INFORMAL GUIDANCE – EXTENT TO WHICH BLOCK DEAL WHILE IN POSSESION OF UPSI IS SAFE HARBOUR – Eshwars
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INFORMAL GUIDANCE – EXTENT TO WHICH BLOCK DEAL WHILE IN POSSESION OF UPSI IS SAFE HARBOUR

Authored by Aishwarya Lakshmi V. M.

Applicant: RS Software (India) Ltd. Date of the guidance: 17.09.2019

Factual Background

(i) R S Software (India) Ltd. had started an employee Trust in the name ‘R S Software Employee Welfare Trust’ with the objective of aiding the employees in the form of medical facilities, scholarships, housing etc.

(ii) The Trust acquired shares of the company from October 2012 to January 2013 and held 4.47%. However, pursuant to the proviso to Reg. 3(12)[i] of SEBI (Share Based Employee Benefit) Regulations, 2014 there was a regulatory obligation on the Trust to sell the shares.

(iii) The Promoters (40.47% holding), Executive Directors and Independent Directors [two persons, each of them holding 0.27% and 0.19%] of the Applicant Company were desirous of acquiring the shares held by the Trust, through the stock exchange.

Guidance sought

(i) Whether shares held by the Trust if purchased by the Promoters or Promoters Group or Independent Directors of the Company will be within the limits and not in contravention of SEBI (SAST) Regulations, 2011 and SEBI (PIT), Regulations 2015 and SEBI (LODR) Regulations, 2015?

(ii) Whether the purchase of shares by way of Block Deal through the Stock Exchange is in compliance with the relevant Regulations as these are being acquired on the grounds of regulatory requirement?

(iii) Whether Regulation 5 of the SEBI (PIT) Regulations, 2015 puts any restraint on this transaction?

Provisions Involved

a. Regulation 3(2) of SEBI (SAST) Regulations, 2011.[i]

b. Regulation 16(1)(b)(vi)(c) of SEBI (LODR) Regulations, 2015.[ii]

c. Regulations 3, 4 and 5 of SEBI (PIT) Regulations, 2015.[iii]

Informal Guidance by SEBI

(i) With regard to the compliance of SEBI (SAST) Regulations, SEBI in its guidance stated that the Promoter group may acquire the shares without making a public announcement of an open offer, provided that the overall acquisition does not exceed 5% of Voting Rights of the Applicant company in a financial year.

(ii) As regard the compliance of and SEBI (LODR) Regulations, the guidance stated that the Shareholding of Independent directors together with their relatives should not be 2% or more of the total voting rights in the Applicant.

(iii) As regard, the query on compliance of SEBI (PIT) Regulations, and whether block deal is a safe harbour to prove their innocence, the guidance observed that the proviso (ii) in Reg. 4(1) of SEBI (PIT) Regulations, can be a safe harbor only when the block deal is done without being in breach of Reg. 3 and both the parties had made a conscious and informed decision. The guidance concluded that a person will be treated as an insider for all purposes and has to demonstrate his innocence in case he trades while in possession of UPSI.

(iv) The guidance also stated that the SBEB Regulations do not stipulate the purchase of shares by the Promoters as the compliance. Hence, the purchase via block deal cannot be regarded as statutory compliance.

(v) Regulation 5 is regarding formulation of Trading Plan. Since purchase of shares by the promoters is not a regulatory requirement, the query becomes redundant.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/dec-2019/SEBI%20IG%20letter.pdf_p.pdf.

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] This provision required un-appropriated inventory of shares not back by stock options acquired from the stock market to be appropriated before FY 2015 or after disclosing to the stock exchange within a period of 5 years (i.e) 27th October 2019.

[i] Regulation 3(2) of SEBI (SAST) Reg., 2011: No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations:

Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding.

[ii] Regulation 16(1)(b)(vi)(c) of SEBI (LODR) Reg., 2015: “independent director” means a non-executive director, other than a nominee director of the listed entity who, neither himself, nor whose relative(s) holds together with his relatives two per cent or more of the total voting power of the listed entity.

[iii] Regulation 4 of SEBI (PIT) Reg., 2015 – Proviso to Reg. 4 specifies instances that can be shown by a person alleged to have engaged in Insider Trading, and proviso (ii) reads as – “the transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision;

Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.

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