Friday, September 23, 2016

Exempted inter-se transfer amounts to ‘sale’

[The following post is contributed by Supreme Waskar, who is a corporate lawyer in Mumbai]

In an earlier post on February 18, 2012, Mr. Umakanth Varottil had discussed the informal guidance issued by the Securities and Exchange Board of India (SEBI) to Strides Arcolabs in connection with the company’s eligibility to issue securities to its promoters on a preferential allotment basis. Through its informal guidance dated September 12, 2016 in the matter of KJMC Financial Services Limited (“KJMC”), SEBI has utilized the opportunity to reiterate the legal position on the company’s eligibility to issue securities to its promoters on a preferential allotment basis.
  
Background

During April 2016, the promoter of KJMC executed an inter-se transfer of equity shares by way of gift to his wife. There was no change in the promoter holding pursuant to the above inter-se transfer and it was a gift without any consideration.

Issues
1.     Whether inter-se transfer of shares by way of gift amounts to sale of shares?
 2.     Whether exempted inter-se transfer of shares by way of gift by the promoter(s) will make transferor/promoter(s) ineligible to issue securities on preferential allotment basis in terms of regulation 72(2) of the SEBI (ICDR) Regulations, 2009 (“Regulations”)?

Legal scenario

In terms of regulation 72(2) of the Regulations, where any person belonging to promoter(s) or the promoter group has sold his equity shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall be ineligible for allotment of specified securities on preferential basis. Further as per section 4 of the Sales of Goods Act, 1930, “sales” means the property in the goods are transferred from the seller to the buyer for a price.

SEBI’s view

The primary intention of the Regulations is not with respect to consideration but with “change in ownership of equity shares”. Accordingly, an inter-se transfer of shares by way of gift will be considered as “sale” as envisaged in the regulation 72(2) of the Regulations, thereby making the promoter(s) and promoter group ineligible for allotment of specified securities on preferential basis.

Comments

In terms of the Sale of Goods Act, 1930, a transfer without consideration does not amount to sale. However, for the purpose of regulation 72(2) of the Regulations, a  transfer without consideration even if exempted under regulation 10 of the SEBI Takeover Regulations from making open offer, shall not be eligible for exemption of the application of regulation 72(2) of the Regulations. SEBI’s informal guidance in both these cases clearly indicate that exemptions under regulation 10 of the SEBI Takeover Code are not blanket exemptions from application of all the provisions of securities laws.  

In this context, the issues and concerns raised in the earlier post on this Blog would also operate to the present informal guidance.

- Supreme Waskar

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