Applicability of SAST, PIT and ICDR on Company’s Succession Planning Transactions

Securities Exchange Board of India (“SEBI”) vide its informal guidance to the promoter of Shri Dinesh Mills Limited (“SDM”), dated November 4, 2019 has made certain observations in relation to overall succession planning transactions between the promoters/promoter group members in relation to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT”), SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“SAST”) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”).

SDM’s promoters, as part of succession planning, intended to transfer their shareholding in SDM through a series of transactions to various family trust which involved:

(i) Conversion of outstanding warrants of the promoters/promoter group members into equity;

(ii) An off-market gift of shares between family members to members of the promoter group); and

(iii) Migration of shares held by members of the promoter group to family trusts (“Acquirer Trusts”).

SEBI was informed that the Acquirer Trusts are controlled by trustees who are members of the promoter/promoter group and their beneficiaries are also members of the promoter/promoter group. Further, SDM represented that the Acquirer Trusts shall be part of ‘new promoter’/ ‘promoter group’/ ‘persons in control of the issuer’. Further, ICDR provisions will not be contravened on transfer of locked-in securities and the balance lock-in period shall continue in the hands of the Acquirer Trusts.

In the above context, SEBI’s responses to the questions posed by SDM were as follows:

(a) Whether the proposed inter-se off-market transfer of shares between insiders within a period of 6 months post receipt of shares by the same promoter/member of promoter group pursuant to conversion of warrants will violate provisions regarding contra-trade of PIT and if the promoters/promoter group members who had acquired shares through inter-se off-market transfer of shares or through block deal window mechanism between promoters/promoter group members wants to transfer shares to the Acquirer Trusts within 6 months would violate the provisions regarding contra trade under PIT.

SEBI clarified that, the applicability of PIT in case of SDM which has allotted share warrants (convertible at the option of holder within 18 months) to its promoters/promoter group as a part of succession planning between promoter families, may attract contra trade restrictions under PIT if transferred to the Acquirer Trusts within 6 months.

Further, SEBI clarified that if the promoters/promoter group members who had acquired shares through such inter-se off-market transfer/block deal window mechanism want to transfer shares to the Acquirer Trust within 6 months, the said transfer may also attract the contra trade restrictions under the PIT.

(b) Whether the equity shares acquired by the promoters/promoter group members of SDM, pursuant to the exemption under Regulation 10(1)(a) and Regulation 11(1) of SAST respectively in the financial year 2019-20 consume or reduce the creeping acquisition limit of 5% in the same financial year 2019-20 per regulation 3(2) of SAST.

SEBI clarified that the acquisition which is otherwise exempt under SAST may not be counted towards computing acquisitions on a gross basis under the creeping acquisition limits per regulation 3(2) of SAST.

(c) Whether the specified securities (i.e. shares of SDM) held by promoters/promoter group members and locked-in per regulation 167(1) of ICDR can be transferred to the Acquirer Trusts per regulation 168(1) of ICDR.

SEBI clarified that the specified securities held by promoters/promoter group members and locked-in as per regulation 167 of ICDR may be transferred to the Acquirer Trusts under regulation 168(1) of ICDR, however the transferability would be subject to the SAST.

A welcome informal guidance as it provides clarity on what acquisitions would be counted on a gross basis for the market and promoters/promoter groups of listed entities who wish to undertake various succession planning transactions which may trigger provisions of PIT, SAST and ICDR.

Authors:

Aditya Alok, Senior Associate
Sushim Aryan, Associate

Date: September 21, 2020