5 Life Lessons to learn from Rana Kapoor of Yes Bank

There isn’t an investor I know who hasn’t got scathed in the Yes Bank carnage. From a high price of 400 in Aug 2018 it touched 28 in less than 12 months. For easy math – its was down 94% from its peak in a year and it will have to go up by 1300% just to regain the same top – if it ever does.

Much has been said and written about the bank in magazines and papers and some Astute and Prolific Journalists such as Andy Mukherjee of Bloomberg wrote about and predicted the troubles of Yes much before the meltdown began but this piece is about the philosophy of life and the specific lessons to be learnt from Mr. Rana Kapoor s leadership and conduct.

All style and minimal substance

Sift thru the internet and a few websites and one would see that Yes Bank managed to get almost every award in the banking space. Its alleged greatness was greater than thou and when the industry and all other banks were showing signs of slowdown and stress it kept declaring stupendous numbers with the lowest NPA s in industry (even lower than HDFC bank in many quarters)

Banking is a difficult industry. NIMs are 2-5 % in best case which implies – to earn a margin of 2% you lend an amount X and hope to collect all of it back thru the life of that loan and if one large account defaults, it can wipe out the capital of the bank

I kept wondering thru the meteoric rise of the bank – are robots evaluating, disbursing and collecting loans. If the same kind of employees are working across the industry how can Yes be an outlier. At its peak Yes traded at about 6 times book and 50 PE.

Lesson

Businesses that seem too good to be true are seldom that good. In its zeal to expand and a soon wanna-be HDFC, Yes took unmanageable risks and lent out money to every suspicious borrower (everything is in public domain now - the less said the better) and allegedly grew remarkably well. But most of its large borrowers had no intention / sources / business model to pay back. If you are in business or in a job - Aspire to grow in line or slightly better than the industry, you will be just fine and the power of compounding will take care of the rest. In a zeal to achieve stratospheric growth, you not only end up taking unreasonable risks but also put in jeopardy the existential probability. Greed kills.

The Business Model and its Conduct

All the readers of this piece would have taken a loan one or the other time in life and we all know that the .5% processing fees can be negotiated or even waived off at times. After all processing fees isn’t a fees for any effort or paperwork (which entails another fee), it’s part of the business model. It is heard that Yes bank developed an interesting model of charging humongous amounts of processing fees (in some cases upwards of 8-10% of the loan amount). This processing fees reflected in qtrly PnLs as fees income / other income etc and showed Yes bank to be a very intellectually superior bank that could generate such large amounts of fees as a proportion of its Net Profits. What everyone ignored was the fact that the relationship managers and senior officers on the field were expanding the lending book by taking undue risks, in some cases with collusion of the promoters, charging this large upfront fees that would make the deal look awesome from a short term perspective, earning hefty bonuses for themselves and eventually leaving the bank with rotten lemons. If Rana Kapoor was a part of this scheme, its even worse, if he was not, obviously as the Boss of the bank, he was distracted fighting his petty battles while losing the war. I would love to be wrong here but my gut tells me that all these loans would not even have a decent backing of monetizable securities. Time will tell.

Lesson

Hire people not only on the basis of fancy degrees or self-proclaimed past achievements. Build teams where the team members have superior sense of responsibility and unquestionable ethics. Senior executives should have as much knowledge of philosophy and psychology as of the subject matter. For only then will they remain grounded and steer clear of designs based on the foundations of greed.

Banking industry is rife with examples of executives working on extreme short termism, earning huge bonuses and leaving a trail of destruction and sometimes orchestrating the demise of the institution. Does anyone remember Dick Fuld. He brought down Lehman and still got to keep the bonuses.

If You are at the helm and operating and building large organisations, the bonuses of your key personnel should not be tied to short term paper profits, the sustainability of which is in question. The incessant pressure of QoQ and YoY growth will most certainly create a fertile ground for executives to cook books. And they will.

