Inter Se Promoter Exemption for Takeovers: Computation of Holding Period

A few days ago, SEBI made public its informal guidance issued to Weizmann Forex Ltd. on October 25, 2012. In this case, the target company became listed only in 2011 due to a corporate restructuring process. The question was whether certain shareholders can avail of the exemption for inter se promoter transfer by taking into account the promoter holdings in the previous company from which the business was restructured into the target. Qualifying for the exemption requires that both the transferor and transferee should have been disclosed as promoters of the target company for at least 3 years. SEBI adopted a purposive interpretation to answer in the affirmative thereby making the exemption available in that case even though the parties did not technically satisfy the condition.


The relevant facts can be gathered from the company’s requestto SEBI. Weizmann Forex Ltd., the target company was previously an unlisted company with the name Chanakya Holdings Ltd. As part of an overall restructuring of the Weizmann group, which involved many other legs that are not directly relevant for our present purposes, the forex business of Weizmann Ltd. (the demerged company), being a listed company, was demerged into Weizmann Forex Ltd. (the resulting company). As part of this restructuring process, Weizmann Forex’s shares were listed on the stock exchanges. The promoters of Weizmann Forex intend to transfer certain shares of Weizmann Forex among themselves and hence approached SEBI for informal guidance.

Under Reg. 10(1)(a)(ii) of the SEBI Takeover Regulations, there is an exemption from a mandatory open offer for transfer of shares inter se among qualifying persons being “persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or [the takeover] regulations for not less than three years prior to the proposed acquisition.”

In the present case, none of the proposed transferors of shares were able to satisfy the requirement of being named as promoters in Weizmann Forex as they acquired shares in that company only under the restructuring process. However, if their shareholding in the demerged company (Weizmann Limited) were taken into account for the purpose of computation of the 3-year period, they would satisfy the requirement. Similarly, the transferees too were unable to satisfy the 3-year period of being named as promoters in Weizmann Forex. While one of the transferees held shares for a 3-year period across the two companies (similar to the transferors), the other transferee did not satisfy the 3-year period across two companies (on a combined basis) either.

The issue for SEBI’s consideration was whether, given these facts, the proposed transfer of shares among promoter was exempt from the mandatory open offer requirements under Reg. 10(1)(a)(ii).

SEBI’s Informal Guidance

In interpreting the Takeover Regulations, SEBI considered the 3-year holding period of the transferors and transferees by looking at their holdings on a combined basis in Weizmann Ltd. and Weizmann Forex Ltd. even though they may not have satisfied the requirement strictly with reference to Weizmann Forex Ltd., which is the target company.

Moreover, as far as the transferees are concerned, SEBI’s guidance goes one step further. Even though one of the transferees has not satisfied the 3-year holding period requirement, the exemption has been made available to it. SEBI reasons as follows: “The condition of 3 years shareholding by the transferees prior to the proposed acquisition would be deemed to be fulfilled in case all the transferees collectively hold shares for a period of 3 years prior to the proposed acquisition provided the other conditions for availing the exemption are fulfilled.”


In interpreting the Takeover Regulations, SEBI had adopted a purposive approach in making the exemption available to the parties, as opposed to a literal or technical approach that may have denied this facility to the parties. By taking into accounting the shareholding of the parties in the demerged company, necessary consideration has been placed on the demerger transaction, which is essentially a restructuring of businesses and shareholdings as opposed to a complete transfer or sell-out of the business. In other words, it is considered a purely internal group restructuring.

Such an approach is not unusual. For instance, the Income Tax Act, 1961 considers such demerger transactions (provided certain other conditions are satisfied) as a restructuring (rather than a pure sale) and confers certain benefits in terms of exemptions from capital gains tax. More specifically, for the purpose of computing the holding period, the period of shareholding by a shareholder in the demerged company will be considered at the time of sale of shares in the resulting company. The present interpretation of SEBI brings the holding period under the Takeover Regulations on par with such a regime, which is understandable in the context of restructuring transactions and the purpose of the holding period for purpose of exemption under the Takeover Regulations. The only difference is that the Income Tax Act expressly provides for such treatment, while under Takeover Regulations it is only by virtue of the interpretation adopted by SEBI in this case.

