Critiquing SEBI’s Narrow Interpretation of the Inter-Se Transfer Exemption

[Simran Sharma is a fourth year B.A.,LL.B (Trade and Investment Law Hons.) student at National Law University, Jodhpur}

The Securities and Exchange Board of India (SEBI) provided informal guidance in June this year on the interpretation of the “inter se transfer exemption” under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”). This post aims to comprehensively critique SEBI’s narrow interpretation of this exemption in a specific case. The author will begin by outlining the facts and the guidance sought from SEBI. Subsequently, it will analyse the inter-se transfer exemption and its operational framework under the Takeover Code. Finally, it will discuss the potential implications of SEBI’s narrow construction of the exemption.

The case revolves around Vidli Restaurants Limited (“Target Company”) and its three promoters: Dr. Vidhi V. Kamat, Kamats Worldwide Food Services Private Limited (“KWFSPL”), and Vits Hotels Worldwide Private Limited (“VHWPL”). VHWPL held a majority shareholding in the Target Company. Dr. Vidhi Kamat intended to gift 9998 equity shares held by herself in Vits Hotels Worldwide Pvt. Ltd. to Dr. Vikram V. Kamat, her husband, i.e., to her “immediate relative”.

This transaction would indirectly grant Dr. Vikram Kamat control over the Target Company, triggering a mandatory open offer requirement. According to the facts provided, Dr. Vikram V. Kamat currently does not hold any equity shares or voting rights (VRs) in the Target Company. As a result of this proposed transaction, Dr. Vikram Kamat’s shareholding in VITS Hotels Worldwide Pvt. Ltd. would increase to 99.99% of the equity shareholding. Consequently, he would indirectly acquire control over the Target Company, along with his wife, who already holds a 13.30% shareholding in the Target Company. This cumulative shareholding triggers a mandatory offer requirement.

The key question for SEBI’s analysis is whether the proposed transaction is eligible for exemption under regulation 10(1)(a)(i) of the Takeover Code. This exemption would relieve the parties involved from the obligation to make an open offer as required by regulation 3 read with regulation 5 of the Takeover Code.

In its informal guidance, SEBI has clarified that the proposed transaction in question does not meet the criteria for an inter-se transfer of shares within the Target Company. Rather, it involves the transfer of shares of the holding company, VHWPL. The guidance stated that inter-se transfer exemption provided under the Takeover Code does not apply to transfers of shares in the holding company. Therefore, the transaction is not eligible for the inter-se transfer exemption, and the parties involved are not exempt from the open offer obligations under the Takeover Code.

SEBI has, however, indicated that the parties involved can submit an exemption application under regulation 11(1) of the Takeover Code to seek relief from the open offer requirements. Even while noting that Dr. Vikram is a member of the promoter group in the case at hand, a condition that itself operates as an “automatic exemption” as it is counted as an inter-se transfer,  the informal guidance clarified that the inter-se transfer exemption applies specifically to transfers of shares among “immediate relatives” of promoters within the target company. The implication is that in cases where control of the target company is indirectly acquired through the transfer of shares of the promoter entity in the holding company instead of the takeover company, the automatic exemption from making an open offer does not apply.

The critique of SEBI’s interpretation of the inter-se transfer exemption is based on several key points indicating the scheme of the operation of this exemption. The author argues that SEBI’s narrow construction deviates from a broader understanding of the inter-se transfer exemption. The purpose of the exemption is to facilitate smoother transactions among qualified parties who have an existing relationship or alignment of interests.

In this regard, a granular analysis of the framework of the Takeover Code is required. Regulation 3, read with regulation 5, specifies that even in cases of indirect acquisitions where the cumulative shareholding or voting rights exceed 25%, a public announcement of an open offer is required. However, regulation 10 provides automatic exemptions, including inter-se transfers, where an open offer is not mandatory. The author proposes that if direct and indirect acquisitions are treated at par with each other for the purposes of triggering an open offer, it should be treated no differently when it comes to assessing their eligibility for exemptions to this requirement under regulation 10.

An inter-se transfer involves qualified parties such as immediate relatives, identified promoters, companies and their subsidiaries, persons acting in concert, and shareholders who have been persons acting in concert. These transfers may be exempted from the mandatory offer requirement due to their existing relationships or alignment of interests.

The understanding of “persons acting in concert” under regulation 2(q) is relevant, as it also serves as an exemption to the mandatory offer requirement under a category in regulation 10. This concept ought to be examined in the context of the regulatory framework for exemptions to the open offer requirement. Parties pursuing a common objective or purpose to acquire shares, voting rights, or control over the target company are considered persons acting in concert. This includes companies under the same management or control as the acquiring entity. The author contends that acquisitions of shares or voting rights within the same group, where control of the target company remains unchanged, may not necessitate a mandatory open offer.

SEBI’s narrow interpretation of the inter-se transfer exemption is critiqued for failing to consider the exemption’s purpose and the broader scope of qualifying parties. By limiting the exemption to “immediate relatives,” SEBI adds administrative burden and strays from a purposive interpretation of the Takeover Code. The author proposes modifying the exemption to specifically include transfers among shareholders of the holding company of the target company.

SEBI’s narrow interpretation has the potential to increase administrative burden by imposing additional disclosure requirements, regulatory scrutiny, compliance costs, and uncertainty. This affects parties involved in transfers between shareholders of the holding company, especially smaller companies or individual shareholders with limited resources. A more inclusive interpretation of the inter-se transfer exemption would bring clarity, reduce administrative burden, and promote consistency.

– Simran Sharma