Clipped from: https://economictimes.indiatimes.com/prime/corporate-governance/dishtv-yes-bank-dispute-why-lenders-businesses-are-wary-of-apex-courts-ruling-on-pledged-shares/primearticleshow/92346438.cms
SynopsisThe Supreme Court’s judgement on PTC India has extensively examined the concept of pledged shares, rights of pledgers, pledgees, and the consequences of invocation. The ruling may play out even in the DishTV-Yes Bank case. Legal experts say it could take away Yes Bank’s voting rights in DishTV. Will the verdict change equations between lenders and borrowers?
The two-year-old legal battle between DishTV and Yes Bank — over the exercise of voting rights accrued to the lender after invocation of pledged shares — could well be reaching a tipping point. Thanks to a Supreme Court judgement on May 12 in an unrelated case involving PTC India that examined the concept of pledge, the right of pledger and pledgee, and how such rights change — or don’t change — following invocation of pledged shares.
According to legal experts, the DishTV-Yes Bank dispute could put to test some key observations made by the Supreme Court in the PTC India case. However, what is making both businesses and the lending community apprehensive is that the apex court’s interpretations could unsettle some of the ways in which they deal with each other.
Legal experts feel this could also trigger a spate of amendments in laws and regulations around pledging of shares. The laws that are likely to undergo fresh scrutiny include the Depositories Act, 1996, the Sebi (Depositories and Participants) Regulations, 2018, and the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, they add.
The trouble at DishTV
Already emboldened by the observations made in the Supreme Court judgement in the PTC India case, DishTV has renewed legal efforts to restrain Yes Bank from participation in its forthcoming extraordinary general meeting (EGM) on June 24, 2022. The agenda items include, re-appointment of several board members, including that of Jawahar Goel as managing director of the company for the next five years.
Incidentally, Yes Bank — the single-largest stakeholder with 25.63% stake in the company after invocation of the pledged DishTV shares — had in September 2021 asked for reorganisation of the board, citing mismanagement in the business. It, too, had called for holding an EGM to effect changes in the board. However, the DishTV promoter group, with 5.9%, has been thwarting any such move that would lead to a change of control. Their contention has been that the invocation of pledged shares does not give the lender the right to control the company and make changes in the management. Yes Bank, however, contended that its right to vote was also backed by a contractual agreement between the two parties.
The current relationship goes back to 2018, when the DishTV promoter group pledged its shares to raise funds to bail out parent company Essel Group. Subsequently, following non-payment of dues, Yes Bank invoked the pledged shares in May 2020, becoming the single-largest owner in the direct-to-home (DTH) service provider.
DishTV promoters have been contending that Yes Bank should choose to play one of the two roles: either a lender, or an investor. If it wants to act as an investor with more than 26% stake, Yes Bank should come out with an open offer Sebi regulations, and up its stake in the company, contended the Essel group.
Last Friday, the Bombay High Court rejected DishTV’s plea to restrain Yes Bank from voting in the June 24 EGM, where the DishTV legal counsel cited the recent Supreme Court order in the PTC India case. DishTV had also sought the court’s permission to exercise its voting rights with respect to the pledged shares. The Economic Times reported that DishTV is likely to challenge the order in a division bench.
What the Supreme Court judgement says
In its May 12 judgement, the apex court referred to an earlier case to affirm that a pledgee does not have the right of ownership but has a limited right to retain ownership until the debt is paid, and the right to sell after reasonable notice. Further the court noted that the pledgor has the right to redeem the pledge until ‘actual sale’ of the pledged shares.
“The Supreme Court, relying on previous high court judgements, has interpreted the term ‘actual sale’ in Section 177 of the Contract Act to mean a sale to a third-party, and not a sale to oneself,” points out Rajat Sethi, partner of law firm S&R Associates. What it effectively means is that the pledgee cannot sell the share to itself and claim ownership rights over the shares.
Interestingly, the apex court notes that even after invocation of the pledged shares, the pledger has the right to redeem those shares. Thus, in effect, the pledger remains the legal and beneficial owner of such shares till the time the shares are sold to a third party.
