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Guidelines for exemption application where trust is an acquirer

Finsec Law Advisors

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On December 22, 2017, SEBI has issued a circular outlining a standard format for the filing of an application under Regulation 11 (1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) requesting exemption from the obligation to make an open offer (“Circular”).

Over the past few years, promoters of various listed companies, including that of Wipro, Dr. Reddy’s, NIIT, have rearranged their shareholding by transferring the shares held by the promoter group to a trust for charitable purposes or for family succession or for tax purposes. Post restructuring the shares would be held in the name of the trust and not the promoters themselves, even though they continue to hold beneficial interest in those shares. This restructuring also helps promoters to ring fence their personal assets from their business liabilities.

Under the Takeover Regulations, an acquirer (trust in this case) acquiring shares or voting rights over the specified threshold or control over a listed company has to mandatorily make an open offer. Therefore, such acquirers, i.e. trusts, have been seeking exemption from open offer obligations by filing applications under Regulation 11 of the Takeover Regulations and many of them have received such exemption.

To streamline the process of applying for such exemption, SEBI has issued the Circular outlining the standard format for filing an exemption application in cases involving restructuring of shareholding in the form of a trust. The schedule to the Circular lists indicative conditions, guidelines and undertakings to be given by the applicant where the acquirer is a trust (“Guidelines”). These Guidelines are a consolidated restatement of previous orders where such exemption had been granted by SEBI. The objective behind the Circular is to ensure the quick processing of such exemption applications.

The basic rationale for SEBI to grant such exemptions is that pursuant to such restructuring, there is no effective change in control or transfer of shares to any third party and therefore open offer obligations should not be imposed for such restructuring. The Circular provides the Guidelines to be followed by exemption applicants to ensure that there is no effective transfer of control or shareholding to third parties.

Chiefly, the Guidelines mandate the trustees and beneficiaries of the transferee trust to be immediate promoters, or their relatives and lineal descendants with specific exclusion of any third party. Further, the Guidelines also prohibit private companies formed by such promoters or their lineal descendants from becoming trustees, as shareholding details of such private companies are not in public domain. The regulator feel that there is a potent risk that shares of such private companies can be later transferred to third parties without the knowledge of the regulator or the stakeholders.

This is a welcome move as it will provide guidance towards the necessary pre-requirements while making exemption application involving trusts, which would lead to an early disposition of cases.