On March 31, 2022, the Securities and Exchange Board of India (“SEBI”) published on its website, an informal guidance dated December 29, 2021 (“Informal Guidance”) in connection with the provisions of Chapter III (Prospectus and Allotment of Securities) of the Companies Act, 2013 (“2013 Act”), in response to a request from Equirus Capital Private Limited (“ECPL”).
ECPL is a registered merchant banker and was approached by certain prominent shareholders (“Shareholders”) of FabIndia Limited (“FabIndia”) seeking a clarification on the proposed transaction given below:
SEBI was requested to opine on whether the Proposed Transaction would be deemed to constitute a ‘public offer’ in terms of the provisions of Chapter III of the 2013 Act.
SEBI observed that as per Section 42(2) of the 2013 Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, any offer by any company, listed or unlisted, to allot or invitation to subscribe, or allotment of securities to more than 200 persons, in the aggregate, in any financial year, shall be deemed to be an offer to the public. SEBI held that gifting of shares by the existing shareholders of a company, which does not involve payment of any consideration by the transferee may not constitute a deemed public offer, unless there is an existence of a design/ arrangement between the company and the existing shareholders to circumvent the applicable provisions of law. As such, in the absence of any design/ arrangement to circumvent the law, the Proposed Transaction may not per se be deemed a public offer.
ECPL had also sought clarification from SEBI on the following:
However, with respect to (a) above, SEBI noted that the information given by ECPL was not sufficient to examine the query. With respect to (b), SEBI noted that disclosures to be made in the DRHP were specified in the SEBI (Issue of Capital and Disclosure Requirements) Regulations. Further, the Proposed Transaction was only a hypothetical situation and there was no certainty as to how the transaction would be actually executed. As such, no reply could be given to such query.
It can be seen that in view of the unusual nature of the Proposed Transaction, SEBI has looked at the spirit of the law and has not adopted a strict literal interpretation. It is interesting to note that SEBI has introduced the requirement of there being “absence of a design/ arrangement to circumvent the provisions of law” in order for a gift of shares to more than 200 persons, not to constitute a public offer.
Please find a copy of the Informal Guidance, here.
This update has been contributed by Vinod Joseph (Partner) and Smriti Tripathi (Associate).
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