Delhi High Court: Unity Must Get BharatPe Consent for Share Capital Increase

• The Delhi High Court dismissed Unity Small Finance Bank's appeal against an interim order.
• The order prevents Unity from increasing its authorized share capital without consent from Resilient Innovations Private Limited, BharatPe's parent company.
• A shareholders' agreement from October 2021 between Unity, Resilient (49%), and Centrum Financial Services (51%) required unanimous consent for capital structure changes.
• Unity proposed increasing capital from ₹4,000 crore to ₹4,900 crore to convert warrants into compulsorily convertible preference shares (CCPS).
• Resilient opposed this and initiated arbitration proceedings under Section 9 of the Arbitration and Conciliation Act.

This ruling by the Delhi High Court reinforces the enforceability of shareholders' agreements, particularly those clauses that designate 'Reserved Matters' requiring unanimous consent for significant corporate actions.

The Delhi High Court recently dismissed an appeal lodged by Unity Small Finance Bank, affirming an earlier interim order that prevents the bank from proceeding with a proposed increase in its authorized share capital. This significant ruling mandates that Unity Small Finance Bank must secure the explicit consent of Resilient Innovations Private Limited, the parent entity of BharatPe, before presenting any such capital alteration proposal to its Board of Directors. The case, identified as Unity Small Finance Bank Vs Resilient, underscores the critical role of pre-existing agreements in corporate governance.

A Division Bench comprising Justice C Hari Shankar and Justice Vinod Kumar unequivocally stated that Unity was legally bound by the terms of its shareholders' agreement. This agreement, which includes Resilient and Centrum Financial Services, explicitly requires prior written approval for any modifications to the bank's capital structure. The court found no grounds to interfere with the initial judgment, describing Unity's appeal arguments as lacking any substantive basis and merely a desperate attempt to overturn a valid decision.

The core of the Delhi High Court Unity BharatPe share capital dispute lies in a shareholders' agreement established in October 2021. This agreement was forged between Unity Small Finance Bank, Resilient Innovations, and Centrum Financial Services. Under its terms, Resilient held a 49% shareholding in the bank, while Centrum Financial Services held the remaining 51%. A crucial provision within this document designated decisions concerning changes to the bank's capital structure as "Reserved Matters."

This classification meant that any alteration to the capital structure necessitated the prior written consent of both shareholders, Resilient and Centrum. The dispute escalated when Unity proposed to augment its authorized share capital from ₹4,000 crore to ₹4,900 crore. The stated purpose of this BharatPe share capital increase was to facilitate the conversion of existing warrants into compulsorily convertible preference shares (CCPS). Resilient Innovations, however, opposed this move, arguing that it violated the terms of the shareholders' agreement, and subsequently initiated legal proceedings under Section 9 of the Arbitration and Conciliation Act to enforce the contractual obligations.

This ruling by the Delhi High Court reinforces the enforceability of shareholders' agreements, particularly those clauses that designate 'Reserved Matters' requiring unanimous consent for significant corporate actions. The court's firm stance highlights that such agreements are not mere formalities but legally binding contracts that dictate the operational parameters and strategic decisions of an entity. For companies operating with similar governance structures, this judgment serves as a potent reminder of the necessity for strict adherence to agreed-upon consent mechanisms, especially when dealing with fundamental changes like capital structure adjustments.

The decision in the Unity Small Finance Bank case provides clarity on the legal weight carried by meticulously drafted shareholders' agreements. It signals to all parties involved in joint ventures or entities with multiple shareholders that bypassing established consent procedures, even for what might be perceived as beneficial capital restructuring, carries significant legal risk. The court's dismissal of Unity's appeal underscores the principle that contractual obligations, once entered into, must be honored, thereby strengthening the framework for corporate governance and investor protection in India.

This ruling reinforces the enforceability of shareholders' agreements, particularly clauses designating 'Reserved Matters' requiring unanimous consent for significant corporate actions like capital structure changes. Lawyers advising on corporate governance or M&A should ensure such agreements are meticulously drafted to prevent disputes, while compliance officers in entities with similar agreements must ensure strict adherence to consent requirements before proceeding with capital alterations.

Source: Original reporting via legal news sources