How the FPO price of YES Bank implies a huge dilution for existing investors

In a bid to draw in investors for its follow-on public offer (FPO), YES Bank has set the price band at Rs 12-13 per share — half the current market price of the stock. While such a steep discount could appear attractive for new investors, it has led to a steep dilution in equity base for existing shareholders in the bank.

For the Rs 15,000 crore that YES Bank is looking to raise from the FPO, the price band would imply issuance of fresh shares of Rs 1,154-1,250 crore. Given that the existing number of outstanding shares in the bank is around Rs 1,255 crore, the FPO would imply a 50 per cent dilution in existing base.

Under the reconstruction scheme, SBI invested Rs 6,050 crore, while seven other lenders invested Rs 3,950 crore — ICICI Bank (Rs 1,000 crore), Axis Bank (Rs 600 crore), Bandhan Bank (Rs 300 crore), Federal Bank (Rs 300 crore), Kotak Mahindra Bank (Rs 500 crore), IDFC Bank (Rs 250 crore) and HDFC Ltd (Rs 1,000 crore).

Currently, SBI holds 48 per cent in YES Bank, ICICI Bank and HDFC Ltd (8 per cent each), Axis Bank (4.8 per cent), Kotak Bank (3.6 per cent), Bandhan Bank (2.4 per cent), Federal Bank (1.9 per cent) and IDFC Bank (1.7 per cent). Under the reconstruction scheme, SBI can hold a maximum of up to 49 per cent in YES Bank, and not reduce its holding below 26 per cent before three years.

The FPO issue would mean a straight 50 per cent dilution for these existing shareholders in their equity holdings and 15 per cent dilution in book value (per share). Of course, this is assuming that they do not buy additional stake in the FPO offer.

However, the Executive Committee of the central board of SBI has approved a maximum investment of Rs 1,760 crore in the FPO. This would mean that SBI’s stake in the bank would come down from the current 48 per cent to about 30 per cent.

Roping in new investors through the FPO will lower the burden of existing lenders, including SBI, to pump in additional capital.