[Prateek Surisetti is a V Year B.A. LL.B. student at NALSAR University of Law]
I write to analyze an Order (dated 5 July 2018) of the Securities and Exchange Board of India (“SEBI”), which exempted a proposed acquirer from complying with regulation 3 of the SEBI (Substantial Acquisitions and Takeovers) Regulations, 2011 (the “Takeover Regulations”). The Order sheds light on the particular considerations that SEBI takes into account before permitting an acquisition beyond the threshold without having to undertake an open offer.
Prior to delving into the facts, it would be useful to form a basic understanding of the legislative framework.
Legislative Framework
Under regulation 3(1) of the Takeover Regulations, the acquirer is required to make a public announcement of an open offer in the event that, as a consequence of the acquisition, the acquirer and the persons acting in concert with the acquirer acquire more than the threshold limit of 25% (of voting rights) if the target company.
The SEBI Order under discussion cites sections 11(1) & S 11(2)(h) of the SEBI Act, in addition to regulation 11(5) of the Takeover Regulations, as the statutory basis for issuing the Order. While the referred SEBI Act provides for SEBI’s general jurisdiction relating to matters of share acquisitions, the Takeover Regulations provide for SEBI to exempt entities from the obligation to make an open offer by way of a reasoned, written order. The Takeover Regulations also empower SEBI to impose additional conditions.
Facts
The Batliboi Limited (“Target Company”), prior to the proposed acquisition, was owned by the public to the extent of approximately 25%, while the remaining shares were held by the promoters. The promoters consisted of Mr. Nirmal Bhogilal (approx. 50%), the Bhogilal Family Trust (approx. 15%) and 10 others (approx. 10%).
Through the proposed transaction, the Bhogilal Family Trust (“BFT”) sought to acquire, by way of “contribution (gift) through an off market transaction”, all the shares of Mr. Nirmal Bhogilal and, consequently, own approximately 65% of the Target Company’s shares for the furtherance of “a private family arrangement to provide for family succession and welfare of the Transferor’s family” . Given that the acquirer breached the threshold (i.e. 25%) under regulation 3(1) of the Takeover Regulations, it was required by the same provision that the acquirer make an open offer. Hence, the BFT applied, in accordance with regulation 11(3), for an exemption.
Further, it is pertinent to note that the Bhogilal Family Trust is a private irrevocable trust under the Indian Trusts Act, 1882. The trustee is Mr. Nirmal Bhogilal and the beneficiaries of the said Trust are Mr. Nirmal Bhogilal and his immediate relatives (explicitly clarified to exclusively include his spouse, his descendants and their spouses). Additionally, the Trust Deed contains a positive statement clarifying that the beneficiaries of the Trust will always be immediate relatives of Mr. Nirmal Bhogilal and negates the possibility of a third-party beneficiary.
Additionally, it is pertinent to take note of the conditions imposed through the earlier transaction, as the said conditions continue to hold relevance in the current transaction and form the basis for grant of exemption. In the earlier transaction, wherein Mr. Nirmal Bhogilal transferred approximately 15% of Batliboi Limited to Bhogilal Family Trust, the acquirer (same entity-BFT in both the earlier transaction and the primary transaction under discussion) applied for an exemption from obligations under regulation 3 of the Takeover Regulations.
SEBI had granted the exemption, provided that (a) the existing corporate trustee resigned and (b) an amendment is caused in the Trust Deed that excluded the possibility of a corporate trustee in the future, (c) the BFT mandatorily disclose to the stock exchanges of a change in the composition of the Trust (trustees/beneficiaries) which have an effect on the “ownership, control of shares or voting rights held by the Trust”, (d) that the provisions of the SEBI Act and affiliated Regulations pertaining to ownership, control of shares or voting rights would apply to the beneficiaries of the trust, in addition to the Trustees and (e) that the Trust Deed should not have provisions that limit the liability of the trustees or beneficiaries of the Trust. Also, the Bhogilal Family Trust submitted that the transaction (f) would not cause any prejudice to the interests of the public shareholders, (g) would not cause an “effective change” in the exercise of voting rights or control or management and (h) would not cause a change in the overall shareholding pattern, control or management of the promoter group and (i) that the beneficiaries of the Trust would always be within the confines of Mr. Nirmal Bhogilal’s immediate relatives.
Coming back to the primary transaction, SEBI granted the exemption, subject to certain conditions, in addition to conditions imposed in the earlier transaction. Over the course of the ensuing section, I identify and analyze all the conditions and rationales for the grant of exemption.
