Author: Ravinandan Bajpai, School of Law, University of Mumbai
Abstract
YES BANK was once considered one of India’s fastest-growing private banks. However, by 2020, it faced an acute liquidity crisis, leading to a complete regulatory takeover. The scam involved a pattern of risky lending, underreported non-performing assets (NPAs), and alleged money laundering. The arrest of Rana Kapoor, the former CEO and MD of the bank, marked the beginning of a legal battle against financial misconduct. This article studies about the background of the scam, the legal proceedings that took place and the rules and laws that were applied.
Introduction
The YES BANK Scam of 2020 stands as one of the most significant financial frauds in Indian banking history. The case involved allegations of mismanagement, fraudulent loans, and money laundering against the bank’s founder, Rana Kapoor. The crisis led to severe liquidity issues, requiring the Reserve Bank of India (RBI) to intervene immediately in the matter with a moratorium and a bailout plan. This article examines the background of the scam, the legal proceedings, relevant laws, and its broader impact on India’s banking sector. The case highlights the urgent need for stricter corporate governance and regulatory oversight to prevent such financial misconduct.
Background/Facts of the Case
1. The Rise of YES BANK
Founded in 2004 by Rana Kapoor and Ashok Kapur, YES BANK aimed to become a leader in private banking. By the mid-2010s, it was recognized for its rapid expansion and aggressive lending practices providing loans to retails, corporate and MSME clients. The bank provided substantial loans to corporate clients, including infrastructure and real estate firms. YES BANK was listed on the stock exchanges after the successful listing of its IPOs. In 2008 the co-founder and non-executive chairman Ashok Kapur was killed at Hotel Trident in the 26/11 Mumbai Terror Attacks.
2. The Unfolding of the Crisis
Between 2017 and 2019, concerns emerged about the bank’s financial stability due to rising Non-Performing Assets (bad loans). The RBI flagged multiple governance issues and forced Rana Kapoor to step down in 2019.The bank continued to deteriorate, leading to a moratorium by the RBI on March 5, 2020. After an investigation by the Enforcement Directorate (ED) it was found that the co-founder Rana Kapoor and DHFL promoters Kapil and Dheeraj Wadhwan embezzled of Rs. 5,050 Crore by the means of suspicious transactions.
3. Key Allegations Against Rana Kapoor and his aides
The central investigation agency i.e. Enforcement Directorate unfolded that YES BANK has bought the debentures from DHFL of worth Rs. 3,700. When DHFL gained cash liquidity then it gave a Rs. 600 Crore loan to DOIT Urban Ventures which was a company owned by Rana Kapoor and his family beneficially, it was also revealed that the Rs.600 Crore loan was passed by DHFL against the substandard collateral i.e. an agricultural land of real worth Rs. 39.68 Crore which was inflated to the worth of Rs. 735 Crore by considering the conversion of that agricultural land to a residential land.
It was also found that YES BANK has processed a loan of Rs. 750 Crore to M/s Belief Realtors Private Limited which was beneficially owned by Wadhawans (promoters of DHFL) for the purpose of completion of its Bandra Reclamation Project in Mumbai. Investigations have revealed that the whole amount was siphoned off by the traitors without spending a penny on the real project for which the money was sanctioned.
Proceedings in Court
1. Arrest and Charges
On March 8, 2020, the Enforcement Directorate (ED) arrested Rana Kapoor under the Prevention of Money Laundering Act (PMLA), 2002. The investigation revealed that Kapoor and his family allegedly received ₹600 crore in kickbacks from DHFL through shell companies formed by Rana Kapoor. The Central Bureau of Investigation (CBI) also filed charges of fraud and criminal conspiracy against Kapoor. In toto 8 cases were registered against Rana Kapoor from CBI and ED.
2. Bail Applications and Denials
Kapoor’s legal team filed multiple bail applications, citing health concerns. However, courts consistently denied bail, citing the severity of the allegations and risk of tampering with evidence. Kapoor was lodged in Taloja Jail in Navi Mumbai and after many trails he finally secured bail in all the 8 cases against him and was released from the jail after 4 years.
