Trusts & Trustees, ttad080, https://doi.org/10.1093/tandt/ttad080
Although the Indian Trust Act is an 1882 act which has not seen any change since its enactment, the law on the subject has evolved over time with changes in other laws/regulations. The article analyses the Indian securities/capital market regulator’s Securities Exchange Board of India (SEBI) perspective on the transfer of promoter shareholdings of a listed entity into private trust structures. The article discusses and examines SEBI regulations, circulars and orders to understand the contours of structuring an SEBI-compliant private trust. It also explores and analyzes SEBI’s thought process and the requirements that a structure must ensure in order to qualify for exemption.
In India, a trust may be set up as a public trust or a private trust. Public trusts are created for the benefit of a fluctuating body of persons that cannot be ascertained at any point of time, for instance; the public at large or a section of the public following a particular religion, profession or faith. A private trust, on the other hand, is a trust which is set up for the benefit of an individual or a distinct group of individuals.
Private trusts are established and governed under the provisions of the Indian Trust Act, 1882. Although the Indian Trust Act, 1882 has not seen any modification since its enactment, the changes in exchange control laws, insolvency and bankruptcy laws, and regulations issued by the Indian securities/capital market regulator, Securities Exchange Board of India (SEBI) and tax laws, amongst others, have correspondingly resulted in a substantial development of the legal framework governing private trusts set up in India.
Private trust structures are most commonly used for achieving objectives such as consolidation and ringfencing of assets, streamlining succession planning and efficient governance of family businesses, amongst others. In furtherance of these objectives, promoters are increasingly settling their shareholding in Indian publicly listed companies into private trusts.
When structuring a trust that seeks to house promoter/promoter group shares of public companies, one has to be mindful of the various SEBI regulations/orders governing the subject. This article focuses on the developments in Indian trust law brought about by SEBI’s regulations on the subject. The article discusses and examines SEBI regulations, circulars and orders to understand the contours of structuring an SEBI-compliant private trust housing promoter shareholding. Subsequent sections of the article explore and analyze concepts including layering or sub-trusts, the role of corporate trustees, direct and indirect acquisitions, and limitation of liability of trustees.
SEBI takeover regulations
SEBI is a market regulator in India and has several core responsibilities such as safeguarding the interests of investors and overseeing the securities market. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 20111 (“Takeover Regulations”) have been issued with a view to regulate mergers and acquisition activities in India, protect public shareholders of listed companies by providing easy exit opportunities, ensuring transparency in market activities and creating a level playing field.
Regulation 32 (acquisitions of shares or voting rights), Regulation 43 (acquisition of control) and Regulation 54 (indirect acquisition of shares or control) of the Takeover Regulations become relevant as these stipulate certain scenarios wherein a direct and/or indirect acquisition of shares, voting rights and control could trigger an open offer under the Takeover Regulations.
The obligation to disclose and make an open offer is an onerous one for promoters and therefore, the Takeover Regulations specifically contemplate the exemption of certain transfers from the purview of an open offer. Regulation 10 (general exemptions) provides exemptions when an open offer is triggered. Regulation 10(1)(a)5 is especially relevant to this topic as it exempts acquisitions pursuant to inter-se transfers amongst certain qualifying persons such as (i) immediate relatives, (ii) persons listed as promoters up to 3 years prior to the acquisition and (iii) persons acting in concert for not less than 3 years prior to the acquisition, from the obligation of making an open offer.
Regulation 116 (Exemptions by the Board) empowers SEBI to grant exemption(s) from the obligation of making an open offer on a case-to-case basis by passing an order subject to such conditions as it may deem fit and imposed in market interest. The order is passed by assessing the exemption application submitted by the proposed acquirer. The application is required to set out information such as details of the target company and the details of the proposed acquisition. This application is submitted along with a duly signed/notarised affidavit, a non-refundable fee and details of the proposed acquisition including grounds of exemption. SEBI is also authorized to constitute a panel of experts for recommendations.