Karma

It was terribly unfortunate that Mr. Ashok Kapur was killed in the 26/11 attacks in Bombay. A bank that was jointly founded by the co brothers Rana and Ashok then befell to be managed by Rana Kapoor. Obviously Rana Kapoor didn’t want to give a sliver of board space away to his co-sister. What was the point in denying the rightful board seat to Madhu Kapoor and family.  Rana Kapoor fought tooth and nail to keep Madhu Kapoor away from the Yes Board. We used to hear about the law of karma and if we do a misdeed, it will come back to haunt us in our next life. God perhaps got worried that the present generation in this kalaguya doesn’t give a damn about the next life and therefore shortened the turnaround time dramatically. These days Karma comes around rather swiftly. And in less than a year when the meltdown started the diamonds of Rana Kapoor got withered away at the price of marbles.

Lesson

We often forget that when we are born we are a mere 3 odd kilos and when we die we reduce to the same in the ashes that are left behind. And we cannot take anything along. The amount of time and energy that Rana Kapoor invested in fighting with his relatives would have definitely taken a large share of his mind-space and attention, while his professionals ran the bank aground. Yes came to be respected as a reasonably good, technologically advanced, and a forward looking bank. But I will have my cake and eat it too  was the undoing that set the seeds of banks erosion of capital and credibility.

We teach our children a simple yet powerful lesson Sharing is Caring but forget the same ourselves along our lives – and then one day we lose it all or suddenly die. We all know that our time on this planet is limited but tend to generally disbelieve this for ourselves while remembering this for everyone else. And if we ever reflect peacefully, our significance on this ever evolving planet with millions of years of humanity and over 7 billion of us at any time on this earth is so negligible that a calculation or real reflection is humbling. So why be greedy and why not truly remember and imbibe in our personality the famous Chapter 2 , Verse 71 of Bhagwad Gita that says we came empty handed and so shall we leave.

Debt and the desire to acquire/hoard more

Pledging the entire holding of his stock to make alternate investments became a self fulfilling prophesy. When the value of the stock tanked, all the fair weather friends and lenders didn’t blink an eyelid before selling Rana’s stake.  

Lesson

We all know that debt is death. Debt works 24 hrs relentlessly, whereas factories and executives and organisations work for limited hrs in a day and take weekends off. The modern monetary theory that professes ever expanding debt and the new age entrepreneurs and managers who take its refuge might not be able to fully fathom the ramifications of the same. Some of the most successful investors and thinkers such as Warren Buffett have rubbished this vehemently. Avoid debt as much as possible. Depreciating assets and objects of gratification should never be purchased using debt.

Most Friends and Well wishers only offer umbrellas when its bright and sunny. The true umbrellas are seldom found when its pouring. Just remembering this is enough to keep you grounded, responsible and strategic.

When in doubt Disclose

I am reasonably certain that Rana and the top echelons of Yes knew that the loan book is far more rotten than what they were disclosing a few qtrs ago. Else why would the edifice of lies come crashing down just one qtr later when the new CEO took over. Obviously top guys were riding a tiger that they couldn’t get off without being eaten (I remember this line from Satyam’s Ramalinga Raju’s confession in Jan 2009). If these guys had taken RBI seriously and mustered the courage to come out clean rather than making up the lower than actual NPA numbers, coming clean on divergences and apologised and course corrected – which would have been possible only if they acknowledged the mistake, the markets would have been kinder.

Lesson

‘When in doubt disclose’ - This is what the legendary Sh. NR Narayana Murthy says about corporate governance. Inspite of all the personal criticism he stood his ground when he smelt impropriety in a few transactions at Infosys a few years ago. And I truly respect him for that. Omkar Goswami came heavily on Mr. Murthy – but then who is Omkar Goswami anyway.

Shareholders, media and public can pardon a few bad qtrs or a bad year of financial performance but impropriety and doubt over corporate governance (even if the net effect of the same is much lesser than bad performance) is brutally punished and brands can seldom recover from that damage thereby destroying shareholder wealth permanently. Corporates and Individuals should choose to lose money, if need be, as money can be recovered easily over time but a shred of reputation if lost never comes back. What takes a lifetime to build can be destroyed in just a second.

We are all born innocent and pure. The vicissitudes of life (everyone has them) can either derail us from the General Accepted Life Principles of Propriety or keep us firmly on track and make us want to be the Human Beings, Managers and Owners that we expect others around us to be like.

Manu also writes on the Huffington Post
Twitter @manurishiguptha

Electric Vehicles – Awesome Potential & Dream 'BUT' Very Distant Reality

I wonder how many readers of this blog have ever used Indian Railways but when I first saw the water mug (used by Indians to clean their derrière) tied to chain using a miniature lock – the contraption far heavier than the mug itself, I wondered, A country where a petty mug needs protection – what’s the future of our future and who will protect it with which harness or security.

