YES Bank revamp: SEBI not in loop?

KR Srivats New Delhi | Updated on March 16, 2020 Published on March 16, 2020

It’s not only the lakhs of retail shareholders in crisis-ridden YES Bank who were caught off guard by the Centre’s move to place a three year lock-in on certain existing shareholders as on March 13. Even SEBI seemed to have stumped on this front.

It now transpires that SEBI had no inkling (not sounded out by Department of Financial Services) on the likely restriction (lock-in for 75 per cent of shareholding) on YES Bank shareholders who held 100 or more shares on the date of commencement of reconstruction scheme, that is, March 13.

If capital market and banking circles are to be believed, SEBI burnt the midnight oil this weekend to dash off its views on the matter to the Centre and even made a case for the concerned authorities in the Finance Ministry to do a rethink on the restriction.

However, on Monday morning, shareholders were promptly informed by their DPs/brokers about the execution of corporate action that 75 per cent of their shareholding has been locked-in for three years.

So why has it upset the existing shareholders who face the lock-in now that necessary corporate action has been executed swiftly by the depositories on Sunday itself?

Reason is not far to see: among the shareholders who face the brunt of this move are funds (India-focussed ETFs) that had bought (in F&O as well as cash segments) into YES Bank on behalf of the investors in such funds. Now these investors are stuck in the hapless situation of chakravyuha (no exit for three years till March 12, 2023. Over 250 funds — out of nearly 300 institutional investors in YES Bank — are foreign funds.

Also, thanks to the lock-in, which also applies to shares sold by investors on Friday, an artificially skewed (lopsided) market has been created in YES Bank shares in the secondary market on Monday, said a corporate governance expert. Shares of YES Bank was the only gainer (jumped about 45 per cent) in Nifty50 during Monday’s trade, surprising many analysts who expected the stock to fall after the Centre imposed the lock-in.

Breach of contractual duties

Although the reconstruction scheme is flowing from the powers vested under the Banking Regulation Act 1949, imposing lock-in on existing shareholders of a listed company by an authority other than SEBI is a breach of contractual obligations, said experts.

Besides there are issues around ‘free transferability’ and right to own or sell property (stocks fall within the definition of property), they said. The authorities cannot simply say that from tomorrow onwards an investor cannot sell — a due process of shareholders assent has to be obtained, felt some experts.

International investors are likely to get discouraged by this lock-in move (restriction on transferability). One argument is that Section 45 of Banking Regulation Act does not provide the powers to impose restrictions on transferability of shares of a listed company. While some may argue that the unprecedented situation called for unprecedented measure, such as the lock-in for the existing shareholders, this differential treatment may only give a handle to minority shareholders to knock the doors of Indian courts.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said: “For an ordinary retail investor who can always hold more than 100 shares barred from selling shares, the reconstruction scheme may come as a jolt. Regardless of the commonly perceived over regulated nature of sector being banking activity under a listed entity; this leaves lots of questions unanswered while revival exercise has taken paramount focus. Whether and to what extent reconstruction scheme would be put to judicial scrutiny, time will tell.”

The jury is still out on whether the RBI (through Centre) has encroached on the powers of SEBI.

Published on March 16, 2020
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