“The objective of a pledge is not to purchase a security. Purchase by self constitutes conversion and does not extinguish the pledge or right of the pawner to redeem the pledge,” says the apex-court judgement.
Legal experts point out that the judgement has reaffirmed the distinction between beneficial and registered ownership under the Sebi (Depositories and Participants) Regulations, 2018. If a pledgee registers oneself as ‘beneficial owner’ (BO) in the depositories’ record, the purpose is to enable sale of the pledged shares to a third party, not for self-buying.
The judgement is bound to change the way pledges of shares have been understood by the lending fraternity thus far, says P Ravi Charan, partner at law firm Link Legal. This is also likely to discourage frivolous legal proceedings by pledgers, he adds.
Impact on the Dish TV-Yes Bank dispute
In a detailed note analysing the impact of the apex court’s judgement on the DishTV-Yes Bank dispute, proxy-advisory firm Stakeholders Empowerment Services noted that Yes Bank was not the absolute owner of shares, and DishTV still had the right to redeem pledged shares till sold to a third party.
“The judgement could have clarified that the sale of pledged shares by the pledgee to self is fine so long as price discovery is done, and the sale is done having given reasonable notice of sale to the pledger.”
— Rajeev Dewal, legal advisor, Indian Banking Association
The report pointed out that in the light of the Supreme court’s judgement, Yes Bank is not a rightful owner, “It is just a guardian of shares under the pledge agreement and waiting to sell to realise money.” Moreover, the voting rights associated with the pledged shares still lie with promoters of DishTV promoters, it said.
Sonam Chandwani, managing partner of law firm KS Legal, thinks Yes Bank is caught in this disputed position due to the mixed nature of its relationship with DishTV. “The best way out for Yes Bank would be to simplify its role as either the pledgee or the investor with regards to DishTV,” she says.
Lawyers feel this is a positive outcome for lenders, as they are now at liberty to invoke the pledge and safeguard themselves against exaggerated claims with regard to the value of shares or any other value-related disputes.
Opening a Pandora’s box
However, the Supreme Court’s observations in the PTC India case does stir up the hornet’s nest in the lending fraternity. Many question the logic of not allowing a “self-sale” of pledged shares at a fair value.
Commenting in his personal capacity, Rajeev Dewal, a leading lawyer and legal advisor to the Indian Banking Association (IBA), says the judgement is good in theory but has dealt with the issue of sale by the pledgee inadequately.
“The judgement could have clarified that sale of pledged shares by the pledgee to self is fine so long as price discovery is done and the sale is done having given reasonable notice of sale to the pledger,” he says.
Even Ravi Charan feels that given the unique nature of stress in a secured financing arrangement — where even schemes of restructuring promulgated by the banking regulator permit acquisition of shares by the lending fraternity — the bar on the pledgee to sell pledged shares to self at fair value needs to be revisited.
Some lawyers feel if one applies the rationale laid down in the PTC India case, several banks — being depositories — will be affected, as far as voting rights are concerned. “Voting rights are vital in several aspects, accounting for the rightful participation of the owner,” says Chandwani.
There are also several questions around interplay of the Depositories Act and Sebi’s takeover regulations. The apex court itself has called for a review in these regulations in light of its judgement to avoid ambiguity.
Most experts agree that there is a need to align the Depositories Act 1996 with the Indian Contract Act 1872 when it comes to distinguishing between ‘registered owner’ and ‘beneficial owner’.
“The Depositories Act, which is merely a procedural law, needs to clearly subordinate itself to the substantive law — the law of contract. Also, the Depositories Act could specify that depository is merely the share-ledger keeper, and the demat shares with a depository continue to be owned legally by the holder,” says Dewal.
It should note that lien or pledge of shares with the depository is akin to perfection of security created over the shares by the pledge agreement, he adds.
There could be accounting implications of the apex court’s interpretation of rights of pledger and the pledgee. “How should consolidation-related questions be approached in situations where the pledgee has invoked the pledge but not sold the shares to a third party?” asks Sethi.
While the Supreme Court’s decisions hold great value under the legal fabric, there is still scope for a deeper interpretation of the law by a larger bench, feel some experts.
(Graphics by Manali Ghosh)(Originally published on Jun 21, 2022, 02:02 AM IST)
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