THE BLOG
05/06/2014 04:19 pm ET Updated Jul 06, 2014

Investor Confidence and Dispute Resolution

Private and public investment in employment-intensive sectors like manufacturing will likely be priorities, given the rising number of youth who need jobs, irrespective of who wins the parliamentary elections in India. Therefore, essential are clear signals that ensure that investor confidence is not impacted negatively.

A case playing out in the media continuously over the past year highlights that potential impact. It concerns the claims by the current management of India's Yes Bank that the family of its slain Chairman cannot inherit his promoter rights despite his family owning more than 10% of the shares of the Bank, and having very qualified members (see here and here).

That then-Chairman Ashok Kapur was executed in cold blood during the terrorist attack on India's financial capital, Mumbai, in 2008 only compounds the perceived iniquity.

The wording of the Articles of Association of Yes Bank, among India's largest and newest private banks, appears to be unambiguous:

The Articles state that "so long as the Indian partners (Kapur and Kapoor) hold at least 10% of the issued and paid-up shares of the company, (they) shall have the right to recommend the appointment of three directors (of the Board)." The Articles also state that "Ashok Kapur ... shall mean his successors, legal representatives and assigns." Very surprisingly, current Yes Bank management led by Rana Kapoor has been opposing that right of the Ashok Kapur family. Further, the Articles also set out how the Indian Partners can nominate Independent Directors.

In what is seen commonly in banana republics, the board of Yes Bank apparently relying on the opinion of a paid consultant who is also a retired jurist, has interpreted that the Kapur family has no such rights as is set out clearly in the Articles. This is in contrast to established precedent, especially in the case of the Kotak Mahindra (now Kotak) Bank and the transfer of the Chairman position from the late Harish Mahindra to his son, Anand Mahindra, upon Harish's death even though the Mahindra family owned only 4% of the shares of Kotak Mahindra
(see here and here).

Ordinarily, a rapid response from the Central Bank, the Reserve Bank of India (RBI), that has oversight responsibilities on private banks would have solved such disputes. But in India, the Reserve Bank has maintained silence. Such apparent inertia may be perceived by investors to mean that the Articles of Association, that normally would be considered sacrosanct, have no specific value. Naturally, that impacts on investor sentiment. Meanwhile, RBI has set up a committee on bank board governance issues that is to report shortly. Concurrently, there has been speculation on how easily or otherwise RBI Governor Rajan might coexist with the incoming government, and also criticism of his actions as Governor.

Surely, dealing with such cases expeditiously is key to enhancing investor confidence. Just as political campaigns have a rapid-response team, so too should all those with responsibilities for investor confidence have the duty to resolve nagging cases that grind away at belief in an economy.