MC EXCLUSIVE SEBI panel rejects proposal on blanket exemption in case of family arrangements under Takeover Code.

SEBI panel rejects proposal on open exemption in case of family arrangements under Takeover Code.

• SEBI panel denies blanket exemption for family arrangements in takeover rules
• No exemption for fund-to-fund transfers or primary market issuances
• Each case to be scrutinized separately; SEBI to issue consultation paper

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A key SEBI panel has rejected the proposal to grant blanket exemption to family arrangements under the takeover regulations, on the ground that such deals are too complex and varied to be given a regulatory free-pass. As per sources, panel has also rejected the idea of giving exemption in case of fund to fund transfers and exemptions for trigger of open offer in case of primary issuances.

On family arrangements, the committee flatly turned down a proposal to exempt inter-se transfers arising out of family settlements from mandatory open offer requirements. The committee was of the view that family arrangements can have innumerable provisions and can deal with a variety of rights, liabilities, entitlements and assets, including listed company shares.

More importantly, such arrangements may also include clauses related to third parties, raising serious minority shareholder concerns. The panel emphasised that the mere permission of a court does not ensure compliance with SEBI’s takeover regulations, as the courts may always not be required always to consider the provisions of the Takeover Code.

Panel’s view is that each family arrangement is unique and impossible to put in a same frame. So, each case requires separate regulatory scrutiny. Hence, it strongly recommended against including family arrangements as an exempt category under Regulation 10, of Takeover Code.

SEBI had proposed that share transfers arising from family settlements or arrangements should be exempt from open offer requirements, if they are supported by formal agreements and approved by a competent authority. As such transfers only involve re-distribution of assets within a family, including shares of listed companies. As a safeguard SEBI had suggested that there should be no change in family controlling the listed company. But the panel rejected the SEBI’s proposal.

The panel adopted a similar stance on inter-se transfers between funds, rejecting a proposal that sought exemption where control structures remain unchanged. The committee pointed out that each fund is different, often managed or controlled by different person or entities, and in many cases, it is difficult to even ascertain the true control structure. Granting such exemptions, it cautioned, could weaken the enforcement architecture of the takeover code. The panel did not accept this proposal.

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The panel also declined to revive an exemption for primary market transactions, including preferential allotments and PIPE deals, even under tightly controlled conditions.

SEBI had proposed that primary market transactions, such as Private investment in public equity (PIPE) deals, can be beneficial for companies and their shareholders and should not be discouraged by mandatory open-offer obligations on PIPE investors. It noted that jurisdictions such as the UK and Singapore permit such transactions through tightly regulated “whitewash” mechanisms, and suggested that a similar framework could be considered in India. SEBI also pointed out that a comparable exemption earlier existed under the 1997 Takeover Regulations but was removed through an amendment in 2002.

Currently, both primary market transactions, where the company issues new shares to an acquirer, and a secondary market transaction, whereby an acquirer buys shares from an existing shareholder, are treated on par for the purpose of triggering the mandatory open offer requirement.

The panel cautioned that exempting preferential allotments under Regulation 10 could allow the takeover regulations to be easily circumvented. It noted that although similar exemptions existed under the 1997 takeover regulations, they were deliberately removed in 2002 to prevent misuse.

SEBI is expected to come up with a consultation paper based on the recommendations of the Panel formed to review the Takeover Code. The panel had submitted its report last year and is being reviewed internally by SEBI.

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