Partners hold along with any of their affiliates directly or indirectly, at least 10 percent of the issued and paid up capital of the Company, the Indian Partners, shall have the right to recommend the appointment of three directors collectively referred to as the “IP Representative Directors.”
Section 111 says that Ashok Kapur and Rana Kapoor are deemed as IP representative directors. Further in Section 121 pertaining to ‘Rotation of Directors’, the Articles say: Two of the IP representative directors as well as the Rabo representative director shall not be liable to retire by rotation.
Ashok Kapur passed away in the Mumbai terror attacks in 2008. Rana Kapoor’s status as an IP representative director, however, holds. The other two positions of IP representative directors remains vacant, since the family of late Ashok Kapur and Rana Kapoor have not been able to arrive at a consensus to jointly nominate anyone, said a person familiar with the matter.
On powers to appoint Non-executive chairman and CEO and MD, the Articles state: The Indian Partners shall have the right to recommend the name of the chairman.
The same section adds: “The chairman, CEO and Managing Director shall be subject to the same provisions, as to resignation and removal of other directors of the company and shall ipso facto immediately cease to be the chairman, CEO and managing director, as the case may be, if he ceases to hold the office of director for any cause.”
The Articles also say that the appointment, reappointment or termination of appointment of the chairman, CEO and managing director, will be subject to the approval of the Reserve Bank of India. The same also holds true for whole-time directors as well.
Implications For Management Transition
One implication of the Articles could be that Kapoor will have the ability to stay on the board of Yes Bank, even if he has to step down as CEO. However, it remains unclear whether the RBI would take a position on this.
Macquarie Research in a note on Thursday, 20 September, said:
As per the articles of association of the bank, he (Rana Kapoor) has a non-retiring seat on the board of directors of the bank (this too is subject to RBI approval). So, in some form, he can continue to offer his expertise, guidance and support to the bank. At this stage, it is too early to comment on whether RBI may deny him the board seat as well.
A legal consultant, who spoke on condition of anonymity, said that a number of promoter driven firms have Articles of Association, which ensure that a director from the promoter group is not liable for retirement. However, this is applicable until a regulator asks the board of the company to amend its Articles of Association and make this director also liable to retirement.
To be sure, the bank has not said anything which suggests that the RBI has raised concerns about Kapoor’s role as a director on the board of the bank. It’s one line statement simply said the RBI has allowed him to continue as MD & CEO till the end of January, 2019.
Part of the Yes Bank statement Reserve Bank of India has vide letter dated 17 September, 2018 received today, intimated that Rana Kapoor may continue as the MD & CEO till 31 January 2019, and the Board of Directors of the Bank are scheduled to meet on 25 September, 2018 to decide on the future course of action.
An email sent to the bank on Thursday seeking clarity, was not answered till the time of going to press on Friday, 22 September. An email sent to the RBI seeking clarity was also not answered.
A lot will depend on the grounds cited by RBI in denying Kapoor a full three-year term. Should they have cited Kapoor’s inability to meet the RBI’s ‘fit & proper’ test for bank directors and top managements, then it would be difficult for him to continue on the board, said a senior banking consultant while speaking on condition of anonymity.
Whatever Kapoor does now will invite public scrutiny, said this consultant, while adding that any attempt by Kapoor to assert his position at the bank could lead to considerable criticism.