SEBI's Guidance on Family Trusts and Open Offer Exemptions for Thejo Engineering

Introduction

The Securities and Exchange Board of India (SEBI) plays a crucial role in the regulation of India's securities market. Recently, SEBI provided interpretive guidance to K.J. Joseph and Thomas John, the promoters of Thejo Engineering Limited (TEL), regarding their proposed family trust and its ramifications concerning the open offer requirement.

Overview of the Situation

Company Background: Thejo Engineering Limited, currently listed on the NSE Emerge platform, is in the process of migrating to the main board.
Shareholding Structure: The promoters and their family group hold a combined 54.27% of TEL’s shares. They plan to form a family trust and transfer 51.75% of their holdings to this trust.
Beneficiaries: The beneficiaries of the trust will align with the existing shareholder structure, reflecting their proportional ownership.

SEBI’s Guidance on Key Questions

Eligibility for Exemption with a Third-Party Trustee

SEBI outlined that under Regulation 11(1) of the Takeover Regulations, the board may grant exemptions from open offer obligations, tailored to specific circumstances. However, the inclusion of a third-party trustee in the proposed trust structure precludes eligibility for exemption as designated in SEBI's Master Circular (Chapter 8) regarding trust-related acquisitions.

Exemption with Family Members Excluded

According to the Master Circular, eligibility for exemption is limited to individual promoters, their immediate relatives, and lineal descendants serving as trustees and beneficiaries. The proposed trust, which excludes certain promoter group members, fails to satisfy these conditions.

Essential Takeaways

SEBI's insights stress the necessity of fulfilling particular prerequisites outlined in the Master Circular for trusts seeking exemption from open offers:

The trust must represent a "mirror image" of the promoter group’s holdings, so there’s no change in control.
Only promoters, their immediate relatives, or lineal descendants should act as trustees and beneficiaries. Although meeting these criteria enhances the chance of obtaining an exemption, SEBI retains the discretion to approve or deny requests based on specific case details.

Additional Considerations

This guidance is tailored to the details provided by the applicants and may not apply universally. Consulting with legal and financial professionals for custom advice regarding individual situations and compliance with pertinent regulations is crucial.

Conclusion

SEBI’s interpretive guidance offers valuable insights to promoters and their families contemplating forming trusts related to shares in listed companies. Understanding the criteria for exemption and recognizing the board's discretionary authority is vital for making informed decisions and ensuring compliance with regulatory standards.

Reference to SEBI’s Guidance

Subject: Request for informal guidance under the provisions of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 concerning the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 regarding Thejo Engineering Limited.

Your application, received on October 03, 2023, requested guidance through an interpretive letter under the Informal Guidance Scheme, supported by further clarifications via email on October 31, 2023.
Key representations in your application include:
- Company Listing: TEL is listed on the ‘Emerge’ platform of NSE and is transitioning to the main board.
- Share Structure: The promoters and their family group hold 54.27% of TEL’s shares, with plans to create a Family Trust encompassing 51.75% of this stake.
- Beneficiary Composition: Beneficiaries will include existing Promoter Group shareholders, with their share interests in the trust mirroring existing ownership.
- Trust Structure: Proposed governance will include one neutral trustee not part of the promoter group.
You sought clarifications regarding:
- Exemption with a Third-Party Trustee: Is the family trust with a third-party trustee eligible for exemption under Regulation 11(1)?
- Exemption with Limited Beneficiaries: Does restricting the trust to spouses and lineal descendants of the promoters affect exemption eligibility?
Upon review:
- The board may grant exemptions as stated in Regulation 11(1), conditional upon written explanations.
- The Master Circular specifies conditions for trust eligibility, including:
  - Continuous mirroring of the promoters’ ownership structure.
  - Exclusive roles for individual promoters and their immediate relatives or lineal descendants as trustees and beneficiaries.
The application outcome is dependent on these criteria and does not secure automatic exemption. All applications will be assessed by the Takeover Panel and SEBI case-by-case, without public disclosure for 90 days from the date of this letter.
The guidance provided is based on your specific facts and may differ under alternative circumstances. The views herein are confined to the requested interpretation concerning Regulation 11(1) and do not influence the applicability of other laws or SEBI regulations.