However, in the case of the transferee, to the extent that SEBI finds that all the transferees may collectively satisfy the holding period requirement, it is perhaps providing a fairly liberal reading. This seems to suggest that where there is a group of transferees, it might be sufficient if one or more of the transferees satisfy the holding period requirement, and it is not necessary for each one of them to satisfy it. This might provide greater options to structure transfers that may avail of the inter se promoter exemption. At the same time, it may be argued that this is too much of a stretch of the Regulations, and could be subject to potential misuse.

Developments on the GAAR

The Shome Committee recently released its final report, which can be downloaded from this link. (We had discussed the recommendations of the earlier report on this blog, here.) Following this, the Ministry of Finance has clarified that some of the recommendations of the Committee will be implemented by means of suitable amendments to the provisions as presently enacted. It appears that the Government has decided that the implementation of the GAAR will be delayed, so that the provisions come into force from April 1, 2016. Among the other key decisions taken by the Government are the following:

The definition of an impermissible avoidance arrangement will be amended, such that only those arrangements will fall within the scope of the provision which have “the main purpose” (as opposed to “the main purpose or one of the main purposes”) of obtaining a tax benefit.

The Constitution of the Approving Panel has been modified, and the Panel shall consist of one retired High Court Judge, one IRS officer not below the rank of Chief Commissioner, and one expert academician or scholar having expertise in direct taxes, accounts or international trade.

Directions issued by the Approving Panel shall be binding on the assessee as well as the Income-tax authorities (as opposed to the current provision that the directions shall be binding only on the Income-tax authorities).

The Approving Panel will be permitted to consider, amongst other factors, “the period or time for which the arrangement had existed; the fact of payment of taxes by the assessee; and the fact that an exit route was provided by the arrangement.” These factors may be relevant but will not be sufficient to determine whether the arrangement is an impermissible avoidance arrangement.

Investments made before August 30, 2010 will be grandfathered, and protection is provided to FIIs and non-resident investors in FIIs

The implications of the Finance Ministry’s decisions have been discussed in several articles, including those in the Business Standard, and the HinduBusiness Line.

Legal advice privilege for tax advice given by non-lawyers

One of the striking changes in professional advice over the last two or more decades is the gradual erosion of the monopoly which members of the legal profession once had in giving legal advice. This, with the increasing importance of specialisation, has seen businessmen turn to members of other professions who are experts in particular fields that call for legal advice: for example, a chartered accountant advising a company about tax planning. In Indian law, section 126 of the Evidence Act recognises that legal advice given by a “barrister, attorney, pleader or vakil” is protected and it has been generally assumed (more below) that this privilege is not available to the same advice given by other professionals. Section 126, like many other Indian statutory provisions, is based on the common law in England.

In 2004, PricewaterhouseCoopers [“PwC”] developed a tax avoidance scheme in England and disclosed this to the Revenue (as it was required to do under the Finance Act, 2004). It advised one of its clients, Prudential plc, that it would benefit from using this scheme. HMRC ordered Prudential and PwC to disclose certain documents in connection with the scheme and the question was whether this could be resisted on the ground that the documents were protected by legal advice privilege [“LAP”]. On 23 January, 2013, the UK Supreme Court has declined an invitation (Lords Sumption and Clarke dissenting) to hold that the rationale for LAP makes it impossible to confine it to members of the legal profession. The lead judgment, given by Lord Neuberger (with whom Lords Hope, Mance and Reed agreed) recognises that there is a powerful case to be made in favour of extending LAP to members of other professions and indeed, that not doing so is difficult to defend in principle, but ultimately holds that this is a matter of policy that requires legislative intervention. The judgments of Lords Neuberger and Sumption repay careful study and this post does no more than summarise their reasoning, before describing the position of law in India. The issue is of considerable importance to companies, since it is not by any means uncommon, especially in areas like tax advice, to turn to eminent experts who are not members of the legal profession.

