SAT on Holding Period for Inter Se Promoter Transfers

Mandatory takeover offer
requirements are subject to certain exemptions. One such exemption is when
there is an inter se transfer of shares among promoters of a company, so long
as certain conditions are satisfied. One such condition, stipulated in
regulation 10(1)(a)(ii) of the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (the “Takeover Regulations”), is that the persons
who are undertaking the transfers must have been “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”. The relevance of the three-year holding period has
previously arisen in cases where a company’s shares have become listed through
the process of a corporate restructuring, following which promoters of the
erstwhile company (prior to restructuring) have sought to transfer shares using
the exemption. The precise question is whether the three-year period applied
only while the company (whose shares are being transferred) has been listed, or
whether the promoter holdings in the company preceding the restructuring can
also be considered. This question was recently decided by the Securities
Appellate Tribunal (“SAT”) in Arbutus Consultancy
LLP v. The Securities and Exchange Board of India
This case relates to certain
inter se transfers of shares that occurred in respect of the target company
Rattan India Infrastructure Limited. The target company’s shares were listed on
July 30, 2012 as a result of the demerger of the power business of India Bulls
Real Estate Limited (“IBREL”). One of the promoters of IBREL acquired shares in
the target company from some of the other promoters during the period July to
October 2014. Thereafter, when the acquiring promoters sought to make an open
offer to the shareholders of the target company in October 2015, the Securities
and Exchange Board of India (“SEBI”) sought to the revise (upward) the price of
the offer on the ground that the inter se transfers between promoters that were
carried out at a higher price were ineligible to be exempted under the Takeover
Regulations. This is because the promoters did not satisfy the three-year
period during which they were to be named as promoters in the filings made by
the target company. It was this stance of SEBI (communicated by way of an
order) that the acquiring promoters have sought to challenge by way of an
appeal before the SAT.
The acquiring promoter’s
arguments before the SAT were that since the promoters of IBREL and the target
company are the same, the filings made by the promoters in IBRL must also be
considered towards fulfillment of the three-year period. In doing so, the
acquiring promoters relied upon an informal guidance issued by SEBI in the case
of Weizmann Forex where, as we have observed
in an earlier post
, SEBI adopted a liberal reading and a purposive
interpretation of the requirement by taking into account the promoter holding
in the previous company from which the business was restructured into the
target company.
However, the SAT refused to
accept either of these arguments. Instead, it adhered to a rather strict
interpretation of the three-year rule, and side-swept SEBI’s informal guidance
in Weizmann Forex.
As to the three-year rule, the SAT
15.    … Regulation 10(1)(a)(ii) clearly states that in order to be
eligible for exemption from making an open offer inter-se transfers of shares
amongst persons named as promoters in the shareholding pattern by the target
company in terms of its listing agreement has to be for not less than 3 years
prior to the proposed acquisition. The argument that the promoters have to be
named in the listing agreement for minimum period of 3 years overall, not
necessarily 3 years subsequent to the signing of the listing agreement, cannot
be accepted by a plain reading of Regulation 10(1)(a)(ii). If such an
interpretation is accepted a company listed today with an unchanged promoter
holding for more than 3 years prior to listing becomes eligible for exemption
from making an open offer for inter-se promoter transfers even tomorrow. This
is not the intention behind the amended law (SAST/ Takeover Regulations, 2011).
17.    … the promoter holding pattern prior to listing is not a relevant
factor to be reckoned with for this purpose. Hence, it is irrelevant whether
the same promoters were holding the same shares for over a long period either
in the target company or in the parent company or both, prior to listing the
target company. The only relevant factor is date of listing the target company
and the promoter holding filed by the target company as part of the listing
agreement. In the present appeal, it is an undisputed fact that the target
company was listed only on July 30, 2012 and the inter-se promoter transfers
were made first on July 9-10, 2014 and subsequently on September 5 and October
20, 2014. Therefore, as on the first date of inter-se promoter transfer the
Target Company was listed for 23 months and 10 days and on the date of the last
inter-se transfers the Target Company was listed for 26 months and 20 days. As
such, the promoter holding as per the listing agreement was filed by the target
company only for 23 months and 10 days as on the first date of inter-se
promoter transfers. Since, the stated eligibility condition as per Regulation
10(1)(a)(ii) is “for not less than 3 years” the inter-se promoter transfers
made on July 9-10, 2014 and also subsequently on September 5 and on October 20,
2014, all were ineligible for exemption from making an open offer.
The SAT held that the informal
guidance rendered by SEBI in Weizmann Forex represented an incorrect position,
and that contrary views were provided subsequently in other rulings of informal
guidance such as in the case of Commercial
Engineers and Body Builders Company Ltd
. In any event, due to the
provisions of the SEBI (Informal Guidance) Scheme, 2003, a letter issued by
SEBI is not binding on it, and is not to “be construed as a conclusive decision
or determination on any question of law or fact by SEBI”.
In all, the SAT’s ruling is
relevant for two purposes. First, it seeks to impose a technical interpretation
on the three-year requirement for promoter holding, such that the three years
are computed only on a post-listing basis. Even if the promoters held the
shares prior to the listing of the shares, that would not count. While this is
understandable for new listings of shares, it could give rise to difficulties when
the listing of shares arises due to a corporate restructuring where there is
only a rearrangement of businesses, with perhaps a continuation of the
shareholding structures across the different companies. In case of such
restructuring, promoters will have to wait for three years before undertaking
an exempt inter se transfer.
Second, it seeks to undermine
the nature of an informal ruling. Granted that the limited reliance that can be
placed upon an informal ruling is well-understood due to the nature of such a
ruling, in the present case the SAT (accepting SEBI’s arguments) seeks to treat
the ruling as if it was provided incorrectly by the official concerned. In
other words, responsibility has been pinned on the individual officer issuing
the guidance, which leads to a situation whereby at an institutional level SEBI
can disown the same. This approach is likely to result in lesser dependence on
the informal guidance system.
We may not have heard the final
word on these issues, as the acquiring promoters have sought to appeal against
the SAT order.

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.


  • Hi. Do you feel this case has any chance of appeal at the apex court. All three arguments led by the appellant have been drained flat. On what basis can they apply – at least informal guidance is of no help

    Informal guidance reply -Such a letter cannot be construed as an
    order of the Board under Section 15T of the Securities and Exchange Board
    of India Act, 1992 (‘SEBI Act’ for short) and shall not be appealable.

    The informal guidances issued by SEBI officials in the present
    matter are not approved by the board of SEBI and as such the cited
    judgments have no relevance here

    It was held that informal
    guidances were views of a department of SEBI and cannot be construed as
    law and as such not amenable for appeal before this Tribunal

  • @R shah. Thanks for your comment. It would be difficult to predict the outcome, but the appellants may seek a wider interpretation of the relevant exemption provision. As to reliance on the informal guidance, your point is well taken and that might not be something that will be of significance before the Supreme Court.

  • Do you feel the Appellants have any case to appeal in the supreme court as per Section 15Z appeal can be based on any question of law arising out of such order.

    When Regulation Reg. 10(1)(a)(ii) is clear and Listing agreement can be effective only once a company lists so how can this law be questioned?

    Any company which comes with an IPO usually has same promoter holding for past 3 years Why should a special privileged be offered? If it related to M&A/Restructuring usually a demerger is a court mandated process. In this case it relates to change in control of power 2 Years after the demerger process – So a very weak argument in my view.

    Second the Informal Guidance point stands no ground – “Such a letter cannot be construed as an order of the Board under section 15T of the Act and shall not be appealable.”

    Thanks Aditya

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