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Photo: Reuters
Photo: Reuters

Sebi imposes 1 crore penalty on 2 promoter entities of Yes Bank

Sebi penalties as these two entities failed to disclose encumbrance or pledge on their shareholding in Yes Bank

The Securities and Exchange Board of India (Sebi) on Tuesday imposed 1 crore penalty on two promoter entities of Yes Bank Ltd namely – Morgan Credits Ltd and Yes Capital (India) Pvt Ltd.

The market regulator imposed penalties as these two entities failed to disclose encumbrance or pledge on their shareholding in Yes Bank. Yes Capital had raised 630 crore from Franklin Templeton Mutual Fund and Morgan Credits had raised 950 crore from Reliance Mutual Fund. The mutual funds had subscribed to debentures issued by these two entities at a cover ratio of 3.3 times and borrowing cap of 0.5 times respectively.

“It is undisputed fact that the Noticees (two Yes Bank promoter entities) have not made any disclosures to YBL (Yes Bank) and the stock exchanges as alleged rather they have contended that the transactions in question were not covered within the scope of a pledge," said Sebi in its order.

This particular transaction had come to light in 2018 subsequently it also threw up many such instances of private limited companies backed by promoters were issuing non-convertible debentures (NCDs) by pledging company shares through complex structures.

While this was a standard practice of raising funds through debt funds and referred in lending parlance as Loan Against Shares (LAS), it was the lack of disclosures that irked the regulator.

Sebi norms require that any encumbrance on shares which prevents free tradability of shares needs to be disclosed to shareholders.

“Sebi always held that the intention of the SAST (substantial acquisition of shares and takeover) Regulations is to cover all types of encumbrances by whatever name called," said Sebi in the order.

Following the occurrence of such complex structures to evade disclosures Sebi had further tightened the definition of pledge under Sebi norms in June 2019.

“The failure as found in this case, had clearly defeated the purposes of the Regulations i.e. investor protection and ensuring market integrity. Considering the role and responsibility of the Noticees in these regards and obligations cast upon them under the SAST Regulations, in my view, the default is grave and the gravity of this matter cannot be ignored," said Sebi in the order.

Sebi further tightened the norms around LAS by ensuring that mutual funds would need to ask for a 4 times cover when subscribing to NCDs backed by shares.

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