SEBI exemption circular
While Regulation 107 of the Takeover Regulations does contemplate certain automatic exemptions where an open offer is not mandatory, in certain identified scenarios such as inter-se transfers and although SEBI is authorized under Regulation 118 of the Takeover Regulations to grant exemptions on a case-to-case basis, the circumstances in which a promoter could settle his/her shareholding in a private trust without triggering an open offer requirement under the Takeover Regulations were unclear. Promoters often contended that the requirement to make an open offer did not arise as although there was a transfer of shares from the promoter to the private trust, control effectively continued to vest in the promoters/immediate family members acting as trustees and benefit was also derived by the same promoters/promoter groups. However, in the absence of any formal direction on this subject, the field was largely governed by SEBI’s orders granting/refusing exemption, issued on a case-to-case basis and this aspect often became a vexed question.
It was with a view to provide a clearer picture that SEBI released its circular dated 22 December 2017 bearing Circular No. SEBI/HO/CFD/DCR1/CIR/P/2017/131 (“Exemption Circular”), whereby it introduced a format for making an application for exemption from open offer under the Takeover Regulations. The Exemption Circular sought to bridge the gap identified above and impart clarity to parties involved in the settlement/acquisition process. The Exemption Circular clarified certain conditions subject to which an exemption from the requirement of making an open offer would be provided to an individual promoter of a listed company settling his/her shares into a trust. The Exemption Circular was issued after analyzing historic exemption applications and orders issued by SEBI. The Exemption Circular now finds a place in the Master Circular for Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 dated 16 February 2023.9
The Exemption Circular prescribes the conditions, compliances and undertakings which need to be captured in the trust deed/application in order to be eligible for an exemption. Accordingly, every private trust structure that is being conceived to house promoter shareholding of a listed company must be aligned with these requirements. The requirements can broadly be categorized as conditions/restrictions applicable to the settlors, the trustees and the beneficiaries.
Settlor(s) and contributor(s)
The transferor(s) can only be such persons who have been disclosed as promoter(s) in the shareholding pattern filed with the stock exchanges for a period of at least 3 years prior to transfer.
The transferor(s) would have to provide an undertaking to the effect that their liabilities and obligations under the SEBI regulations would continue to apply personally to the transferor(s) and will not get diluted due to transfers to the private trust.
Only individual promoters, immediate relatives and lineal descendants can be trustees and/or beneficiaries of the private trust.
The private trust must in substance be a mirror image of the promoter’s shareholdings such that the promoter’s ownership or control of shares or voting rights in the target company is not altered.
There must be a restriction on the trustees from transferring or delegating their powers to any person other than the trustees;
Ownership or control of shares or voting rights must vest directly with the trustees and indirectly with the beneficiaries.
There should be no limitation of liability of the trustees/beneficiaries under the trust deed in relation to the provisions of the SEBI Act and other regulations.
In the event of any change in trustees, beneficiaries, ownership and control, there is a requirement that appropriate disclosures be made to SEBI.
The above requirements as applicable to the trustee(s) are also applicable to beneficiary(ies).
The trust deed must restrict the beneficiaries of the trust, from transferring, assigning or encumbering their beneficial interest in any manner including by way of pledge/mortgage.
The trust deed must provide that where the trust is dissolved, the trust assets will be distributed only to the beneficiaries or to their legal heirs.
Additionally, the trust deed is required to meet the following compliance requirements:
The trust shall confirm, on an annual basis, on its continuous compliance with the exemption order passed by SEBI. The trust shall get its compliance status certified from an independent auditor annually and furnish the certificate to the Stock Exchanges for public disclosure with a copy endorsed to SEBI for its records. The trust shall comply with provisions of the Companies Act 2013 and other applicable laws and
There shall not be any layering in terms of trustees/beneficiaries under the trusts.
It would follow that the Exemption Circular has been effective in providing an indicative list of criteria that SEBI will take into consideration when determining an exemption application. Needless to clarify that the Exemption Circular is not a self-contained code and cannot comprehensively indicate what SEBI’s position may be on every conceivable structure. It therefore becomes imperative to continuously monitor the various exemption orders that are being issued by SEBI so as to understand the nuances that attach to the grant of exemption.
SEBI exemption orders
SEBI through its rulings in various exemption applications (“Exemption Orders”) has provided an insight into the types of structures that would potentially qualify for exemption when it comes to transfer of promoter shareholdings into a private trust. We have analyzed some key Exemption Orders passed by SEBI herein below.
