Why the YES Bank co-founders' fight may not end soon

The last week's much-awaited verdict of the Bombay High Court on the unfortunate legal fight between Rana Kapoor, co-founder of YES Bank and the family of Ashok Kapur-the other co-founder-was supposed to settle the ownership or the promoter issue once and for all. But that didn't seem to happen.

While the Court has restored the rights of Madhu Kapur, the warring families are bracing for another legal fight over the bank's Article Of Association.

This has been a lengthy court battle, lasting for almost two years. The Judge GS Patel himself wrote about the voluminous nature of the filings. The 153-page order talked about notice of motion running into 1,300 pages and a joint compilation that ran into five volumes and some 2,000 pages. "This, I was told, was 'for convenience' although that term seems to have been used somewhat loosely," the Judge wrote in his order.

The issue before the Court was very limited: restoration of rights of Ashok Kapur's widow Madhu Kapur to jointly nominate directors on the board of the new generation private bank. Both Ashok and Rana are related by marriage: their wives are sisters. Ashok Kapur, a seasoned foreign banker and a non-executive chairman of YES Bank, died in the 26/11 terrorist attack in Mumbai.  

Under article 110 of the bank, it gives the rights to Indian promoters-Rana and Ashok-the right to recommend three directors on the board of Yes Bank so long as they are holding a minimum of 10 per cent stake in the bank. However, Madhu Kapur didn't get a chance to exercise her rights.  

After the verdict, Rana Kapoor was talking about refreshing the article of association. The Court did make a mention on the amending the article to avoid any future conflict.

"I have very little doubt that there are Articles that require amendment, both for consistency going forward and also to resolve the present disputes," notes the order.

There is no direction as such on amending the article, but there is a view in the Rana Kapoor camp that it signals amendment to reflect the new reality. The amendments in the article, if effected by the bank's management, will give rise to another long legal battle in the court.

The Court has clearly preserved the sanctity of the article when it said, "the article of a company are to it very like what the constitution is to a citizen. Shareholders are truly invested in the enterprise not merely for making profits and earning dividends, but also with a view to ensure that their rights, enshrined in the article are always protected."

In this particular case, the Court also tried to find a way out through mediation till the very end. The judgement was pronounced on the June 4, but the matter was kept pending for the purpose of exploring the possibility of agreeing on a set of disputes to be referred to mediation. But since it didn't happen, the judgement was released on June 17.

The judgement also talks about another distant possibility: " a matter on which two warring groups will have to make a studied decision, and that is to reduce their shareholding to below 10 per cent, " the order said.

And if that happens, their rights under the article to nominate directors no longer exists. That seems to be the best way forward. In fact, this will eventually happen as the funding needs of the bank grows and their equity reduces unless they invest more to keep their equity above the minimum threshold of 10 per cent. But it seems unlikely in the long run.