Delhi HC Upholds BharatPe Parent’s Control at Unity Small Finance Bank

The Delhi High Court has reinforced the authority of Resilient Innovations Private Limited (RIPL), the parent company of BharatPe, in strategic decision-making at Unity Small Finance Bank (SFB). On November 5, a Division Bench comprising Justices C Hari Shankar and Vinod Kumar dismissed an appeal filed by Unity SFB challenging an interim order that mandated the bank to secure prior written consent from its shareholders before proceeding with certain corporate actions.

The bank had sought to increase its authorised share capital from ₹4,000 crore to ₹4,900 crore. This move was aimed at converting previously issued warrants into compulsorily convertible preference shares. However, the proposed capital infusion would significantly dilute RIPL’s shareholding from 49 percent to 21 percent, raising concerns among existing stakeholders.

Central to the dispute is the shareholders’ agreement signed on October 26, 2021, by Unity SFB, RIPL, and Centrum Financial Services. This agreement stipulates that the bank must obtain prior written approval from representatives of both shareholders for certain strategic and corporate decisions identified as 'Reserved Matters.' These provisions are designed to safeguard the interests of all shareholders by ensuring mutual consent on critical issues.

Unity SFB had initially requested RIPL’s consent for the capital increase but later argued that the proposal did not fall within the scope of Reserved Matters, suggesting that any earlier references to the contrary were inadvertent. The court rejected this argument, describing it as an “argument of desperation.” The judgment highlighted that the bank itself acknowledged the need for shareholder approval in official board documents and correspondence, making it untenable to later deny its contractual responsibilities.

The bank also contended that the shareholders’ agreement could not override its articles of association. This claim was dismissed by the court, which pointed to Clause 8 of the agreement that explicitly states the contractual arrangement has precedence over any conflicting provisions in the bank’s memorandum and articles of association.

Unity SFB further argued that the Reserve Bank of India (RBI) had instructed it to remove Reserved Matter clauses from its articles of association. The court clarified that such regulatory directives do not nullify the contractual obligations voluntarily agreed upon by the shareholders. Moreover, the RBI was aware of the shareholders' agreement and did not object to the clause that prioritizes the agreement over the bank’s constitutional documents.

Following the ruling, a spokesperson for BharatPe emphasized the importance of adhering to the court’s directions. They stated, “The Board must ensure that the Bank complies with the Court’s directions in letter and spirit. We expect the Board to exercise independent judgment, free from undue influence, and act in the interests of the Bank and all its stakeholders, including minority shareholders.”

The spokesperson underscored the significance of maintaining the governance framework established when the joint venture was formed in 2021. They argued that consistent application of this framework is vital to preserving trust among shareholders and securing the bank’s long-term interests.

Centrum Financial Services, another shareholder, declined to comment on the judgment due to ongoing legal proceedings but reassured stakeholders that the bank’s operations remain unaffected. A representative stated, “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.”

The Division Bench’s decision upheld the earlier interim order and dismissed Unity SFB’s appeal. However, the broader dispute between the parties continues before the single judge and awaits a final resolution.

This case highlights the complexities involved when multiple investors hold significant stakes in a financial institution. Shareholders’ agreements frequently play a crucial role in governing how key decisions are made, especially in sectors like banking where regulatory oversight and investor protections are stringent. The judgment serves as a reminder that contractual obligations between shareholders carry substantial weight and cannot be circumvented through unilateral actions.