Restriction on appointment of corporate trustee(s)
A review of the below Exemption Orders reveals that SEBI when issuing exemptions has not permitted the appointment of any corporate trustee (be it a company promoted by the promoters in question or a third-party trusteeship company) as trustee of the private trust structures under consideration.
The order of Visaka Industries Limited acquired by G. Vivekanand Family Trust10 dated 9 June 2017 becomes relevant in discussing the permissibility of corporate trustees in an acquirer trust. In this case, the trustees included two corporate trustees, one of whom was promoted by the promoter of the target company and another was an independent trusteeship company. The duties of the corporate trustees were defined and they were not part of the management committee nor were the shares registered in the corporate trustees’ names. A concern was raised by SEBI stating that “the primary reason for granting exemption from the open offer obligation is that it is a matter within the family. For such reason, the Trustee should also be strictly within the family. If professional trustees are given admittance, then the chances of control passing out of the family circle are very (likely).” In light of this, the order only granted an exemption after restructuring the trust to delete provisions on corporate trustees.
In the matter of Batliboi Limited acquired by the Bhogilal Family Trust11 dated 24 March 2017, the trust deed included Bhogilal Trusteeship Private Limited, a company absolutely owned by the promoter and promoter group as a trustee. The corporate trustee was being involved for smooth succession planning and provided the undertakings to disclose any change in its ownership or control and that its liability as a trustee is not limited in relation to SEBI laws. However, despite offering compliance, the takeover panel made the following observation: “in case a private limited company is appointed as a Trustee, there may be issues of transparency in determination of control/change in control. Further, it may be difficult to track the changes in the ultimate control of a private limited company. Therefore, the panel recommended the rejection of the application.” As a result, the trust had to be revised and the provisions pertaining to appointment of corporate trustee removed before the exemption was granted.
The discussion on appointment of corporate trustee also found place in the matter of Mahindra & Mahindra Limited by Anand Mahindra Family Trust and Mahindra Family Trust12dated 26 March 2018. In this case, Kotak Mahindra Trusteeship Services Ltd. was initially appointed as an administrator trustee and subsequently its title was changed to a trust manager. Furthermore, the takeover panel also recommended that the trust deed be amended to add limitations to the powers of a trust distributor. For instance, the trust distributor could not direct the trustees to distribute the funds and the power of removal of such trust distributor was to be retained in the hands of the trustees.
It would follow that SEBI has by virtue of the above decisions re-emphasized its position that the decision making and management should be in the hands of the promoters or their immediate relatives and that only individual promoters/immediate relatives should be trustees and beneficiaries in a trust. The involvement of non-individual external third parties in such trust structures ought to be limited to roles that are administrative or logistical in nature.
Restriction on limiting of liability of trustees
In the matter of Indian Metals & Ferro Alloys Limited by B Panda Trust,13 dated 28 March 2018, SEBI initially rejected the application for acquisition due to certain clauses in the trust deed. It was highlighted that a clause relating to delegation of authority by the managing trustee to any other trustee would lead to dilution of control. In their view, the liability of the managing trustee could not be limited for acts done by other trustees to whom the authority has been delegated. Another provision in the trust deed discussed by the takeover panel was the provision on conversion of the trust to a Guarantee Company pursuant to the change in law. It was held that such a provision should be dealt with on its occurrence instead of including it in the trust deed.
Distinction between “immediate relative” and “relative”
SEBI has in the matter of Deep Industries Limited acquired by Rupesh Savla Family Trust14 dated 31 March 2017 held that there is a distinction between “relatives” and “immediate relatives”. In order to be eligible for an exemption, an acquirer trust can only include parties who are “immediate relatives”. This is because unlike the definition of “immediate relative”15 which includes spouse, parent, brother, sister or child of such person or of the spouse, the definition of “relative” is broader. “Relative”16 additionally includes members of a Hindu Undivided Family. This distinction becomes important from the perspective of management and control of an SEBI-compliant trust and upholds that a trust deed should be a mirror image of the promoter shareholding. On a separate note, the order also clarifies that a trust deed cannot create a provision for appointment of interim trustees.
