SEBI Order Denying Inter-se Promoter Transfer Exemption

[Guest post by Shashank Prabhakar, who is a lawyer with
Finsec Law Advisors]
The Whole Time Member of the Securities and Exchange Board
of India (SEBI) recently passed
an order
relating to an application under Regulation 11(5) of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover
Regulations) for exemption from making an open offer under Regulation 3(2).
The facts are that Gokul Agro Resources Limited (GARL), the
target company, was controlled by two groups of shareholders, namely, the Thakkar
family and the Rajput family, who were named as promoters of the target
company. Between them, they held about 72% of the equity shares in the target
company. The shares of the target company were listed on the stock exchange in
September 2015, pursuant to a composite scheme of arrangement sanctioned by the
High Court whereby the windmill business of the parent, Gokul Refoils &
Solvents Limited (GRSL), was demerged and transferred to the target.
Thereafter, in 2016, the Thakkar family, which held about 41% equity in the
target and the Rajput family, which held about 31% of the equity in the target,
reached an understanding whereby it was decided that the Thakkar family would control
the target, while the Rajput family would control the parent.
To implement this arrangement, one Mr. Thakkar who held 20.74%
of equity, wished to acquire 31% equity from the Rajput family. For this
purpose, Mr. Thakkar made an application to SEBI under Regulation 11(1), seeking
relaxation of the conditions laid down in Regulation 10(1)(a)(ii) which
provides an exemption for acquisitions by “persons
named as promoters in the shareholding pattern filed by the target company in
terms of the listing agreement or these regulations for not less than three
years prior to the proposed acquisition.”
Technically, he was not eligible
for seeking an exemption under this provision, since the shares of the target
company were only listed in 2015 and the promoters are required to be named as
such in the shareholding pattern for at least three years to avail the
exemption. He submitted that both the families owned shares in the parent
company for well over eight years, and once the composite scheme of arrangement
came into effect the families were allotted shares in the target in the same
proportion. He also cited the treatment that would be given under the Income
Tax Act where, in this instance, the date of acquisition of the shares in the
parent company would be considered for the purpose of calculating capital gains
for sale of shares allotted pursuant to the scheme of arrangement.
Interestingly, the parties would have been eligible for an exemption Regulation
10(1)(a)(ii) if the same arrangement was to be implemented for the shares of
the parent company. The only technicality that prevented Mr. Thakkar from
availing the exemption was the fact that he was not named promoter in the
shareholding pattern filed by the company for more than three years.   
SEBI referred the matter to the Takeover Panel, which noted
that the criteria for availing an exemption under the 2011 Takeover Regulations
was much stricter and clearer compared to the exemption provisions under the earlier
1997 version of the Takeover Regulations. The relevant provision for seeking
such an exemption under the 1997 Regulations would have been Regulation
3(1)(e)(iii)(b), which exempted inter-se transfers amongst “qualifying
promoters.” The 1997 Regulations then provided an elaborate definition of
“qualifying promoters”, which left a lot of room for interpretation and
structuring transactions and inter se transfers between promoters. The 2011 Regulations
did away with all that and instead made it simpler and leaner in the form of
Regulation 10(1)(a)(ii). According to the Takeover Panel, the regulatory intent
was that only those parties who had been disclosed as promoters were eligible
for exemption and, since the parties did not meet the criteria, they were not
eligible to seek the exemption. The Takeover Regulations Advisory Committee (TRAC)
Report, which came out in 2010, recommended a pre-existing relationship of at least
three years between parties seeking exemption so as to “…curb the abuse of introduction of new entities as qualifying parties….”
Taking all this into consideration, the Whole Time Member of SEBI rejected the
application and denied exemption from making an open offer under Regulation
The scope for structuring transactions to qualify for the
exemption has been vastly reduced under the 2011 Regulations. Although SEBI has
discretionary powers to provide relaxation from strict compliance with
procedural requirements, this order confirms that it is unlikely that it would
use such powers to grant exemption for inter-se transfers where parties do not
meet the three year requirement.
– Shashank Prabhakar

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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