Yes Bank Case: SEBI Widens The Scope Of Disclosures Around Promoter Shares

In a major order that can have wide implications for promoters who have encumbered their shares, the market regulator has imposed a penalty of Rs 50 lakh each on two promoter entities of Yes Bank Ltd.

The promoter entities — Yes Capital India Pvt. Ltd., and Morgan Credits Pvt. Ltd. — failed to make timely disclosure of ‘non-disposal undertakings’ in relation to their shareholding in the beleaguered lender, the Securities and Exchange Board of India has said in its order.

The two promoter entities had cumulatively raised Rs 1,580 crore from mutual funds through issue of zero coupon non convertible debentures. They had agreed to maintain a borrowing cap or a cover of Yes Bank’s equity shares against the debentures during the subsistence of the debenture deeds.

SEBI concluded that the agreement to maintain a cover ratio was in effect a ‘non- disposal undertaking’, amounting to creation of an encumbrance. By not disclosing it, the promoter entities violated the takeover regulations.

This can have wide repercussions for promoters and debt agreements. SEBI’s order has expanded the gamut of covenants and undertakings which would be considered as an encumbrance. And promoters run the risk of violating the takeover regulations if they fail to make related disclosures, experts told BloombergQuint.

Disclosures On Encumbrance

The takeover code requires promoters to disclose all encumbrances on their shares. This includes a pledge, lien or any such transaction which entitles a third-party to sell or appropriate the promoters’ shares.

Non-disposal undertakings given by promoters amount to an encumbrance as well, as per SEBI’s clarifications on its takeover regulations. Such undertakings would, as per the regulator, include:

• Not encumbering shares to another party without the prior approval of the party with whom the shares have been encumbered.
• Non-disposal of shares beyond a certain threshold so as to retain control.
• Non-disposal of shares entailing risk of appropriation or invocation by the party with whom the shares have been encumbered or for its benefit.

In Yes Bank’s case, the promoter entities argued that the debenture trust deeds did not contain any explicit clause on disposal of shares. None of the parties contemplated the clauses as an encumbrance and hence, SEBI cannot expand their meaning beyond their intention. And lastly, the takeover regulations only contemplate disclosure on encumbrances having aspects similar to a lien or pledge.

But SEBI rejected these arguments and held that clauses mandating maintenance of a cover ratio amounted to an encumbrance. Covenants restricting transfer of underlying shares against debentures create an encumbrance, and hence require disclosure, SEBI’s order said.

Impact On Promoters

SEBI has tied the need of disclosure around encumbrances with the underlying effect on shares of a listed entity. As prices in equity markets are determined on the basis of information, investors could suffer due to a lack of disclosure, SEBI’s order pointed out.

Any covenant or undertaking which restricts the ability of a promoter to transfer shares or clauses which even remotely entail the risk of a forced sale will now be considered within the ambit of the term “encumbrance”, Vishal Yaduvanshi, partner at Indus Law, said.

Sumit Agrawal, partner at Regstreet Law Advisors, said the principle which SEBI has laid down is that investors need to know about any restriction on the title of shares, connection of shareholding with tradability and market price of shares.

Yaduvanshi pointed out that apart from debt agreements, certain other agreements by promoters of listed entities could also be impacted.

“Clauses pertaining to rights of first offer or refusal, put/call option contracts, or covenants such as asset cover ratio which have the effect of restricting transfer or forcing sale of shares will now need disclsoures as well,” Yaduvanshi said.

Such a wide interpretation of “encumbrance” can adversely impact the ability of promoters to tide over short-term liquidity issues.

Once promoters start making these disclosures, it sends a signal to the market that the company is in distress, which may not always be the case, Ajay Shaw, Partner in DSK Legal, told BloombergQuint.

He pointed out that SEBI’s interpretation would mean any transaction by a promoter having some link to his holding in a listed company must be disclosed. For instance, a creditor grants an unsecured loan to a promoter on the basis of a document demonstrating his networth which includes his shareholding in a listed company. Can the mere use of such a document by a creditor amount to encumbrance, he asked.

This would severely impact promoters ability to tide over short-term liquidity situations, he said.