In the case of Batliboi,17 a clarification was issued by SEBI with regard to who would fall within the ambit of the term “immediate relatives”. In this case, the proposed beneficiaries of the acquirer trust included two trusts that had certain lineal descendants identified as beneficiaries. The Exemption Order permitted the acquirer trust to include the identified sub-trusts as beneficiaries. This demonstrates that although the Exemption Circular only speaks of individual promoter/immediate relatives/lineal descendants as trustees/beneficiaries, SEBI has relaxed this requirement by permitting sub-trusts as beneficiaries provided that the settlor, trustees and beneficiaries of such a sub-trust(s) fall within the ambit of promoters or its immediate relatives. This Exemption Order is analyzed in greater detail below.
Sub-trusts as beneficiaries
In the matter of acquisition of Batliboi Limited by Bhogilal Family Trust18 dated 5 July 2018, an application was made to transfer additional shareholdings to the Bhogilal Family Trust in continuation of the previous order. The two orders depict a trust structure where the beneficiaries include individuals as income beneficiaries of the main trust and two sub-trusts as corpus beneficiaries. The sub-trusts would get the corpus of the main trust only at the time of dissolution. The acquirer addressed SEBI’s concern on sub-trusts with the reasoning that “such arrangement retains the control of the family assets [including shares of Batliboi Limited (Target Company)] with Shri Nirmal Bhogilal, and, at the same time, provides an appropriate succession mechanism so as to facilitate smooth transition of family assets to the next generation family members in future and avoid any disputes within the family at a later stage”. SEBI permitted such a structure considering the trustees and beneficiaries of the sub-trusts continued to fall within the meaning of lineal descendants, immediate relatives and promoter group. Certain conditions were imposed by SEBI such as amendment of the trust deed of the sub-trust such restricting the right of the trustee to nominate any person as a trustee upon death, incapacity or resignation of the trustee. SEBI directed that the sub-trust deed be modified such that right of a trustee to nominate another trustee be restricted to immediate relatives only.
In the case of Mahindra and Mahindra,19 SEBI permitted the categorization of beneficiaries as primary beneficiaries and secondary beneficiaries provided that both classes of beneficiaries comprise promoters/immediate relatives of the promoters/lineal descendants of promoters. Typically, secondary beneficiaries could include lineal descendants of the promoters. Often the trust deed provides that the rights of the secondary beneficiary shall come into effect only upon death or incapacity of the primary beneficiaries or at an identified later point in time. In this case, the discussion on secondary beneficiary becomes relevant as SEBI accepts the inclusion of a trust where the settlors, trustees and beneficiaries of such trust belong to the promoter group/immediate relatives as a secondary beneficiary. Further, it is important to note that SEBI vide its decision granted liberty to the settlors to add a natural person/trust as a beneficiary at a later point in time so long as such person trust is a promoter/immediate relative/lineal descendant.
Decanting of income or corpus of acquirer trust
The matter ofLux Industries being acquired by Ashok Todi Family Trust, Ashok Bimla Todi Family Trust, Pradit Todi Family Trust and Pradip Shobha Todi Family Trust20 dated 30 April 2020 makes an interesting case. Here, the listed company comprised family members as promoters and their shares were proposed to be transferred into four separate trusts with family members as settlors and beneficiaries in each other’s trust. The order is a common order for simultaneous acquisition by multiple trusts. It discusses SEBI’s disapproval of decanting income or corpus of trusts to receiving trusts. SEBI directed that the provisions pertaining to decanting should be deleted and the trust deed ought to be amended to provide that in the event of dissolution of the trusts the distributions of trust property should be made in favour of beneficiaries/lineal descendants only. The takeover panel also directed the deletion of the clause in the trust deed enabling trustees to exercise their vote subject to any written agreements of shareholders of the target company. This is especially relevant in the context of the SEBI Disclosure Circular discussed in Conclusion section below.
Direct and indirect acquisitions
In the matter of acquisition of Globus Spirits Limited by Yamuna Family Trust21 in the order dated 20 March 2020, the promoters held shares in the target company directly as well as indirectly through their shareholdings in two holding companies. In this case, SEBI permitted a structure where under the promoters sought to enter into a settlement agreement gifting their direct and other indirect shareholding in the target company to one of the promoters and subsequently, such promoter would transfer the entire shareholdings (both direct and indirect) in the target company into the acquirer trust.
