SEBI has issued an informal guidance to Strides Arcolabs in connection with the company’s eligibility to issue securities to its promoters on a preferential allotment basis. The information guidance essentially pertains to the interpretation of Reg. 72(2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR), which reads as follows:
The issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date.
Explanation: Where any person belonging to promoter(s) or the promoter group has sold his equity shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall be ineligible for allotment of specified securities on preferential basis.
On 20-21 October, 2011, there was an inter se transfer of shares among the promoters of Strides. This was effected under the erstwhile Takeover Regulations of 1997 (and prior to the new regulations that came into effect on 22 October 2011), and appropriate reporting requirements were complied with. Strides now wishes to issue securities to certain promoters who were the sellers in that transfer, and sought SEBI’s view on the eligibility to issue securities by way of preferential allotment.
In SEBI’s view, the interpretation of Reg. 72(2) and its explanation would not permit Strides to make a preferential allotment of securities to the promoters who earlier sold shares in the inter se transfer among promoters. SEBI’s reasoning is as follows:
The said regulation and its explanation do not differentiate between inter-se transfers made to entities within promoter group and sales made to others. Hence, the term “any person who has sold any equity shares of the issuer” shall also include any person who has made inter-se transfers within the Promoter group. Thus, as per the extant Regulations, if there is any inter-se transfer among the promoter group entities in the preceding six months, then all the persons/entities forming part of “promoter(s) and promoter group” shall become ineligible for allotment of specified securities on preferential basis.
Arguably, this represents a technical approach, and a more purposive interpretation could lead to different results. For instance:
1. The objective of the set of regulations that prescribe specific holding periods for preferential allottees is to prevent short-termism whereby certain investors can take advantage of price movements to sell shares and then obtain them through preferential allotment at more beneficial price. This particularly applies to promoters as they are in a position to control the allotments through their substantial shareholding. Such an objective does not appear to have a place in the context of inter se transfer among promoters because it is just a rearrangement of shareholding among the promoter group without a sale to persons outside the group. While a literal interpretation would lead such a transfer to be a “sale”, a purposive interpretation would not bring it within the mischief that the rule seeks to prevent.
2. The above broad objective of the regulations is also evident from the scheme of Reg. 72(2) and its explanation. For example, the explanation suggests that when there is a sale by any person belonging to the promoter group, then the promoter group itself is disqualified from obtaining shares through preferential allotment for a period of six month. The disqualification appears to operate not just to the individual or entity that sold shares, but to the entire promoter group. In other words, the attribution of an individual seller’s action extends to the entire group, thereby fortifying the position that the promoter group must be treated as a whole. In that case, transfers within the group should be of no consequence, and should not be treated as a sale at all.
3. This approach is not unique to the ICDR Regulations, but also to regulatory frameworks such as the Takeover Regulations that provide specific exemptions from mandatory open offers in case of inter se transfers among promoters so long as specified conditions have been complied with. Such compliances were adhered to even in the Strides case, but that seems to have held no water with SEBI while interpreting Reg. 72(2).