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SAT order on exemption for inter se transfer between promoters and validity of SEBI Informal Guidance

Finsec Law Advisors

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The Securities Appellate Tribunal has recently passed an order in relation to the exemption from the requirement to make an open offer under the Takeover Regulations, 2011, for a transfer of equity shares of a listed company between its promoters.

In the case before the Tribunal, two promoters of India Bulls Infrastructure and Power Limited (Target Company) had undertaken a transfer of equity shares of the Target Company without making an open offer to its public shareholders. They had relied on the exemption under regulation 10(1)(a)(ii) of the Takeover Regulations which provides that an inter se transfer of shares between persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement for not less than three years prior to the proposed acquisition will be exempt from the open offer obligations.

The Tribunal agreed with SEBI’s contention that in order for promoters to utilize the above specified exemption, the shareholding pattern filed by the Target Company in terms of its listing agreement has to be available for a minimum of 3 years post listing. Since the Target Company in the present case was not listed and had not filed shareholding patterns for a period of 3 years before the proposed transaction, the Tribunal resorted to a literal interpretation of regulation 10(1)(a)(ii) of the Takeover Regulations and held that the transaction was not exempt.

The Appellant argued that they had relied on an informal guidance issued by SEBI in the case of Weizmann Forex Limited where, based on similar facts, the SEBI official had taken a purposive interpretation of Regulation 10(1)(a)(ii) and had exempted the transaction from open offer obligations. The Tribunal held that SEBI had inadvertently provided an interpretation in the spirit of the old takeover regulations of 1997, which simply required shareholding in a target company for 3 years, oblivious to the language under the Takeover Regulations. The Tribunal further held that an informal guidance will not be binding on SEBI and that, where the language of the regulations is clear, informal guidance should not be relied on. Further, the fact that SEBI has consistently followed a literal interpretation of regulation 10(1)(a)(ii) in several decisions, barring the Weizmann Forex case, does not help the Appellant’s cause. Although the informal guidance issued by a department of SEBI was never binding on SEBI, it is now important for advisors and market participants to ensure that they do not take positions which are contrary to the language of the regulations, in reliance of previous informal guidance. That will not be a valid defense in any enforcement action taken by the regulator. We may, however, not have heard the last word on the interpretation of regulation 10(1)(a)(ii) yet, as the Appellants have declared their desire to appeal the decision.