Non-Disposal Undertaking-Power of Attorney: A Grey Area Surrounding Investments in Non-Banking Companies by Banks

Abstract

A non-disposal undertaking (NDU Agreement) is an agreement to not dispose off shareholding held by the person holding the shares (“NDU Provider/Obliger”) in a company, usually a Special Purpose Vehicle (“SPV”). This agreement is usually coupled with a power of attorney appointed on the security trustee. It is a combination of contractual negative and affirmative covenant wherein the Obligers agree not to sell the securities unless the sale is required to discharge dues to the lenders. This Agreement involves a deposit of shares in a new Demat account which is then linked to an Escrow Account. The power to sell is given to a Security Trustee who may exercise the Power of Attorney appointed on it along with this Agreement and appropriate the resultant proceeds towards payment of their dues. The PoA and the escrow account safeguard the lenders against any attempts by the Obliger to breach its promise. Furthermore, this is not like a pledge where a beneficial interest or right of the Lender is created in the subject matter. The need to set up this complex legal framework is to take more than 30% of shares in a company as collateral and yet not attract S. 19(2) of the Banking Regulation Act, 1949 (“BR Act, 1949”) which mandates that a bank cannot hold more than 30% of shareholding of the total paid-up capital in a company unless it conforms to S.19(1) which is banking business and any activity in promotion thereof.

Keywords: Banking, Project Finance, Collateral, Depositories, Reserve Bank of India