regulations of 1997 and the present ones of 2011) carve out specific exemptions
from disclosure and open offer requirements in case of pledge of shares in
favour of banks or (public) financial institutions even if such pledge were to
exceed the prescribed threshold shareholding percentages. Given the limited
nature of these exceptions, one of the questions that were raised with SEBI
through an application for informal guidance was whether a pledge of shares in
favour of a trustee company (in the nature of a debenture or securities trustee)
would be subject to disclosure or open offer requirements.
the IL&FS Trust Company Limited (ITCL) made the argument the pledge or even
any shares or voting rights acquired by it were not for its own benefit but on
behalf of several banks or financial institutions that are otherwise exempt
from disclosure or open offer requirements. In other words, although not
expressed in these terms, the argument was that if the pledge of shares
directly in favour of banks or public financial institutions was exempt, there
was no reason the same treatment should not be made available if the pledge was
in favour of an intermediary such as a trustee who would hold it on same terms.
ITCL went on to state that even where the pledge was made to ITCL for the
benefit of another type of entity (such as a non-banking finance company) that
was not exempt under the Takeover Regulations, no disclosure or open offer
obligation must be imposed since ITCL as a trustee was not entitled to exercise
voting rights directly, and hence cannot be said to have acquired any control
over those shares.
SEBI refused to accept either of these arguments of ITCL. Instead, SEBI
observed:
provision in either the erstwhile or present Takeover Regulations providing
exemption to ‘Debenture Trustees’ acting as custodian/agent for the pledged
shares on behalf of the lenders. Therefore, in the absence of such provisions,
you may be required to be governed by the relevant provisions of the Takeover
Regulations, 1997 and Takeover Regulations, 2011, as the case may be.
SEBI appears to have adopted a literal interpretation
in that in the absence of an express exemption for debenture trustees, all
provisions of the Takeover Regulations will apply to such transactions. It has
sought not to go behind the transaction and examine its substance where the
debenture trustee may indeed be only an intermediary performing an
administrative function of holding the pledge on behalf of commercial banks or
public financial institutions who may otherwise be eligible to the exemption
under the Takeover Regulations. Perhaps that is understandable because such an interpretation
would require an examination in each case as to who is the ultimate beneficiary
of the pledge, which might not always be clear, especially if a large portion
of the pledge is held on behalf of other entities such as non-banking finance
companies that are ineligible for the exemption, as this news
report suggests.