Capital First Fined Rs6 Lakh for Not Disclosing Encumbrance on Deccan Chronicle Shares
Moneylife Digital Team 26 August 2021
Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs6 lakh on Capital First Ltd for not disclosing encumbrance on shares of Deccan Chronicle Holdings Ltd (DCHL). Capital First (erstwhile Future Capital Holdings) merged with IDFC Bank in 2018 and the merged entity is called IDFC First Bank.
In its order, the market regulator found that Capital First did not make requisite disclosures about the encumbrances on shares of DCHL held by them to the stock exchanges and DCHL.
In October 2011, Capital First entered into a security net agreement (SNA) with the promoters of DCHL for 6.04 crore shares, which was 28.93% share capital of the company. Thereafter, in November 2011, it entered non-disposal undertakings (NDU) with the promoters, T Venkattram Reddy, T Vinayak Ravi Reddy and PK Iyer for 3.30 crore shares amounting to a 15.79% stake.
It was observed that as and when the NDUs and SNAs were expiring they were replaced by entering fresh NDUs and SNAs between the parties.
These NDU agreements were dated 2 November 2011 and 27 January 2012 wherein DCHL, FCHL, Mr Venkattram Reddy, Mr Vinayak Ravi Reddy, Mr Iyer and Karvy Stock Broking Ltd, (Karvy or Depository Participant-DP) were the signatories. 
These NDUs or SNAs were like encumbrance as they entail the risk of shares held by the promoters being appropriated or sold by the lenders.
Through these NDUs, Capital First, in the event of default, was entitled to create a pledge in its favour for 15.79% to 28.93% of the paid-up capital of the company and hence these shares were encumbered at the time of entering the NDU agreement itself, the market regulator noted.
Hence, necessary disclosures were required to be made by Capital First to the stock exchange and DCHL under SAST (Substantial Acquisition of Shares and Takeover) Regulations. However, it had failed to make necessary disclosures, SEBI added.
Further, the investigation found that FCHL on 27 July 2012 under Regulations29(1) and 31(1) of the SEBI (SAST) Regulations, disclosed to the stock exchange that the promoters of DCHL had pledged 11,28,51,000 shares to it on 26 July 2012 as part of collateral encumbrance created in consideration of borrowings by DCHL and to its group company Aviotech Pvt Ltd. It was observed that the disclosures were made by FCHL on behalf of promoters of DCHL in the exercise of Power of Attorneys (POAs) dated 11 July 2012 and 12 July 2012.
It was found that whenever FCHL had entered NDU agreement with DCHL and Aviotech Pvt Ltd and its promoters, Karvy Stock Broking, as a depository participant was also one of the signatories to the agreement. 
However, in the case of NDU agreements dated 11 July 2012 and 12 July 2012, it was observed that although Karvy Stock Broking was a party to the agreement, it was not a signatory to that agreement (whereas in all other NDU agreements representative of Karvy has signed on the agreements), thereby rendering the agreement per se is not complete.
"The transactions carried out by the noticee (Capital First) as through NDUs or SNAs were encumbrance as they entail the risk of shares held by the promoters being appropriated or sold by the lenders.
"The noticee by not making requisite disclosures of the said encumbrances on shares of DCHL held by them to the stock exchanges and DCHL, the noticee has violated the provisions of ... (SAST) Regulations, 2011," SEBI said.
The order follows SEBI investigated the scrip of DCHL to ascertain whether the promoters of DCHL have made any fraudulent pledging of shares of the company and whether adequate disclosures had been made under the (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST rules) during the period October 2011 to December 2012.
3 months ago
SEBI approves IPO at INFLATED PRICE & allows the Promoters "Asset Stripping"! A RERA like framework (with Retail Investors Monies & dilution of Equity by Promoters, to be deposited in an ESCROW Account, rather than transferring it to the Promoter's personal accounts) is the need of the hour.
3 months ago
Feeble punishment — and years late. What message does this send to others?
Free Helpline
Legal Credit