According to a recent SC judgement, lenders/pledgees are not owners of shares, can’t exercise voting rights once pledged shares are invoked
Those who have invoked pledge shares in Dish TV may not be able to exercise their control over the company in any manner or be able to exercise their voting rights in the company after invoking pledged shares, according to a report by proxy advisory firm Stakeholders Empowerment Services (SES). YES Bank along with IDBI Trusteeship Services owns 25.63 per cent stake in Dish TV through invocation of pledge shares. SES said that it has come across a recent Supreme Court judgement, which effectively limits the rights of lenders on invoked shares. In the understanding of the proxy firm, lenders like Yes Bank and others (together holding 40+ percent of equity in the Company) are not owners of shares and cannot exercise voting rights. Yes Bank held a 24.78 per cent stake in Dish TV India as on March 31, according to BSE data. HDFC has a 4.73 percent stake, and IndusInd Bank 3.78 percent.
A Supreme Court (SC) order, dated May 12, in a case between PTC India Financial Services and Venkateswarlu Kari has been cited by SES. SC said lenders or pledgees are not owners of shares and cannot exercise voting rights once the pledged shares are invoked. SC has observed that following the invocation of pledge shares, lenders only become beneficial owners in depository records only to facilitate the sale of shares. The lender does not become the owner and cannot sell shares to itself as it is prohibited in law. Till such time a third-party sale is effected, a pledger can redeem shares any time by repaying the debt, the SC judgment said.
Share pledge ‘only a loan’
Share pledge is nothing but a loan against shares as collateral. The pledge can be invoked by the lenders as per the agreement or when money is not returned in stipulated time.
“Based on the above observations of the Supreme Court, it can be said that even after invocation, Yes Bank has not become absolute owner of shares, and pledger (Dish TV) still has a right to redeem pledged shares till sold to a third party. Therefore, it is absolutely logical to assume that all the provisions of pledge agreement survive even today, notwithstanding that in depositories records, Yes Bank is shown as a beneficial holder rather than as a pledgee,” SES said in its report. Yes Bank had acquired the shareholding in DishTV as a result of the invocation of pledges in three tranches between May 29, 2020, and July 9, 2020. While this would have triggered an open offer under normal circumstances, YES Bank, being a scheduled commercial bank, had availed of the general exemption under the Takeover Regulations on grounds that it had acquired the shares pursuant to invocation of pledged shares. Soon after invocation of the pledge shares, Yes Bank proposed a revamp of the DishTV board.
Dish TV invokes SEBI
Dish TV has asked SEBI to investigate the actions of YES Bank in proposing the revamping of the board. According to Dish TV, the exemption would not be valid the moment the bank sent a notice in September to oust the existing board members and appoint new directors nominated by the bank as it amounted to taking control of the company. “The company believes that the actions of YES Bank in sending the September 3 notices, September 9 notices and the EGM notice are in violation of the Takeover Regulations. If YES Bank’s proposal to appoint certain individuals to the board of the company, together with the resolution(s) proposed for removal of the existing directors (except for Anil Kumar Dua), is given effect, it shall lead to YES Bank acquiring control over the company,” Dish TV has said in its letter to SEBI. The company said the notices would have necessitated an open offer to be made by YES Bank for acquiring shares from the public shareholders. “No such public announcement has been made by YES Bank, and thus, the aforesaid notices are in violation of the Takeover Regulations,” Dish TV said. Further, Dish TV said that even if YES Bank makes an open offer, there remains a possibility that the shareholding of YES Bank in the company may cross 30 per cent “which shall be in complete violation of Section 19 of the Banking Regulation Act, 1949 (BR Act). Section 19 of the BR Act prescribes that no banking company shall hold shares in any company, whether as pledgee, mortgagee, or absolute owner, of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less,” Dish TV said.
Dish TV and YES Bank have been at loggerheads ever since the bank sent a notice requesting for an extraordinary general meeting (EGM) of the shareholders to seek approval for its proposal to revamp the board of the company. The EGM will now be held on December 30.
SES report says that since Yes Bank is not a rightful owner, it is just a guardian of the shares under pledge agreement and waiting to sell to realise money. Since a pledge agreement doesn’t become nullified after invocation, all the terms and conditions of the agreement remain applicable to both pledgor and pledgee. Therefore, invocation alone does not and cannot change anything.
“Hence, even if Yes Bank claims beneficial ownership of the shares after invocation for the sale, adopting the harmonious interpretation, this does not translate to transfer of general rights over the pledged shares,” the SES said.
“As a result, SES is of the view that voting rights associated with the pledged shares still lie with the promoter. In effect, nothing changes upon invocation as far as respective rights are concerned.”
‘No voting rights for lenders’
“If the voting rights are granted in the pledge agreement ab initio, there is a possibility that it might trigger open offer under Regulations 3(1) of SAST (Substantial Acquisition of Shares and Takeovers). Unless specifically exempted, I am not sure how voting rights can be severed from ownership rights. How can lenders exercise voting rights without being the owner?. The only way a third party can exercise voting rights is by instrument of proxy and in no other way. The law needs to be amended in due course,” JN Gupta, founder SES, told Business Line.
The SC order has not stated the beneficiaries or non-beneficiaries of the law. It has to be seen how banks and other stakeholders interpret this decision in the upcoming cases, Gupta says.