It is convenient to begin with the dissenting view. Lord Sumption makes a characteristically powerful case for jettisoning the widely held view that LAP is confined to members of the legal profession. In summary, he gives three reasons: (1) the rationale for LAP is not the status of the adviser, but his function. The classic judgments on the subject (notably that of Lord Brougham LC in Greenough v Gaskell) demonstrate that the privilege is recognised because a person should be able to obtain legal advice with absolute confidence that his disclosures to his adviser remain private. That the privilege has traditionally only protected advice given by a lawyer is a result of history, not concept: legal advice was rarely given by professionals who were not members of the legal profession; (2) the supposed justification for the contrary view—that lawyers are subject to stricter professional obligations and are more closely regulated by the courts—is unpersuasive, because the source of LAP is neither professional rules nor court supervision but candour in communication and (3)LAP has already been extended to salaried lawyers and foreign lawyers, which can be justified only on a functional approach to LAP. The obvious question is: does this mean that legal advice received from any person whatsoever is privileged? The answer is that it does not. Lord Sumption demonstrates that LAP is confined to advice received from a professional “whose profession ordinarily includes the giving of legal advice”: in other words, was the legal advice incidental to something else (for example, planning advice given by a builder) or was the legal advice itself the subject of the professional relationship? Thus, tax advice from a chartered accountant is privileged but legal advice received from a surveyor about planning rules may not be.

The majority of the Court differed less for reasons of principle than for the fundamental change Lord Sumption’s proposal would introduce into the law of privilege. Lord Neuberger held that the change involves a policy decision that is best left to Parliament, particularly because Parliament has already enacted legislation on the assumption that LAP is confined to lawyers. To Lord Sumption, Parliament’s assumptions about the common law are irrelevant unless the legislation is unworkable in the absence of the assumptions: which arguably it was not. Lord Neuberger also pointed out that the proposed qualification “profession which ordinarily includes the giving of legal advice” replaces a hitherto clear (if not entirely logical) rule with considerable uncertainty, because a court would have to establish what constitutes a profession, and whether to ascertain its ordinary activities at the level of the profession or the particular member of the profession. It is possible that these criticisms are somewhat overstated, especially if one accepts Lord Sumption’s answer that the difference lies in the purpose for which legal advice is given.

The position in India is not different. The courts have generally held that section 126 of the Evidence Act, 1872 and the provisions that follow are limited to members of the legal profession. In Vijay Metal Works AIR 1982 Bom 6, the Bombay High Court held that salaried employees are also covered, although they cannot be described as solicitors, barristers, vakils etc. In UK Mahapatra (2008) 2 OLR 970, the Orissa High Court held that client documents deposited with a chartered accountant are not privileged for the slightly odd reason that there is no “communication” by the adviser. However, the Law Commission recognised the problem in the 69th Report and recommended the insertion of a clause extending the provision to “legal practitioners” which could potentially include other advisers. Unfortunately, the Law Commission proposed to define this expression as those who are entitled to appear before the courts (thus, with respect, confusing the “candour” rationale for legal advice privilege with the forensic process of litigation) and the proposal was in any event never implemented. Even if the Indian courts are inclined to accept Lord Sumption’s analysis of the rationale for LAP, it is likely that any change would require legislation, especially since the Indian rule, unlike the English rule, is codified.

SEBI Investment Advisers Regulations – an overkill?

In continuation with earlier post on the recently notified SEBI(Investment Advisers) Regulations, 2013 (“the Regulations”), the following further points are worth noting.

1)     The Regulations apply to all Investment Advisers giving investment advice. They are required to register themselves with SEBI.

2)     The term investment advice has been defined to cover advice relating to securities and investment products. This covers a very wide range of products. Investment products may also cover even real estate, gold, etc., i.e., non-financial products. It appears from the Scheme of the Regulations though that the intention may not be to cover such non-financial products. However, every form of securities/investment products, including even bank deposits, national savings certificates, company deposits, etc. would be covered, apart from shares, derivatives, insurance products, mutual fund units, etc.