The answer is a big ‘NO-ONE’.

This little example is to set the scene for this piece and hopelessness that persists because of a generally degenerate attitude of us Indians.

The Government’s 2025 vision is a thing that dreams are made of. Our economy is likely to be 5 Trillion USD, we would have sent missions to various planets by then. And some say, some influential politicians would already have amassed large tracts of real estate on moon and mars by that time, before anyone-else got a whiff.

Nothing shocks me anymore. Bad budget, Irresponsible statements by politicians, the abject neglect of our beautiful nation by its custodians – Nothing. I have set my expectations so so low that I am generally happy and satisfied with my environment but yes I do get surprised more than often.

The recent reduction of taxation on Electric Vehicles (EV) was one such moment recently.

Not only was it a dichotomy to the present state of industry and the automobile sector, it was a reflection of the cluelessness of the ‘powers that be’, making policies that are likely to have a significant impact on this nation and eventually on our lives.

The automobile sales (combination of 2 and 4 wheelers) are down 30-40% in the last few qtrs., most of the auto plants are now going through planned prolonged shutdowns and analysts and economists predict hundreds of thousands of people losing jobs in the automobile industry alone.

The EV situation is akin to – Doctors planning to prep, a deeply wounded athlete, (who’s just reached the ER with a severe sports injury) for the next athletic event rather than providing him with the immediate treatment and putting him on a ventilator to save his life at that instance.

EVs are the future – no doubt. And while we are staring at fast depleting fossil fuels across the globe, the world will have to find alternate sources of assimilation of energy through solar, nuclear and hydro, but not unless there is a systemic evolution of infrastructure, culture, attitudes and character of nations.

For EVs to be fully implemented and assimilated into peoples lives – far before the crude is fully depleted and people still preferring the traditional internal combustion engines, the governments of various countries esp ‘The’ densely populated India, a network of charging stations, infrastructure to support, sell, repair and recycle has to be created, maintained and sustained. It’s a paradigm shift in the lifecycle of a nation that has to be effected with multiple catalysts not just a random reduction in sales tax.

A nation where a small 500 mts flyover takes forever to build – if it doesn’t fall off during construction ala Calcutta how on earth do we expect the EV infrastructure to take shape/establish in a nation where everything moves at a snails pace unless 2025 was a misprint in place of 3025. The idea and vision does solicit an entry into the Audacious Project List but then……

I am reminded of the vandalism on the first ever superfast luxury train Tejas where the people in the train destroyed the TV screens and stole anything that could be ripped apart and stolen and people outside simply practiced their cricket and bowling skills by throwing stones and breaking the panes.

Approx 2 yrs ago one of the projects that I was overseeing was vandalized by local goons on an alleged assumption of land encroachment (to the extent of .0055 cents approx. equal to the size of a shirt button). The protectors of their self defined virtuousness damaged property worth approx. 7 Cr that took 2 more years to rebuild and operationalise while the bank interest on the entire project kept piling up. All of these guys are walking scot free and still doing the narebazi. Till the time the corruption and ‘I can get away’ attitude from mind and souls of the citizens isn’t taken out through swiftly enforceable laws – the future is bleak.

Now imagine the effort to establish a Pan India network of charging fields, hard shoulders alongside the freeways and highways and the actual charging contraption that involves a pole, wire, socket and a network of charging grid or whatever.

Perhaps all the unemployed people from the present day automobile industry could be employed as security guards to protect these charging stations.

Sadly, where we need a chain and a lock to protect a petty mug inside a train toilet, we would need a far more robust strategy, execution abilities, set of security protocols and infrastructure even before we embark on this EV journey.

In the meanwhile can someone stop dreaming and look at the bleak present state of liquidity, employment, infrastructure and the massive slowdown that seems to have gripped the nation and its industry.

Follow manu on twitter @manurishiguptha
Manu also writes for Huffington Post

Why a NDA loss might actually be good for the Stock Markets, Investors and India

Markets seem to have a mind of their own and have historically demonstrated that they discount the future far ahead in their present values. Perhaps that explains why Foreign Institutional Investors have pumped in close to 10 Billion USD in 2019 alone whereas they withdrew almost the same in 2018 from Indian markets and barely invested a net total of 2.6 Billion USD in 3 years (2015 2016 and 2017).

