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 stated:
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.