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An exemption paradox

Recent informal guidance issued by the Securities and Exchange Board of India has taken a view which well misses the woods for the trees.

The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Code), which came into force late in 2011, evidently intends to keep an eye on all transactions that could lead to a takeover. But in this pursuit, recent informal guidance issued by the Securities and Exchange Board of India (Sebi) has taken a view which well misses the woods for the trees.

The Code exempts scheduled commercial banks (SCBs) and certain kinds of financial institutions (PFIs) from disclosure and open offer obligations in certain cases. This includes the creation and invocation of a pledge when such pledge is created in the ordinary course of business.

In separate applications made by IL & FS Trust Company and IDBI Trusteeship Services, the applicants sought to extend the exemption where such pledges were created in their favour. The applications expressly stated that the applicants, in certain cases, act on behalf of the SCBs and the PFIs. In effect, at least for a class of transaction, what was being sought was that the exemption available to the SCBs and PFIs directly, be also extended to them indirectly.

In a strict interpretation of the Code, Sebi's informal guidance took the view that the applicants would be governed by all the provisions of the Code since no express exemptions had been given to them. This means that that the trustees would be considered as "acquirer" for the purposes of the Code even when acting as trustee only for SCBs and PFIs.

In the taking of this view, the SCBs and PFIs would not be exempted even where a pledge was created in favour of the trustee for the sole benefit of SCBs and/or PFIs.

Many SCBs or PFIs prefer to employ the services of a trustee when entering into pledge transactions, for various reasons, especially where the lending is a syndicated loan.

In making a blanket statement, that the Code would be applicable in its entirety to the applicants, the informal guidance has resulted in a unique situation where what would be a direct exemption provided to SCBs and PFIs would not be indirectly provided to them when a trustee is interposed.

This strict application of the Code offers no wiggle room to trustees, as far as disclosures are concerned. Notionally, there is possibly some leeway in the context of the open offer obligations. This is because any person can apply to Sebi for exemptions from open offer obligations. Given that this relates to invocation of pledges of listed securities, not many would be inclined to so approach Sebi.

It would be appropriate if Sebi amends the norms to provide for an express exemption in these circumstances.

Nitu Agarwal and Saranya Gopinath

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