Blog: Dish TV lenders may not be able to exercise voting rights despite invoking pledged shares, says report – Moneycontrol

Dish TV | CMP: Rs 12 |The share ended in the red on June 15. Yes Bank and other lenders to Dish TV may not 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). The report cited a Supreme Court order, dated May 12, in a case between PTC India Financial Services and Venkateswarlu Kari. The ruling said lenders or pledgees are not owners of shares and cannot exercise voting rights once the pledged shares are invoked.

Yes Bank and other lenders to Dish TV  promoters may not 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 held a 24.78 percent 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.

The report cited a Supreme Court order, dated May 12, in a case between PTC India Financial Services and Venkateswarlu Kari. The ruling said lenders or pledgees are not owners of shares and cannot exercise voting rights once the pledged shares are invoked.

Simply put, pledging means that the promoters of a company can take loans against the shares they hold in the company. Since shares are considered a type of asset, they act as collateral. If the company defaults on the loan, lenders can sell the shares that are pledged with them in case the promoters fail to come up with additional collateral within a stipulated period.

The Supreme Court’s judgment also said that following an invocation of pledge, 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 judgment added.

“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,” said the SES report.

“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,” it added.

A beneficial owner is when one who gets to enjoy ownership benefits even though the title to some form of the property is in the name of another individual. It also refers to any individual or group of individuals who have the power to vote or control the transaction decisions, either directly or indirectly, with regards to a specific security, such as shares belonging to a company.


The Yes Bank-Dish TV saga 

Yes Bank and Dish TV have been locked in a legal battle for some time now. Dish TV’s promoters had pledged their shareholding in the company to lenders, including Yes Bank, to secure the loan. Upon default, lenders exercised their right to invoke the pledge and became beneficial owners of the invoked shares. 

Once the shares were invoked, Yes Bank, having become a beneficial holder, started exercising its rights as a beneficial holder in Dish TV, including the right to vote, and demanded a revamp of the board.

In September last year, Yes Bank, in a letter to Dish TV, demanded an extraordinary general meeting of shareholders to oust the service provider’s promoter and managing director Jawahar Goel, along with four other directors. Dish TV India, in October, declined the request, citing embargoes and provisions under the Banking Regulation Act and the market regulator’s directive. The case is currently sub judice.

“By applying the rationale laid down in the PTC India case, Yes Bank is stripped of its voting rights,” said Sonam Chandwani, managing partner, KS Legal and Associates. “Here, it is pertinent to note that even though the securities are held by Yes Bank, only the beneficial owner will have access to the rights, benefits and liabilities arising out of such securities.”

Voting rights are vital in several aspects accounting for the rightful participation of the owner, Chandwani added.


‘Yes Bank not rightful owner in Dish TV’ 

According to the SES report, 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 report 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.”

An email sent to Yes Bank regarding the issue did not elicit a response until the time of publishing this story.


Legal troubles?

Experts said that if the Supreme Court’s judgment is applied in other cases as a precedent, many lenders may have to specifically make agreements to exercise voting rights in the company along with, in the case of pledged shares. But that too, could be a challenge.

“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),” said JN Gupta, founder and managing director, SES. “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,” added Gupta.

The Supreme Court’s 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, he said.

An immediate repercussion of this judgment can be felt on Reliance Capital’s insolvency process. Reliance Home Finance had issued non-convertible debentures which it failed to redeem. As part of the restructuring terms of these debentures in 2019, its promoter, Reliance Capital, had pledged its entire shareholding in Reliance General Insurance Company in favour of IDBI Trusteeship Services, the debenture trustee.

Reliance Capital has argued that just because IDBI Trusteeship has ownership of Reliance General Insurance’s shares doesn’t mean Reliance Capital’s custody and ownership of those shares has come to an end. 


What’s in for banks?

For banks, the going could get tough.

“This (ruling) is going to be a headache for banks,” said a senior official with a state-run bank, requesting anonymity. “Every time when there is an instance where pledged shares are invoked, the question of ownership, custody will arise. Moreover, it will delay the recovery process.”

Legal experts agreed with the banker’s view.

“The challenge lenders may face is finding a buyer at the appropriate time and invoking a pledge at the right time, viz., once a third-party buyer is identified,” said Nirav Shah, partner at DSK Legal.

“Given that the pawner has a right to redeem the pledge till such time the pawnee sells the shares to a third party, the lender would have to invoke the pledge, get its name listed as a beneficial owner of those shares (in case of demat shares) and immediately conduct the sale to a third party and realise the proceeds,” Shah added.

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