Proposed Acquirer’s Submissions
The application requested for exemption on the grounds of having a legitimate purpose. It stated that the proposed transaction was aimed at consolidation of the family assets in Batliboi Limited and provide flexibility to transfer shares at the time of succession. A layered trust was structured which allowed for Mr. Nirmal Bhogilal to exercise control over the shares, while simultaneously being capable of serving as a structure which would allow his descendants to conveniently allocate shares amongst their spouses and children at the time of succession.
Initially, the Trust Deed allowed for Mr. Nirmal Bhogilal to nominate a Trustee, who would take over upon Mr. Bhogilal’s death, permanent incapacity or resignation. As the relevant clause did not specify that the nominee had to necessarily be an immediate relative of Mr. Nirmal Bhogilal, the consequence of the same could be that Mr. Nirmal Bhogilal might nominate a third-party nominee who does not belong to his family. The proposed acquirer submitted that, as the same could be deemed to be against the spirit of the Takeover Regulations, an amendment to the effect of restricting Mr. Nirmal Bhogilal’s nomination powers to his immediate relatives had been caused.
SEBI’s Decision
The SEBI Order is preceded by a section titled “Consideration of the Application and Findings”, which lists out the various conclusions (broad and specific) that factored into the decision. Next, the SEBI Order imposes certain mandatory conditions. I will analyze both in the same sequence.
The broader conclusions mentioned include (A) the motivations behind the proposed transaction (facilitation of family succession), (B) the proposed transaction’s lack of effect on public shareholders, (C) the control over Target Company remaining unaffected, (D) promoter group shareholding remaining constant, (E) public shareholding remaining constant and (F) compliance with other laws.
Moving onto the specifics, the section preceding the Order further notes (i) the Trustees of the sub-trusts are Mr. Nirmal Bhogilal’s offspring and the other Trustee of the parent trust is said Mr. Bhogilal’s spouse, (ii) the Beneficiaries are all immediate relatives of Mr. Nirmal Bhogilal, (iii) the Trustees of both the parent and the sub-trusts have been promoters of the Target Company for more than the last three years, (iv) the purpose behind the layered trust structure being succession and that the said purpose has been sufficiently substantiated with facts, (v) the clause in the Trust Deed limiting Trustees to Mr. Nirmal Bhogilal’s immediate relatives, (vi) the Proposed Acquirer’s undertaking to disclose change in ownership to the stock exchanges and (vii) the Proposed Acquirer’s undertaking that the SEBI Act and affiliated Regulations would apply to both Trustees and Beneficiaries.
The conditions imposed were (a) exclusion of third-parties from being appointed as Trustees or Beneficiaries of the sub-trusts, (b) reporting and disclosure requirements, (c) liability under SEBI Act and Regulations would extend to Beneficiaries, in addition to the Trustees of the Proposed Acquirer, (d) the Proposed Acquirer shall ensure that the Trust Deed remains in consonance with the conditions imposed above and any modification shall be expeditiously reported to SEBI and (e) auditing and other compliances.
From an analysis of the factors influencing the decision and the conditions imposed, it is clear that SEBI’s concern is to prevent transfer of ownership to a third-party (a person outside the group of Mr. Nirmal Bhogilal and his immediate relatives). For the same reason, the exemption was granted in the earlier transaction after the Bhogilal Family Trust severed ties with the corporate trustee and included a clause excluding corporate trustees or beneficiaries in the future. The same is to ensure that ownership does not effectively change and remains within the family. If a corporate trustee/beneficiary were to be allowed, then the beneficial ownership could be transferred indirectly through share transfer of the corporate trustee/beneficiary.
The rationale behind imposing a condition (reproduced below) precluding appointment of third-party trustees/beneficiaries in the sub-trusts seems to be aimed towards precluding the possibility of the sub-trusts breaking off the Bhogilal Family Trust and consequently cause transfer of ownership to a third-party.
Takeaway
The decision provides us with insight into the factors that SEBI considers relevant for grant of exemption from obligations under regulation 3 of the Takeover Regulations. It is pertinent to note that the reasons provided are neither exclusive, nor absolute. But the various reasons provided can be distilled into a few core concerns, which appear are recurring refrains throughout the decision.
The core concerns that SEBI was influenced by are:
(a) lack of prejudice to the public shareholders,
(b) a valid reason for transfer (e.g. family succession) and
(c) shareholding remaining within the promoters themselves.
– Prateek Surisetti
