BharatPe, Centrum Financial Services lock horns over Unity SFB capital move

Court restrains lender from taking up authorised share capital increase without BharatPe's approval as shareholders dispute warrant conversion and potential stake dilution

Fintech major BharatPe and Centrum Financial Services, the two shareholders of Unity Small Finance Bank (SFB), are locked in a dispute over a proposed change to the lender's capital structure, with the Delhi High Court restraining the bank from taking up an increase in authorised share capital without BharatPe's written consent.

 

The deadlock stems from warrants authorised in October 2021 that are due to lapse by the end of October 2026. Their conversion requires Unity SFB to increase its authorised share capital, a move BharatPe has refused to consent to on three occasions over the past year.

 

Even as the dispute remains sub judice, people aware of the development indicated that an out-of-court settlement remains possible, given the time available before the warrants expire. The matter is listed for hearing on October 28.

 

At the heart of the dispute is the potential dilution of BharatPe's 49 per cent stake in Unity SFB. BharatPe's counsel told the Delhi High Court that the proposed conversion could reduce its holding to 21 per cent.

 

"Warrants are dilutive instruments and the fintech did not want to get diluted. It cannot hold these warrants due to foreign-owned and controlled entity (FOCE) norms under the Foreign Exchange Management Act (FEMA). Such warrants cannot be diluted unilaterally and the warrant terms recognise that transfers and conversions cannot happen without BharatPe's consent," a person with knowledge of the matter said.

 

According to a second industry source, Centrum's argument is that dilution is a consequence of BharatPe choosing not to participate in subsequent capital infusions despite being offered warrants in proportion to its holding.

 

Under the shareholders' agreement, Centrum can subscribe to up to 51 per cent of the warrants and BharatPe up to 49 per cent. If either shareholder declines to participate, the unsubscribed portion can be offered to other investors, the person said.

 

The warrants are proposed to be converted into compulsorily convertible preference shares (CCPS), which would eventually convert into equity upon an initial public offering (IPO). BharatPe's ownership percentage would decline as the overall share base expands.

 

An email sent to BharatPe seeking comment did not elicit a response.

 

"As the matter is sub judice, we decline to comment. The discussions are solely between the bank's promoter and a financial investor. The bank remains operationally unaffected and continues to serve its customers and stakeholders as usual," Centrum Group said in response to Business Standard's queries.

 

The proposal is to increase the authorised share capital from ₹4,000 crore to ₹4,900 crore.

 

However, that rests on the requirement for BharatPe's consent before Unity SFB can increase its authorised share capital. Such an increase requires an amendment to the bank's memorandum of association, which is a "reserved matter" under the October 2021 shareholders' agreement and requires the written consent of both shareholders.

 

Previously, the bank had sought BharatPe's written consent for the proposed increase in authorised capital three times and was refused each time.

 

Notably, sources said Unity SFB was well capitalised despite the dispute.

 

A person aware of the development said the bank's capital adequacy ratio is around 26 per cent against the regulatory requirement of 15 per cent, and the move was aimed at keeping capital available for future requirements.

 

Another person aware of the development said the bank's internal capital assessment concluded that no additional capital was required this financial year.

 

BharatPe invested around ₹746 crore for its 49 per cent stake under an October 2021 shareholders' agreement — capital that went towards funding Unity SFB, which was licensed on the condition that it take over the failed PMC Bank.

 

"The impact of the warrants is that they can dilute BharatPe significantly. That also means that if the stake comes down to 21 per cent, the investment doesn't justify it. BharatPe needs to protect its shareholding in this case," one of the persons quoted above said.

 

Unity SFB began operations in November 2021 after the RBI licensed a consortium of Centrum Financial Services and BharatPe's parent, Resilient Innovations. It subsequently took over the assets and liabilities of the collapsed PMC Bank, with the amalgamation scheme notified in January 2022.

 

Centrum Financial Services holds 51 per cent in Unity SFB and is its promoter, while Resilient Innovations holds 49 per cent. BharatPe is required to reduce its stake to 10 per cent within eight years of the bank commencing operations, which is by 2029.