Revocable and irrevocable acquirer trusts
Our review of various Exemption Orders has revealed that whilst most acquirer trusts are structured as irrevocable (i.e. a structure in which settlor/contributors do not benefit from the trust), SEBI has also permitted revocable structures in the matters of Vadilal Industries Limited acquired by IVG Family Trust dated 8 April 2020,22 Batliboi Limited23 and Lux Industries Limited.24 Accordingly, it will follow that while revocability/irrevocability of the structure is relevant consideration from a tax planning perspective, it is not so much of a consideration/pre-requisite from a SEBI perspective.
Inter-se transfer exemption under the takeover regulations
On 23 June 2023, SEBI issued an interpretative letter25 in response to an informal guidance request made by Dr. Vidhi V. Kamat in the matter of Vidli Restaurants Limited being the target company. Dr. Vidhi Kamat, Kamats Worldwide Food Services Limited and VITS Hotel Worldwide Pvt. Ltd. were the promoter shareholders of the target company. Dr. Vidhi Kamat intended to gift her entire shareholding in VITS Hotel Worldwide Pvt. Ltd. to her husband, Dr. Vikram Kamat (who was not a promoter/shareholder of the target company). Pursuant to the gift of her shareholding in VITS Hotel Worldwide Pvt. Ltd. to her husband, Dr. Vikram Kamat would indirectly acquire control over the target company. It was in backdrop of these facts that a request was made to SEBI to issue a clarification on whether such a transaction would trigger the requirement of making an open offer under the Takeover Regulations. In its interpretative letter SEBI clarified that the proposed transaction would not meet the inter-se transfer criteria under Regulation 1026 as it was not an inter-se transfer of shares of the target company but an inter-se transfer of shares of the holding company and such a transfer does not qualify for an automatic exemption. SEBI directed that in the circumstances, the parties could consider making an application for exemption under Regulation 1127 of the Takeover Regulations. Parties ought to be mindful of this aspect when contemplating an inter-se transfer of holdings amongst immediate family members as a condition precedent to the transfer of the said holdings into an acquirer trust.
In the matter of joint acquisition of M/S. S. H. Kelkar & Company Limited by Ramesh Vinayak Vaze Family Trust and Kedar Ramesh Vaze Family Trust,28 SEBI vide its order dated 26 April 2018, rejected the exemption application on the ground that it was in violation of the Takeover Regulations. Regulation 10(1)(a)(ii) of the Takeover Regulation exempts acquisitions pursuant to inter-se transfer of shares amongst qualifying persons being promoters provided that they are named as promoters in the shareholding pattern for not less than 3 years prior to the proposed acquisition. In the present case, M/S. S. H. Kelkar & Company Limited was listed in the stock exchange in 2015 and the exemption application was filed in 2017. Therefore, the names of the promoters did not appear in the shareholding pattern for a period of 3 years prior to seeking an exemption on transfer of shareholding into the private trust. The takeover panel stated “that granting exemption from the said requirement would defeat the very objective why the norms were made stricter” and rejected the application. A similar order was passed by SEBI in the matter of the acquisition of shares of, Max Ventures and Industries Limited by Neeman Family Foundation Trust29dated 10 July, 2018.
The SEBI Exemption Circular read with the Exemption Orders has to an extent provided an insight into SEBI’s thought process and the requirements that a structure must ensure in order to qualify for exemption. However, the exemption process remains uncertain, subjective and administratively burdensome. A need is felt to revisit and update the Exemption Circular so that it can meet the requirements of evolving structures and be aligned with the stand taken/relaxations made by SEBI in various Exemption Orders.
Anju Gandhi is a Partner at SNG & Partners working from their Mumbai office. She specializes in Banking and Finance and Private Client Practice and is well-versed with RBI Regulations, FEMA Regulations, Labour Laws, Information Technology Laws, Real Estate Laws and Corporate Laws.
Jahnavi Dwarkadas is an Associate Partner at SNG & Partners. She specializes in providing advice on succession planning including the implementation of business succession structures, family settlements, family governance and charity/philanthropy. She is also a core member of the firm’s Environmental, Social and Governance (ESG) practice group.
Avni Gupta, an Associate at the Mumbai office of SNG & Partners assists the team in matters pertaining to private client practice. This includes advising families and businesses on estate planning, business succession structures, and family settlements as well as drafting of wills, gift deeds, trusts and family settlement agreements.