Markets are almost certain that Mr. Modi will come back with a resounding victory and obviously for anyone vaguely connected to the markets, one cannot fathom a NDA loss.

But hang on! History is a great teacher and I make my argument that an NDA loss might actually be good for sharp investors and for the economy. When the obvious doesn’t happen, markets perform better. Lemme explain..

Stock Markets

The stage had been set in 2004 for a Vajpayee comeback. India was shining and just to prove this point, it is believed that close to 500 Cr (approx. 109 Mill USD at that time) was spent by NDA in 2004 and on that historic day of 13 May 2004 as the results started pouring in, the obvious didn’t happen – markets crashed from a high of 10^th May 2004 to a low just 7 days later by a whopping 28.4%. That’s some fall in 7 days for a size of Indian economy. That was the lack of confidence in UPA or Congress+allies at that time. Yet from the low on 11^th May 2004 to the same years high, the markets rose by 69% in just approx. one year. And from the same low (1292 Nifty on 17 May 2004) went on to rise all the way by 392% by 2008 (to 6357 sometime in early 2008).

I still horrifically remember a CPI leader A.B Bardhan (the moment he realised that CPI would end up being an important ally of UPA) on national television saying “to hell with divestment of PSUs and to hell with the economy, and within minutes the markets were locked in lower circuit. God rest his soul in peace. He did succeed in causing a serious consternation with his irresponsible statement on that historic day.

India still shone irrespective of the government. And whilst the obvious didn’t happen in 2004, the investors ended up making tons of money and the wiser ones who weren’t in love with their stocks and could muster the courage to buy when India allegedly stopped shining in May 2004 and sell sometime in early 2008 smiled all the way to their banks.

In 2008 the UPA govt took some stand on the nuclear deal, survived a near death experience when the now defunct CPI withdrew its support and the general public at large was not expecting the Manmohan Sigh Govt to scrape thru in the 2009 polls. In so many years nothing happened on the nuclear front, no new reactor came to be made and nothing changed for the nuclear energy landscape of this country……………….

But Boy.. +- 4,5 days from 16^th May 2009 (election results date) the markets went up by 18% around the result time and eventually up by 50.6% in that year alone from the lowest point. And 90.3% in the next 5 years till sometime in 2014.

When the obvious doesn’t happen investors make money and governments have little or no role to play in how the markets and the economy performs.

Acchhe Din started on the 16 May 2014 when Mr. Modi stormed against all odds to become the 14^th PM of India. And that year, because he was the obvious choice and in line with expectations of the nation, the markets rose a mere 7% in +- 4-5 days of the election results and a mere 66% in subsequent 5 years of his Prime Ministership.

I have always believed and the same has been historically and statistically proved that the best prime minister can add 50 basis points to the GDP of a democratic nation and the worst can at best (with great effort) shave off no more that 50 basis points off the GDP.

Now just imagine if NDA was to lose this election against the common belief of the nation, what all opportunities would that scenario throw for the prudent and the hungry investor.

Real Estate

Between 2004 and 2008 , people could buy an apartment or a piece of land in the morning and sell it at a neat profit in the evening. That was the kind of frothiness that existed in the real estate market. Brokers in Gurgaon roaming around in antique scooters in 2004 were driving Hummers and Porches by 2008.

The global recession in 2008-2009 didn’t help but the real estate kept going up. The economy progressed at a better than expected rate despite a financial crisis that, some say, was the worst in 100 years.

Real estate that was always considered a safe heaven and an asset class giving guaranteed return bled to death between 2014 and 2019. Some of my friends who bought prime real estate in Gurgaon and Delhi and Bangalore aren’t able to sell their assets at 70 cents to a dollar after holding their apartments and real estate for 5 years.

The point is – NDA has been a disaster for the real estate market that has historically been a safe heaven and some estimates say that the unsold inventory of apartments at a national level is at approx. 7 years. The top 7 cities have an unsold inventory of approx. 700,000 apartments.

A recent article in the Mint pegs UPA II to be significantly ahead of NDA II in almost all parameters in spite of the worst recession of 2008 and oil at lifetime high during that period.

Obviously much is left to be desired from the performance of this Govt wrt to real estate.

