The SEBI Takeover Regulations (both the erstwhile regulations of 1997 and the present ones of 2011) carve out specific exemptions from disclosure and open offer requirements in case of pledge of shares in favour of banks or (public) financial institutions even if such pledge were to exceed the prescribed threshold shareholding percentages. Given the limited nature of these exceptions, one of the questions that were raised with SEBI through an application for informal guidance was whether a pledge of shares in favour of a trustee company (in the nature of a debenture or securities trustee) would be subject to disclosure or open offer requirements.
In its application, the IL&FS Trust Company Limited (ITCL) made the argument the pledge or even any shares or voting rights acquired by it were not for its own benefit but on behalf of several banks or financial institutions that are otherwise exempt from disclosure or open offer requirements. In other words, although not expressed in these terms, the argument was that if the pledge of shares directly in favour of banks or public financial institutions was exempt, there was no reason the same treatment should not be made available if the pledge was in favour of an intermediary such as a trustee who would hold it on same terms. ITCL went on to state that even where the pledge was made to ITCL for the benefit of another type of entity (such as a non-banking finance company) that was not exempt under the Takeover Regulations, no disclosure or open offer obligation must be imposed since ITCL as a trustee was not entitled to exercise voting rights directly, and hence cannot be said to have acquired any control over those shares.
However, in its guidance, SEBI refused to accept either of these arguments of ITCL. Instead, SEBI observed:
… ITCL is a Debenture Trustee and there is no express provision in either the erstwhile or present Takeover Regulations providing exemption to ‘Debenture Trustees’ acting as custodian/agent for the pledged shares on behalf of the lenders. Therefore, in the absence of such provisions, you may be required to be governed by the relevant provisions of the Takeover Regulations, 1997 and Takeover Regulations, 2011, as the case may be.
SEBI appears to have adopted a literal interpretation in that in the absence of an express exemption for debenture trustees, all provisions of the Takeover Regulations will apply to such transactions. It has sought not to go behind the transaction and examine its substance where the debenture trustee may indeed be only an intermediary performing an administrative function of holding the pledge on behalf of commercial banks or public financial institutions who may otherwise be eligible to the exemption under the Takeover Regulations. Perhaps that is understandable because such an interpretation would require an examination in each case as to who is the ultimate beneficiary of the pledge, which might not always be clear, especially if a large portion of the pledge is held on behalf of other entities such as non-banking finance companies that are ineligible for the exemption, as this news report suggests.