Preferential allotment restriction on promoters for inter-se ‘gifting’ of shares – Step towards transparency

SEBI vide its Interpretative Letter in the matter of KJMC Financial Services Limited has utilized the opportunity to reiterate the legal position on inter-se transfer of shares between the promoters and the company’s eligibility to issue securities to its promoters on a preferential allotment basis.

Background

In the matter of KJMC Financial Services Limited, Mr. Inderchand Jain i.e. promoter of the company has executed inter-se transfer of 10,08,354 equity shares amounting to 22.48% of total shareholding to his wife Mrs. Chanddevi Jain by way of gift. As the inter-se transfer was by way of gift, the promoter has taken exemption from regulation 72(2) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) wherein a person who has sold any equity shares of the issuer during last six months preceding the relevant date cannot make preferential issues of specified securities.

Additionally, as inter-se transfer to immediate relatives is exempted under regulation 10(1)(a)(i) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) the promoters were exempted from the requirement of making open offer. Further, considering there was no change in promoters shareholding of the company necessary reporting’s have been made under Takeover Code and Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“Insider Regulations”).

The promoter has sought interpretative letter under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 regarding interpretation of regulation 72(2) of ICDR Regulations wherein SEBI has stated that the inter-se transfer of equity shares by way of gift from Mr. Inderchand Jain to his wife Mrs. Chanddevi Jain shall be considered as sale and mentioned that the intention of the regulation 72(2) of ICDR Regulations was not with respect to ‘consideration’ but with ‘change in ownership of equity shares’.

Analysis

The Securities and Exchange Board of India Act, 1992 read with applicable regulations framed thereunder does not define the term ‘sale’. For the purpose of clarity, we will refer to Section 4 of Sale of Goods Act, 1930 which provides for sale and agreement to sell and states that a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Hence, if the transfer of property in goods is not for a price and/or consideration, the same will not be considered as sale. Further transfer of property can be with or without consideration but sale cannot be considered valid without consideration. Therefore, ‘transfer’ is a genus whereas ‘sale’ is its specie.

Additionally, we refer to regulation 10 (1) of the Takeover Code provides for the acquisitions which shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 of the Takeover Code. Clause (a) of the said sub-regulation provides for instances where acquisition pursuant to inter se transfer of shares shall be exempt from the obligation to make an open offer. Now, here the intent of the regulation 10(1)(a) of Takeover Code is to exempt acquisitions pursuant to inter se transfer of shares and the same is not only limited to acquisition pursuant to inter se sale of shares, it can either be by way of sale or by way of gift or otherwise.

Now, regulation 72 of ICDR Regulations provides for conditions for preferential issue and under sub-regulation (2) states that an issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date. Furthermore, the explanation to the said sub-regulation states that where any person belonging to promoter(s) or the promoter group has sold his equity shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall be ineligible for allotment of specified securities on preferential basis. In view of the said regulation 72(2) of ICDR Regulations, it is crystal clear that the intention of the regulation is to prohibit preferential issues of specified securities by a person who has sold any equity shares of the issuer during last six months preceding the relevant date and not otherwise. Further, SEBI in its earlier Interpretative Letter (Reference no. CFD/DIL/MISC/IG/SK/RA/4016/2012 dated 14th Feb.2012) in the matter of M/s Strides Arcolab Limited clarified on regulation 72 (2) of ICDR Regulations and stated that, the term “any person who has sold any equity shares of the issuer” shall also include any person who has made inter-se transfers within the Promoter group.

Furthermore, the term used in the said regulation 72(2) of ICDR Regulations is ‘sold’ and not ‘transfer(red)’, which in other words again shows the intention of the said regulation to include inter-se transfer between promoters by way of sale .i.e. for a price and/or consideration and not otherwise. The objective of the said regulation 72 of ICDR Regulations is to prevent short-termism from certain persons who are aware of price sensitive information on price movements and who can take advantage of such price movements to sell shares and then obtain them through preferential allotment at more beneficial price and more specifically promoters as they are in a position to control the allotments through their substantial shareholding in the company

Inter se transfer including transfer by way of gift amongst the promoters without a sale to persons outside the group is only considered as rearrangement of shareholding amongst the promoter group and the same does not seem to be the intent of the said regulation 72(2) of ICDR Regulation. SEBI being a regulator, in case of sale of shares, is concerned with protecting the interest of the public shareholders and wants to know the entire set of particulars on the basis of which such promoter is doing inter-se transfer of shares between promoters by way of sale for bringing better transparency and to tap unlawful dealing in securities.

Therefore, the primary intention of the regulation 72(2) of ICDR Regulations is with respect to the sale of shares i.e. price and/or consideration and not with respect to change of ownership of equity shares and the interpretation of SEBI on regulation 72(2) of ICDR Regulations in its Interpretative Letter in the matter of KJMC Financial Services Limited to consider inter se transfer of shares between promoters by way of gift as sale will not bring the intention that the regulation 72(2) of ICDR Regulations seeks to deliver. However, SEBI’s contention could be that Special and Subsequent Law (SEBI Act and the Regulations made thereunder) shall prevail over all General laws including Sale of Goods Act, 1930 and the Transfer of Property Act, 1832 having regards to intent and that Investor’s interest  are paramount to be protected by SEBI as a Regulator. 

The view expressed in this article are personal.