Japan’s Sumitomo Mitsui Banking Corporation (SMBC) is acquiring a 20% stake in Yes Bank for Rs 13,482 crore, making it the largest cross-border merger and acquisition deal in India's financial sector.

State Bank of India (SBI) and seven other Indian banks, who had bailed out Yes Bank in March 2020, are unloading their stakes to the Japanese lender.

SBI will divest 13.19% of its stake in Yes Bank for Rs 8,889 crore. A total of 413.44 crore equity shares will be sold at Rs 21.50 per share, subject to receipt of all regulatory and statutory approvals by the acquirer. When SBI had led the rescue operations at the request of the Reserve Bank of India (RBI) five years back, it had acquired the shares of Yes Bank at Rs 10 a share.

SMBC will acquire an additional 6.81% from ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, IDFC First Bank, Federal Bank and Bandhan Bank for Rs 4,594 crore. This is at the same share price at which SBI is selling.

With this deal, SMBC will become the largest shareholder in Yes Bank. A unit of Sumitomo Mitsui Financial Group, SMBC is Japan's second-biggest bank. It has total assets of over $1.7 trillion and operates across 39 countries, including 15 in the Asia-Pacific region.

SMBC's investment "marks a pivotal step in our next phase of growth," Yes Bank managing director and CEO Prashant Kumar said. “This investment is a powerful endorsement of our transformation journey and future potential. Over the past few years, our growth has been shaped by the strong partnership and unwavering support of SBI and they will continue to remain a valued stakeholder.”

After the transaction, SBI’s stake in Yes Bank will fall to 10.78%, from 23.97% it held as of 31 March 2024. Currently, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Axis Bank and Life Insurance Corporation of India together hold an 11.34% stake in Yes Bank.

 The stake sale is expected to be completed within 12 months from the date of execution, SBI said.

The purchase will  be the latest major overseas acquisition by a Japanese financial institution. In Japan, interest rates have rock bottomed for years and a shrinking domestic population has made Japanese lenders look at new areas of growth. Last month investment bank Nomura aquired Macquarie Group's US and European public asset management businesses for $1.8 billion and last December Nippon Life Insurance made Bermuda-based Resolution Life a wholly-owned subsidiary for around $8.2 billion, Reuters reported.

The last cross-border deal in the banking sector was way back in 2020, when Singapore-based DBS Group took over troubled Lakshmi Vilas Bank. Ownership restrictions and state domination of the banking sector have acted as deterrent to such kind of deals. As per the rules, foreign direct investment (FDI) caps a single foreign entity's stake in Indian private banks at 15% and voting rights at 26%. However, the RBI has made rare exceptions when it allowed Fairfax to take a controlling 51% stake in Catholic Syrian Bank (CSB) in 2018 and DBS to absorb Lakshmi Vilas Bank two years later.

An acquisition of 26% stake by SMBC would have triggered a mandatory open offer to acquire an additional 25%, as per Securities and Exchange Board of India (Sebi) regulations. 

Earlier, financial daily Mint had reported that SMBC has secured the RBI's go-ahead to acquire 51% in Yes Bank. SMBC would either buy less than 26% in YES Bank and do a merger through a share swap or may buy up to 26% and launch an open offer.

In March 2020, the RBI got a clutch of banks, led by the SBI, to rescue Yes Bank. A capital infusion was planned and SBI committed Rs 7,250 crore while erstwhile HDFC Ltd and ICICI Bank invested Rs 1,000 crore each. Axis Bank put in Rs 600 crore and Kotak Mahindra Bank Rs 500 crore in the equity shares of Yes Bank. IDFC First Bank, Bandhan Bank, and Federal Bank also contributed to the kitty.

Post reconstruction, SBI held a 49% stake in the bank. A three-year lock-in clause was inserted wherein 26% of SBI’s equity investment and 75% of the other seven banks had to be retained for three years.

Currently, SBI and the seven other banks hod 33.71% stake in Yes Bank. Following the stake sale, SBI will hold 10.78% while the other seven will together have 2.93% stake in Yes Bank.

“India represents a key market for us, and we see immense long-term potential in its dynamic and fast-growing economy,” said Toru Nakashima, president & group CEO of Sumitomo Mitsui Financial Group (SMFG), and Akihiro Fukutome, president & CEO of SMBC, in a joint statement. 

SMBC was advised by financial advisors JPMorgan and Jefferies, and legal advisors J Sagar Associates (JSA) and Anderson Mori & Tomotsune. 

Citigroup Global Markets (Citi) acted as Yes Bank’s financial adviser and AZB & Partners (AZB) as its legal advisor.