The Securities and Exchange Board of India (“SEBI”) has issued an informal guidance dated October 9, 2018 (published on January 21, 2019) in the matter of M/s. Shreevatsaa Finance and Leasing Limited (“Target Company”) under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) and SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”).

Facts

Mr. Praveen Kumar Arora is part of the promoter group of the Target Company holding 64.61% (sixty four point six one percent) of the paid up equity share capital in the Target Company. The promoter group entity in the Target Company consists of Mr. Praveen Arora and Agarni Leasing and Finance Private Limited (“ALFP”). The entire shareholding of ALFP is held by Mr. Som Arora, brother of Mr. Praveen Arora and Mrs. Vrsha Arora, sister-in-law of Mr. Praveen Arora. 

Mr. Arora is proposing to acquire 10.39% (ten point three nine percent) shareholding of the Target Company from the other promoter, namely ALFP.

Pursuant to the completion of the proposed transaction, the shareholding of Mr. Praveen Arora will increase to 75% (seventy five) in the Target Company. However, there will not be any change in the aggregate shareholding of the promoter group and control and management of the Target Company on account of inter-se transfer amongst promoter group entities. 

Issues:

An informal guidance has been sought on the following issues:

a. Considering that the transferor and the transferee have been promoters of the Target Company for a period of more than 3 (three) years, whether the proposed acquisition would be exempt from the open offer obligations as envisaged under Regulation 10 (1)(a)(ii) of the Takeover Regulations?

b. Whether an off market inter-se transfer of shares between the promoters of the Target Company would come under the exemption of Regulation 4(1)(i) of the PIT Regulations or are they mandated to furnish a trading plan as stated in Regulation 5 of the PIT Regulations?

Applicable regulations

a.            Regulation 10 of the Takeover Regulations lists down the general exemptions from the obligations to make an open offer. Regulation 10(1)(a)(ii) of the Takeover Regulations states the following:

“The following  acquisitions  shall  be  exempt  from  the  obligation  to  make  an  open  offer  under  regulation  3  and  regulation  4  subject  to  fulfilment  of  the  conditions stipulated therefor,

(a) acquisition  pursuant  to  inter  se  transfer  of  shares  amongst  qualifying  persons, being,

(i) immediate relatives;

(ii) persons  named  as  promoters  in  the  shareholding  pattern  filed  by  the  target  company  in  terms  of  the listing regulations or  as  the  case may be, the listing agreement or these regulations for not less than three years prior to the proposed acquisition…”

b. Regulation 4 (1)(i) of the PIT Regulations states the following, 

“No  insider  shall  trade  in  securities  that  are  listed  or  proposed  to  be  listed  on  a  stock exchange when in possession of unpublished price sensitive information:

Explanation- When a person  who  has  traded  in  securities  has  been  in  possession  of  unpublished  price  sensitive  information,  his  trades  would  be  presumed  to  have  been  motivated  by the knowledge and awareness of such information in his possession.

Provided that the insider  may  prove  his  innocence  by  demonstrating  the  circumstances  including the following: 

(i)  the  transaction  is  an  off- market  inter-se transfer  between  insiders who  were  in  possession  of  the  same  unpublished  price  sensitive  information  without  being  in  breach of regulation 3 and both parties had made a conscious and informed trade decision.

Provided  that  such  unpublished  price  sensitive  information  was  not  obtained  under sub-regulation (3) of regulation 3 of these regulations.

Provided  further  that  such  off-market  trades  shall  be  reported  by  the  insiders  to  the company  within  two  working  days.  Every  company  shall  notify  the  particulars  of  such trades  to  the  stock  exchange  on  which  the  securities  are  listed  within  two  trading  days from receipt of the disclosure or from becoming aware of such information.”

c. Regulation 4 (1)(ii) of the PIT Regulations provides an insider with the defence that the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.

d. Regulation 5 of the PIT Regulations deals with trading plans and provisions related thereto and entitles an insider to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan. 

SEBI Guidance

With respect to the first issue on whether the proposed transaction would qualify for exemption from open offer obligations under Regulation 10(1)(a)(ii) of the SAST Regulations, SEBI answered in the affirmative. SEBI held that the exemption from open offer obligation under regulation 3 as contained under regulation 10(1)(a)(ii) of the Takeover Regulations would extend to the proposed transfer of shares subject to the compliance of the conditions as stipulated under regulation 10 of the Takeover Regulations. 

With respect to the second issue, on the guidance sought under PIT Regulations, SEBI held that the proviso (i) to Regulation 4(1) of the PIT Regulations, is not an exemption from complying with the provisions of Regulation 4 of the PIT Regulations but can only be used as a defense in case an insider is charged for violating Regulation 4(1) of the PIT Regulations. 

Further, on the question of whether a trading plan has to be mandatorily furnished, SEBI observed that provisions of Regulation 5 of the PIT Regulations only provide for an option to the insiders to formulate a trading plan as the said persons are presumed to be perpetually in possession of UPSI. If an insider opts to have a trading plan as per the regulation, then it may act as a circumstance to prove an insider innocent for the trades executed in terms of the proviso (iii) to Regulation 4(1) of the PIT Regulations.