SEBI's Takeover Rules and the Family Trust Conundrum
The Securities and Exchange Board of India (SEBI) plays a crucial role in regulating company takeovers and safeguarding investor interests. Its takeover regulations mandate that when an acquirer gains significant control of a listed company, they must make an open offer to minority shareholders. This rule applies when someone acquires 25% or more shares, or when existing large shareholders increase their stake by over 5% in a year.
Exemptions for Family Trusts
SEBI recognizes that not all share transfers lead to a change in control. The regulator provides specific exemptions, including transfers by promoters to private family trusts. Over the last ten years, these trusts have become popular structures for holding promoter shares in listed companies.
Families establish these trusts primarily to manage succession and ownership across generations. They aim to ensure business continuity and reduce the risk of family disputes. Trustees hold and manage shares for beneficiaries, exercise voting rights, and oversee trust administration.
In 2017, SEBI introduced rules and an approval process for using private family trusts in succession planning by promoters of listed companies. Through this process, SEBI permits share transfers to family trusts without triggering open-offer obligations, provided the structures meet certain conditions.
The 'Immediate Relatives' Condition
One key condition requires trustees to be "immediate relatives" of the promoter. SEBI's takeover code defines this term narrowly, limiting it to spouses, parents, siblings, and children. Notably, it excludes sons-in-law and daughters-in-law.
This narrow definition often clashes with the realities of promoter families. In many families, daughters-in-law actively participate in governance or serve as trust beneficiaries. The current SEBI framing does not accommodate these practical scenarios.
Contrast with Other Indian Laws
SEBI's definition of 'relative' differs significantly from other Indian laws. Income tax law includes daughters-in-law and sons-in-law as relatives, making gifts to them tax-exempt. Company law also adopts a broader scope, recognizing daughters-in-law for governance and disclosure purposes.
These inconsistencies create confusion and regulatory challenges for families trying to appoint trustees or plan succession. The differences highlight a need for greater harmonization across regulations.
Succession Planning Constraints
While SEBI may consider redefining "relatives," there is also a case for allowing regulated professional or institutional trustees. Bank trustees could manage family trusts when promoter relatives are unavailable. This approach could work when beneficiaries remain family members and control stays within the promoter group.
International examples offer useful comparisons. In both the UK and Singapore, family-related trusts are treated as part of the promoter group for takeover purposes. These jurisdictions impose no restrictions on who may act as trustee, provided control remains within the family.
Indian income tax law follows a similar principle. It grants exemptions based on who benefits from a trust, not who manages it. SEBI could consider implementing safeguards and disclosures to prevent misuse of such structures.
SEBI's Oversight Role
Under current regulations, SEBI reviews trust structures to determine whether they serve legitimate succession planning or attempt to circumvent open-offer obligations. The regulator retains authority to intervene if it believes minority interests are at risk or if exemptions are being misused.
This approach aims to balance the flexibility families need with the requirement to protect investors. SEBI's scrutiny ensures that trust structures align with regulatory intent rather than serving as loopholes.
Need for Balanced Reforms
The current definition of 'relative' under SEBI regulations and associated succession planning constraints highlight the need for regulatory reform. Families require greater flexibility to appoint trustees and transfer shares, while SEBI's investor protection mandate must remain intact.
A broader and more inclusive definition of 'relative,' harmonized with other Indian laws, could address these challenges effectively. Such reforms would support both family businesses and investor confidence, paving the way for sustainable growth in India's corporate sector.
Ultimately, a balanced regulatory framework will enable smooth succession planning while maintaining robust investor safeguards. This equilibrium is essential for India's evolving corporate landscape.
