SEBI penalises two promoter entities of Yes Bank Limited namely – Morgan Credits Private Limited and Yes Capital (India) Private Limited

By an order dated 31st March 2020, Securities Exchange Board of India (SEBI) imposed Rs.10000000 penalty on two promoter entities of Yes Bank Limited (YBL) namely – Morgan Credits Private Limited (MCPL) and Yes Capital (India) Private Limited (YCIPL). These two entities failed to disclose encumbrance or pledge on their shareholding in YBL. YCIPL had raised ?6300000000 from Franklin Templeton Mutual Fund and MCPL had raised ?9500000000 from Reliance Mutual Fund through unlisted Zero Coupon Non-Convertible Debentures. They had agreed to maintain a borrowing cap or a cover of YBL’s equity shares against the debentures during the subsistence of the debenture deeds. MCPL and YCIPL had not made any disclosures to YBL and the stock exchanges and contended that the transactions in question were not covered within the scope of a pledge. According to SEBI, 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 provisions of Regulations 31(1) read with 31(3) and Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations). SEBI observed the following SAST Regulations require a promoter to disclose encumbrance of its shares and the term 'encumbrance' is to be widely interpreted under the SAST Regulations so as to include a pledge, lien or any such transaction, by whatever name called. Further, through the FAQs, it has also been clarified by SEBI that non-disposal undertakings are also included in such disclosure. It is of significance that it is an inclusive explanation and not an exhaustive one. Thus, any transaction that has the characteristics of an encumbrance, by whatever name called, is to be treated as ‘encumbrance’ and should be disclosed under regulation 31 of the SAST Regulations. the condition to maintain ‘cover ratio’ or ‘borrowing cap’ at all times directly or indirectly as stipulated under terms and conditions of respective Debenture Trust Deeds of YCIPL and MCPL restrict their ability to dispose of the shares of YBL held by them , respectively. This restriction is covered within the scope and ambit of “encumbrance” under regulation 28(3). YCIPL and MCPL have structured the transaction in such a way that though there is no explicit clause on non-disposal of shares, it indirectly has the same effect. The agreement also restrains the ability of YCIPL and MCPL to freely sell/purchase its shares in YBL. This update has been contributed by Harshita Jagwani (Associate). Download Pdf