Corruption

Genetic mutations (Darwins theory of evolution) occur over hundreds of years. Character of homo sapiens cant be changed overnight. India over the last 100 years (reasons unknown) became a seriously corrupt nation. NDA tried hard to remove corruption overnight - Stricter policy of Aadhaar, Demonetisation, Watertight rules laid down by MOCA and GST.

Any nation across the planet would have hailed these steps as revolutionary and positively earth/nation shattering. But we poor Indians just couldn’t cope up with this setback. Majority of the people were not ready to weed out corruption or stop dealing in cash or deal in real estate without cash.

Result - : The growth of this nation, Vibrancy in the real estate market (a measure of national growth) and the common man suffered. And suffered hard. Because no one knew how to use the digital means and banking effectively. And this inherently smart and corrupt nation wasn’t ready for this dramatic shift and that’s why the entire demonetised currency found its way back into the system (as people figured out ways around this), much to the surprise of the Powers that Be.

Corruption is the engine of growth for a nation like India and ‘cash economy’ the fuel in it. NDA tried to remove both in a dramatic manner and displeased the nation. The preceding governments allowed a certain free run to everyone across the board (individuals and corporations) and the nation progressed. Cut this fuel supply and everyone suffers.

It is anyone’s guess about the benefits of extolling the virtues of corruption in a diverse, large and a disorganised country like India.

Jobs

This has become a contentious issue in the last few months. Some leaked reports (authenticity unconfirmed) pegs India’s joblessness at 45 year high. Have a heart,… this is bound to happen. The Govt has endeavoured to change the character of the nation overnight and removed the grease (corruption and cash) that drives the engine. How can anyone expect the nation to thrive? And perhaps that’s the reason why most of the citizens of India are roaming around like headless chickens and putting the NSSO in a spot because they released a report that was a true reflection of the state of the nation.

Alongwith the issue of jobs, everyone is talking of the rural distress. We guys living in urban cities can neither see the distress nor feel it. But speak to an Uber driver, or a ricksawwallah, or a vegetable vendor – the guys are in trouble. No one is feeling prosperous or happy. People love Mr. Modi, they say he is a man with a mission and a clear intent but the distress hasn’t reduced. Approx 12000 farmers commit suicide each year because of financial difficulties. For us urbanites, it’s just a statistic. But what a shame that a nation with its bedrock of progress and prosperity that was based on agrarian economy is in shambles. The farmers that feed the nation are happy to destroy the crop and give up farming because selling it to the middle man is more expensive. Forget 12000 suicides – even a single suicide by any farmer should be a national issue requiring attention from the topmost echelons of politics and strategy (read niti aayog or whatever).

I just read that the food inflation is at a 27 year low. Isnt that counter intuitive – if the population and fuel prices are increasing and area under cultivation is decreasing, such low inflation only means 2 things – either our supply chain management has become hyper efficient or the farmer isn’t getting his due. 

The final Take :

If the obvious happens, which is the NDA win, the markets and the economy isn’t going anywhere – for Indian stock markets are trading at 28-30 times their earnings that make the markets one of the most expensive in the world. If at all - these will come crashing down unexpectedly and against everyone’s wishes when the euphoria is over.

But if a majority of Indians doubt the promise of ache din, and begin to question the 15 lacs that were to come to our accounts, and the regime actually changes, the storm in the tea cup might actually bode well for all of us.

Ye Indians! – figure our where your bets are.

Manu also writes in the Huffington post

Earlier articles that created a flutter…..

In Defence Of Vijay Mallaya – The King of Good Times

‘Skin in the Game Reforms’ – Game changer in the Asset Management World

The Invaluable role of Chief Business Obstructers in the modern corporate world

Follow Manu on Twitter

In Defense of Vijay Mallaya - The King Of Good Times

Disclaimer : I only know of Vijay Mallaya thru information available in public domain. I feel sorry for the few of his employees (who had to take their lives in distress) and their families.

I have come across more than a few people who used to tell me with an accent, pseudo enough, that they only flew kingfisher and took pride in it. The parties that Mallaya threw and the host that he was, made national news and was hot topic among the socialites during the man’s good times.

All his alleged friends turned critics who have now denounced him and written him off – I personally feel, have neither been his friends, nor ever accompanied him to the shoot of the famous kingfisher calendar and maybe due to that have felt jealous enough to see him wrapped by young damsels – perhaps often a third his age.

