Inter Se Promoter Exemption for Takeovers: Computation of Holding Period

A few days ago,
SEBI made public its informal
guidance
issued to Weizmann Forex Ltd. on October 25, 2012. In this case,
the target company became listed only in 2011 due to a corporate restructuring
process. The question was whether certain shareholders can avail of the
exemption for inter se promoter
transfer by taking into account the promoter holdings in the previous company
from which the business was restructured into the target. Qualifying for the
exemption requires that both the transferor and transferee should have been disclosed
as promoters of the target company for at least 3 years. SEBI adopted a
purposive interpretation to answer in the affirmative thereby making the
exemption available in that case even though the parties did not technically
satisfy the condition.
Facts
The relevant
facts can be gathered from the company’s request
to SEBI. Weizmann Forex Ltd., the target company was previously an unlisted
company with the name Chanakya Holdings Ltd. As part of an overall
restructuring of the Weizmann group, which involved many other legs that are
not directly relevant for our present purposes, the forex business of Weizmann
Ltd. (the demerged company), being a listed company, was demerged into Weizmann
Forex Ltd. (the resulting company). As part of this restructuring process,
Weizmann Forex’s shares were listed on the stock exchanges. The promoters of
Weizmann Forex intend to transfer certain shares of Weizmann Forex among
themselves and hence approached SEBI for informal guidance.
Under Reg.
10(1)(a)(ii) of the SEBI Takeover Regulations, there is an exemption from a
mandatory open offer for transfer of shares inter
se
among qualifying persons being “persons named as promoters in the
shareholding pattern filed by the target company in terms of the listing
agreement or [the takeover] regulations for not less than three years prior to
the proposed acquisition.”
In the present
case, none of the proposed transferors of shares were able to satisfy the
requirement of being named as promoters in Weizmann Forex as they acquired
shares in that company only under the restructuring process. However, if their
shareholding in the demerged company (Weizmann Limited) were taken into account
for the purpose of computation of the 3-year period, they would satisfy the
requirement. Similarly, the transferees too were unable to satisfy the 3-year
period of being named as promoters in Weizmann Forex. While one of the transferees
held shares for a 3-year period across the two companies (similar to the
transferors), the other transferee did not satisfy the 3-year period across two
companies (on a combined basis) either.
The issue for
SEBI’s consideration was whether, given these facts, the proposed transfer of
shares among promoter was exempt from the mandatory open offer requirements
under Reg. 10(1)(a)(ii).
SEBI’s Informal Guidance
In interpreting
the Takeover Regulations, SEBI considered the 3-year holding period of the transferors
and transferees by looking at their holdings on a combined basis in Weizmann
Ltd. and Weizmann Forex Ltd. even though they may not have satisfied the
requirement strictly with reference to Weizmann Forex Ltd., which is the target
company.
Moreover, as far
as the transferees are concerned, SEBI’s guidance goes one step further. Even
though one of the transferees has not satisfied the 3-year holding period
requirement, the exemption has been made available to it. SEBI reasons as
follows: “The condition of 3 years shareholding by the transferees prior to the
proposed acquisition would be deemed to be fulfilled in case all the
transferees collectively hold shares for a period of 3 years prior to the
proposed acquisition provided the other conditions for availing the exemption
are fulfilled.”
Analysis
In interpreting
the Takeover Regulations, SEBI had adopted a purposive approach in making the
exemption available to the parties, as opposed to a literal or technical
approach that may have denied this facility to the parties. By taking into
accounting the shareholding of the parties in the demerged company, necessary
consideration has been placed on the demerger transaction, which is essentially
a restructuring of businesses and shareholdings as opposed to a complete
transfer or sell-out of the business. In other words, it is considered a purely
internal group restructuring.
Such an approach
is not unusual. For instance, the Income Tax Act, 1961 considers such demerger
transactions (provided certain other conditions are satisfied) as a
restructuring (rather than a pure sale) and confers certain benefits in terms
of exemptions from capital gains tax. More specifically, for the purpose of
computing the holding period, the period of shareholding by a shareholder in
the demerged company will be considered at the time of sale of shares in the
resulting company. The present interpretation of SEBI brings the holding period
under the Takeover Regulations on par with such a regime, which is
understandable in the context of restructuring transactions and the purpose of
the holding period for purpose of exemption under the Takeover Regulations. The
only difference is that the Income Tax Act expressly provides for such
treatment, while under Takeover Regulations it is only by virtue of the
interpretation adopted by SEBI in this case.

However, in the case of the
transferee, to the extent that SEBI finds that all the transferees may collectively
satisfy the holding period requirement, it is perhaps providing a fairly
liberal reading. This seems to suggest that where there is a group of
transferees, it might be sufficient if one or more of the transferees satisfy
the holding period requirement, and it is not necessary for each one of them to
satisfy it. This might provide greater options to structure transfers that may
avail of the
inter se promoter exemption.
At the same time, it may be argued that this is too much of a stretch of the
Regulations, and could be subject to potential misuse.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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