3. Role of the Supreme Court and Other Authorities
Supreme Court and Bombay High Court Oversight: Given the national impact of the YES BANK crisis, both the Supreme Court of India and the Bombay High Court closely monitored the case. They played a crucial role in ensuring due process, handling public interest litigation (PILs), and addressing regulatory challenges arising from the bank’s collapse. The courts were also instrumental in overseeing the implementation of RBI’s restructuring plan for YES BANK.
Serious Fraud Investigation Office (SFIO) Inquiry: The SFIO, under the Ministry of Corporate Affairs, conducted a detailed forensic audit of YES BANK’s financial transactions. It investigated fraudulent loan approvals, money siphoning, and potential violations of the Companies Act, 2013.
Securities and Exchange Board of India (SEBI) Action: The SEBI, responsible for regulating the securities market, examined insider trading activities, stock price manipulations, and governance failures at YES BANK. It took action to protect shareholders and prevent further investor losses.
Rules and Laws Involved
Prevention of Money Laundering Act (PMLA), 2002
The Prevention of Money Laundering Act (PMLA), 2002 is an Indian law aimed at preventing money laundering and confiscating proceeds of crime. It empowers authorities like the Enforcement Directorate (ED) to investigate financial crimes and prosecute offenders involved in money laundering activities. It was used in this case in order to prosecute Kapoor and his allies for money laundering and illegal financial transactions.
Indian Penal Code (IPC), 1860
The Indian Penal Code (IPC), 1860 was the primary criminal law in India, covering offenses like theft, fraud, murder, and corruption. It defined crimes, prescribed punishments, and ensures legal order, forming the backbone of India’s criminal justice system. It is now replaced by Bhartiya Nyaya Sanhita, 2023. The major sections of IPC, 1860 under which Rana Kapoor and his aides were held accountable are as under:
Section 120B (Criminal Conspiracy): Kapoor was charged with conspiracy to commit financial fraud.
Section 406 (Criminal Breach of Trust): Misuse of depositor funds.
Section 420 (Cheating and Dishonest Inducement): Fraudulent transactions with corporate borrowers.
Banking Regulation Act, 1949
The Banking Regulation Act, 1949 governs the regulation, supervision, and control of banks in India. It empowers the Reserve Bank of India (RBI) to oversee banking operations, ensure financial stability, and take corrective actions, such as imposing restrictions or restructuring failing banks. Enforced by the RBI to take control of YES BANK’s operations and implement restructuring.
Companies Act, 2013
The Companies Act, 2013 governs the incorporation, regulation, and functioning of companies in India. It aims to ensure corporate transparency, accountability, and investor protection while introducing stricter compliance measures, corporate governance norms, and penalties for fraud. Provisions regarding corporate fraud and misgovernance were applied against YES BANK’s board members.
Conclusion
The YES BANK scam highlighted major loopholes in banking oversight and corporate governance in India. While Rana Kapoor’s arrest and the bank’s restructuring under SBI’s leadership helped stabilize the situation, the case exposed the risks of aggressive and unethical banking practices. Moving forward, regulatory bodies like the RBI, SEBI, and ED must work towards preventing similar crises through stricter compliance measures. The case serves as a stark reminder of the dangers of unchecked financial misconduct in the banking sector.
FAQS
1. What was the main reason behind the YES BANK crisis?
The primary cause was mismanagement, fraudulent loans, and underreported NPAs, leading to a severe liquidity crisis.
2. How did the RBI intervene in the YES BANK crisis?
The RBI imposed a moratorium, restricted withdrawals to ₹50,000 per account, and later brought in SBI to lead a ₹10,000 crore bailout.
3. What happened to Rana Kapoor?
He was arrested in 2020 under PMLA, 2002 and continues to face multiple criminal and financial fraud cases.
4. Is YES BANK still operational?
Yes, after the bailout and restructuring, YES BANK continues to function under new management, with SBI as the largest stakeholder.
5. What measures have been taken to prevent future banking frauds?
•The RBI has introduced stricter lending norms and corporate governance policies.
•Greater scrutiny on NPAs and risk management practices.
•Enhanced regulatory oversight on private banks.
