The Securities Exchange Board of India (SEBI), vide the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), stipulates that any acquisition of voting rights in a listed company in excess of the thresholds specified therein would trigger an obligation to make a mandatory open offer. The intent behind this obligation is that public shareholders must be provided an opportunity to exit when a party acquires substantial stake or control in the target company. However, such an obligation would be too onerous if it were to apply to circumstances involving inter group transfers, transfers between immediate relatives or promoters, transfers pursuant to transmission, succession or inheritance, acquisitions by lenders pursuant to debt restructuring, etc.
Accordingly, SEBI has provided certain general exemptions subject to certain conditions being complied. Where a transaction does not fall into one of these categories or where certain prescribed conditions are not being fulfilled, Regulation 11 of the Takeover Regulations empowers SEBI to grant exemptions to specific transactions on a case to case basis. The acquirer must file an application with SEBI, supported by a duly sworn affidavit, giving details of the proposed transaction and the grounds on which the exemption has been sought.
Standard Format for Exemption Applications
Earlier, SEBI had shared the format for an exemption application with certain applicants in the past and customarily applications were being submitted in the same format. SEBI has now decided to formalise the standard format in order to ensure uniformity of disclosures in such applications. On 22 December 2017, SEBI issued a circular (Ref: SEBI/HO/CFD/DCR1/CIR/P/2017/131) (Circular) specifying the standard format and providing instructions on the process involved. Broadly the exemption application should include the following information in terms of the Circular:
- General details: Information regarding the acquirer, such as - whether the application is being made by the applicant or by a duly authorised representative, whether the acquirer is a promoter or part of the promoter group of the target company, past applications for exemption, details of pending directions by or proceedings before SEBI, etc.
- Details of target company: General information including a brief history of the target company, details of its directors and promoters, details of its share capital, information regarding market price of its shares, the minimum offer price per share that would be payable as per the Takeover Regulations if an open offer was made, etc.
- Details of the proposed acquisition: Information regarding number and percentage of shares or voting rights proposed to be acquired, the proposed acquisition price, details of the proposed sellers, pre and post shareholding patterns, whether the proposed acquisition would result in a change in control, the grounds for seeking exemption, etc.
Cases involving a trust as an acquirer
In the recent past, there has been an increase in the number of exemption applications being made by parties where the transaction involves settlement of shares to a family trust. This is usually in circumstances where promoters are undertaking succession planning involving transfer of shareholding held by individual promoters or promoter companies to trusts created with the promoters and their heirs as the beneficiaries. SEBI has been considering these applications on a case to case basis based on the recommendations of the takeover panel. In light of the increased number of exemption applications for such transactions, SEBI has included a separate schedule in the Circular discussing such cases and providing clarity regarding their treatment. Considering the various exemption applications involving trusts as acquirers that have been approved, SEBI has created a list of conditions that such applicants have satisfied which would act as guiding principles for any future applicants seeking an exemption:
- The trust deeds must expressly state that: (1) the trust was a mirror image of the promoter’s holdings; (2) the trust’s beneficiaries and trustees only included individual promoters, their immediate relatives or their lineal descendants; (3) the beneficial interest of the beneficiaries has not been and will not be transferred, assigned or encumbered; (4) the assets will be distributed only to the beneficiaries of the trust or to their legal heirs on dissolution of the trust; and (5) the powers of trustees cannot be transferred or delegated to any persons other than themselves.
- Further, the trust deed must include the following undertakings: (1) the trustees and indirectly the beneficiaries are vested with control or ownership of shares or voting rights for the purposes of the SEBI Act, 1992 and the regulations thereunder; (2) any change in trustees or beneficiaries or change in ownership and control of shares would be disclosed within 2 days; (3) the trust shall confirm, on an annual basis, that it is in compliance with the exemption order passed by SEBI and get its compliance status certified from an independent auditor.
- In addition, the transferors must have been promoters of the target company for over 3 years (except for holding on account of inheritance), there must be no layering in terms of trustees / beneficiaries, and the trust deed must not limit the liability of any trustees or beneficiaries in relation to the SEBI Act, 1992 and the regulations thereunder.
While the above conditions will be the basis on which an application is considered, SEBI has clarified that complying with them would not ensure grant of exemption but would significantly expedite the exemption process. SEBI and the takeover panel will continue to scrutinise all applications on a case to case basis.
The standardised format for making an exemption application is a welcome move as it would streamline the application process and bring in certainty for applicants regarding SEBI’s expectation on the disclosure front.
With regard to settlement of shares to a trust, the Circular seems to have been issued given the precautionary approach being adopted by certain parties and makes such transfers more restrictive and subject to a specific exemption. Strictly speaking under Indian trust law, ownership of the asset is vested with the trustee and therefore it is the relationship between a settlor and trustee which should be considered for ascertaining availability of a general exemption. So long as the settlors and the trustees of the relevant trust satisfy the requirements for an inter-se transfer exemption, a general exemption should ideally be available.
On the positive side, given that SEBI has now clarified the conditions and undertakings required with such applications, one hopes that it would assist SEBI in expediting decisions made on these applications and facilitate timely implementation of settlement transactions.