His nemesis was his blatant show of his hobbies even during the times that were bad for the king of good times.

But lets get the record straight. We know that he owes some 1 billion USD approx. 6000 to 7000 INR Crores to the banks, and the banks are claiming some 1.3 Billion USD as recovery of dues including interest. That he left the country in a hush was definitely wrong, perhaps his own interest in General Knowledge was poor for he was a small ignorable fish in the pecking order of defaulters even on the day he fled India.

But what a shame on the fugazi of a system of political patronage in India that a well meaning entrepreneur cannot fail and irrespective of all past successes one failed business decision brings down the edifices of success and remarkable history.

Just imagine that Indian banks are happily taking haircuts under the aegis of the government and are made to own 51% of Jet airways and I fail to understand why Jet wasn’t meted the same treatment as Kingfisher.

If the promoters of top defaulting companies and siphoning agents of this country can still continue to thrive and enjoy and use the sloppiness of our legal system to wade their way through and still lead luxurious lives – something in this nation isn’t right while the financial systems and institutions of this nation are on their knees.

Essar has made a mockery of the system by trying to skittle the NCLT process by throwing in financial googlies without any locus standi. If they actually had the monies to clear off their debts, why did they default in the first place. Shouldn’t just this statement be enough to punish them for their deeds or intentions?

And yet we cant stop vilifying Mallya who was driven to elope inspite of making infinite efforts to keep his airline afloat, to make an effort after effort to persuade the government to change policies to make airline business viable, to believe in his conviction to run a world class airline and giving personal guarantees to raise debt for his beliefs.

Different strokes for different folks – is what the broken political value system of this country stands for. Crony Capitalism, Promoter Banker nexus (a’la ICICIdeocon) must have shaved a percentage points off our GDP.

If Mallaya is to be made a global spectacle of bringing a defaulter back and hung out to dry, shouldn’t our government or the powers that be, be putting atleast 5 dozen top defaulters behind bars and setting an example immediately. Mallaya’s debt seems like a small speck in the ocean of frauds and delinquencies in the Indian Banking space.

And yet big defence contracts worth tens of billions of dollars are being doled out to the very people or their companies who are not in a position to pay a couple of million dollars to their vendors in other businesses and are declaring bankruptcies. Isnt this a sham of gargantuan proportion.

It would be interesting to watch how the top indebted companies fare over the next decade as it is quite possible that most of these are hiding behind the fine art of evergreening their debt. Uday Kotak mentioned in his article of June 2018 that the NPAs of Indian banks could well be over 150 billion USD and we all know that the real number could be much much higher.

Give it to the Mallaya - atleast for academic interest - that :

He brought order to Indian liquor industry and created the worlds largest liquor company (by cases)

Took on some of the biggest global brands and had the audacity to buy some top liquor brands globally.

It would be worthwhile to calculate the downstream taxes paid by United Spirits and United Breweries over the last five decades.

Hubris makes people do wrong things at wrong times and Mallaya was wrong to have called Enrique for his 60^th while his employees were suffering for non-payment of salaries. He should have kept a low profile while his troubles were surmounting and demonstrated remorse and an intent to resolve.

And fear after hubris made him to run away for he was riding a tiger from which, he couldn’t get off.

I think more than a few times Mallaya has offered to pay the entire principle back to the banks if he is given time to resolve. On the one hand the financial and administrative machinery of this nation is taking haircuts on delinquent loans to the extent of 30-50 billion dollars and on the other it is hesitant to allow a guy to make an amend to the only mistake he made in his life - of founding an airline.

For Mallaya – Come back, satiate the ego of the government by going behind the bars for some time and take control of your businesses and assets and genuinely say sorry to your ex-employees. You can still bounce back as you are in a business that never suffers from an economic cycle or a recession.

For Govt – Have a fair policy that’s similar for everyone, allow this man to set his business straight, leave an impression that its perfectly fine for an entrepreneur to fail and restart. By sending that message, you would have set an example for an ocean of entrepreneurs, some of who fail and want to succeed and keep trying.

Because say what you may – Mallaya was the  ‘king of good times once upon a time’.

Manu also writes in the Huffington Post

Follow on twitter @manurishiguptha