SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 (“Takeover Regulations“) framed by the Securities and Exchange Board of India (‘SEBI’) provide that if any person (together with persons acting in concert with him) acquires voting rights or control in a target company in excess of the threshold limits stipulated under the regulations, he is required to provide an exit opportunity to other shareholders of the target company by making an open offer in accordance with the Takeover Regulations.  Regulation 10 of the Takeover Regulations however carve out certain exemptions from the obligation of making open offer under the regulations. One of such exemptions covered under Regulation 10 (1) (a) (ii) of the Takeover Regulations is the acquisition made pursuant to inter se transfer of shares amongst qualifying persons, that is those persons who have been named as ‘promoters’ in the shareholding pattern filed by the target company in terms of the listing agreement or Takeover Regulations for not less than three years prior to the proposed acquisition. The said exemption is subject to the acquisition price falling within the prescribed pricing norms, the transferor and transferee having complied with disclosure requirements under Chapter V of the Takeover Regulations as also filing of certain reports / disclosures with the stock exchange and SEBI.

Against the above background, the question that arises is whether the period of being disclosed as promoter of the target company prior to getting listed could be considered for the purpose of computing the aforesaid period of three years prior to the proposed acquisition. In other words, whether inter se promoter transfers could be made under Regulation 10 (1) (a) (ii) prior to completion of three years of listing?

The Securities Appellate Tribunal (“SAT“) by its recent order dated April 5, 2016 passed in the matter of Arbutus Consultancy LLP vs SEBI (Appeal No. 123 of 2016) has after thoroughly examining the issue, answered the question in the negative and observed that “it is irrelevant whether the same promoters were holding the same shares for over a long period either in the target company or in the parent company or both, prior to listing the target company. The only relevant factor is date of listing the target company and the promoter holding filed by the target company as part of the listing agreement.“

The effect of this order confirming SEBI’s decision is that for the purpose of reckoning the period of being named as promoter in shareholding pattern of the target company in terms of listing agreement commences from the date of the target company’s listing. With that view in mind, the date of inter se promoter transfers was held to be the date on which the obligation to make the open offer under the Takeover Regulations was triggered and consequently, the appellant (being the acquirer) would be required to make the open offer at an offer price of Rs. 6.30/- per share instead of Rs. 3.20/- as stated by it in the public announcement plus pay interest @ 10% to those shareholders who have been holding shares of the target company from the date of inter se promoter transfer.

During the course of the arguments, another interesting question of law which emerged was whether the informal guidance given by SEBI would be binding on it?

As per the appellant, one of the reasons for undertaking the impugned inter se promoter transfer by it was on account of the informal guidance given by SEBI vide its letter dated October 25, 2012 in the matter of Weizmann Forex Limited wherein on facts similar to the present appeal, SEBI had opined that transfer of shares would be eligible for exemption under regulation 10(1)(a)(ii). This opinion, however, was superseded by another informal guidance given by SEBI subsequently in the matter of Commercial Engineers and Body Builders Company Ltd. which was also available in the public domain on the same issue at the relevant time when the appellants acquired shares through inter se promoter transfers.

SEBI relied upon the subsequent informal guidance and submitted that official of SEBI had erred in the Weizmann Guidance by inadvertently providing an interpretation in the spirit of Takeover Regulations, 1997 oblivious of the changes that happened in terms of Takeover Regulations, 2011 and that such a mistake made by an officer of the respondent cannot be used to furtherance of the mistake. It was further argued by SEBI that when the statute is clear, informal guidance should not be relied on and that the informal guidance issued by SEBI is the view of the concerned department of SEBI and cannot be said to be binding on the SEBI Board. According to SEBI, the informal guidance should not be construed as a conclusive decision or determination of any question of law or fact by SEBI and that such a letter cannot be construed as an order of SEBI under section 15T of the SEBI Act.

After hearing the parties at length, SAT came to the conclusion that an interpretation provided under informal guidance by an official of the department of SEBI cannot be used against the correct interpretation of law. SAT also placed reliance on the order passed by it on August 28, 2009 in the matter of Deepak Mehra v. SEBI wherein the legality of informal guidance was examined by SAT and held that informal guidance was the view of the department of SEBI and cannot be construed as law.

Conclusion:

In a nutshell, for the purpose of reckoning the period of being named as a promoter in the shareholding pattern of the target company for claiming exemption under Takeover Regulations, the same will be deemed to commence from the date of the target company’s listing. Major takeaway from the SAT’s order is that a party cannot blindly rely upon the informal guidance given by SEBI in some earlier case if SEBI’s opinion is patently faulty vis-à-vis clear provisions of the statute on that point. To prevent the market participants from erring by relying on SEBI’s informal guidance, it is expected that SEBI will strengthen its internal mechanism to ensure that its informal guidance given in any manner is legally sound and tenable. While technically SEBI Board may not be bound by the view of its department, repeated rejection of informal guidance at a later date could seriously dent the sanctity of such opinion. Consequently, the market participants could lose confidence in the mechanism which was evolved to provide guidance in a highly complex regulatory regime of securities market.

It is not clear what would have been the outcome of the matter if the appellant itself had taken the informal guidance in its case and SEBI had tried to take a different position later on. Certainly, if in such a situation also one is not certain then perhaps, no purpose is being served by the Informal Guidance Scheme.

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