3)     The investment advice needs to be rendered for consideration in cash or in kind. It is not clear whether the intention is to cover only those Investment Advisers who accept consideration from their clients. From the wording of the Regulations, it appears that the consideration may flow from any person. If this is not the intention, then it will need clarification since otherwise many persons would inadvertently get covered by the definition of Investment Advisers.

4)     A person rendering such investment advice for consideration (in cash or in kind) is an Investment Adviser. However, there are several exclusions.

a)     Insurance brokers/agents registered with IRDA are excluded, provided they offer advice solelyin investment products. Same for pension advisers. It is common to see advisers offering advise on a range of products and insurance, pension, etc. are part of such products.

b)     Distributors of mutual funds, stock brokers, sub-brokers, etc. are excluded provided that they give investment advice incidental to their respective primary activity.

c)      Similarly, professionals like CAs, CSs, ICWAs and lawyers are excluded if they given investment advice incidental to their respective professional service/practice. However, considering the wide definition of investment advice, professionals who specialise in financial advice generally may have to consider whether they are covered.

5)     Since the exclusions are specific, any other person who acts as investment adviser, whether full time or part time and whether gives advice generally even incidental to the financial products that he is distributing would be covered. Concern thus arises for persons who act as agents for small savings, company deposits, etc.

6)     Considering the fairly broad definition of Investment Advisers and the limited exclusions, it would appear that perhaps lakhs of persons operating in the financial markets as agents and the like may also get covered. However, it appears, from the history of these Regulations that the intention does not seem to cover persons already regulated by other authorities such as IRDA, etc. In particular, the intention may be to cover only those Investment Advisers whose primary or sole business to render investment advice for consideration. This, however, has not been brought out and a clarification is needed.

7)     Small investment advisers may face the elaborate requirements of registration and compliance of various requirements particularly cumbersome and costly. The Investment Advisers are required to obtain annual a certificate of compliance of Regulations. There are numerous other requirements/procedures some of which are similar to codes of conducts and some involve heavy documentation.

a)     The requirements of disclosure and documentation are so elaborate so as to be unrealistic, even if well intended. KYC documents of each client have to be obtained and kept. Risk profiling and risk assessment of every client has to be maintained in writing. The investment advice provided and rationale for it has to be documented. And so on. These requirements are quite unrealistic and even extraordinary. Even professionals like CAs, lawyers, etc. give various types of professional advice for consideration but they are not required to maintain such records in writing. It may be different if there are a few large clients for whom certain infrequent large transactions are advised on. For small and medium sized clients, this may be meaningless and they may end up implementing in a cursory/summary way.

8)     If, as expected, a very large number of Investment Advisers are covered and have to apply for registration, it will be a mammoth job for SEBI to register them, to keep track of them and to ensure that they comply with the elaborate requirements. And, as it is quite likely, there will be numerous non-compliances, small and big, and SEBI will have to spend time and energy in taking action. The question will whether such effort will be worth it and effective.

a)     There is a strong case for exempting Investment Advisers earning income below a certain limit. Else, assuming that the definitions are broadly applied, thousands of Investment Advisers may simply have to close down shop.

9)     There are valid complaints against many Investment Advisers. That they give biased advice to favor products where they get larger commission/fees directly or indirectly, that they take positions conflicting to their advice, that they act negligently without carefully considering what the client needs/risks. And so on. Thus, some sort of regulation was quite overdue. However, it appears that placing such elaborate but often vague requirements/formalities creates disproportionate costs and efforts on one hand but not being able to control such mal practices on the other hand.

10)   The requirements of basic qualification and specialized training/qualification are fair and it is obviously a must that only qualified, knowledgeable and trained people enter this field. Though not wholly clear, it appears that apart from the basic qualification, an additional certificate in the finance field is also required. A two year period is given for those who do not have such certification.

11)   Body corporates and firms who act as Investment Advisers need to appoint a compliance officer who would be responsible for compliance of the Act, these Regulations, etc.

It seems that SEBI will need to interact much more with Investment Advisers in the field and make a realistic assessment of the field, before bringing these Regulations into effect.