Introduction: Understanding the legality and procedures around gifting shares by promoters of listed companies is imperative for corporate governance. This article decodes the various regulations and necessary disclosures stipulated by the Securities and Exchange Board of India (SEBI), providing insight into this complex aspect of corporate law.
The transferability of the shares is given by Section 44 of the Companies Act 2013, which says that the shares or debenture or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company. As per Section 2(71) of the Companies Act 2013, a public company means a company, which is not a private company and, as per Section 2(68) of the Companies Act 2013, a private company restricts the transferability of the shares in its articles. Thus, it turns out that a public company is one that does not restrict the transferability of its shares. While the shares of a company are indeed transferrable, they should be transferred in compliance with the regulations made by the Securities and Exchange Board of India (SEBI) which prescribes various disclosures to be made – both by the acquirer and the company. In this article, I have discussed the transfer of shares by way of gift by a promoter of a listed company to another promoter of the same company.
Hypothetical Scenario:
Case 1:
There are two promoters in a listed public company Mr. A and Mr. B who hold 51% and 9% shares respectively. Eventually, Mr. A decides to gift 1% shares to Mr. B and since it was a gift, there was no consideration involved.
Case 2:
There are two promoters in a listed public company Mr. A and Mr. B who hold 40% and 26% shares respectively. Later, Mr. A, being a generous man, decides to gift 5% shares to Mr. B. Since it was a gift, there was no consideration involved.
Disclosures:
1. SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015: Regulation 30 & Part A of Schedule III
Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 provides that:
“(1) every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material;
(2) events specified in Part A of Schedule III are deemed to be material events and the listed entity shall make disclosure of such events.”
Comment: The disclosure under Regulation 30 shall be made by the company regardless of the number or value of shares being gifted. It shall be made at the earliest but no later than 24 hours of the receipt of the occurrence of the event or receipt of information.
2. SEBI (Prohibition of Insider Trading) Regulations 2015: Regulation 7 (Read with Regulation 6)
Regulation 7(2) of the SEBI (Prohibition of Insider Trading) Regulations 2015 provides that:
“(a) Every promoter, designated person member of the promoter group, and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.”
Comment: Disclosure under Regulation 7(2) is made by the promoters within two trading days, which shall further be disclosed by the company to the stock exchanges within two trading days. The value of the transaction in the case of a gift is the prevailing market value of the securities on the day of their acquisition or disposal. This disclosure is required to be made in the event the value of the gifted shares exceeds the threshold limit of 10 lakh rupees. It is important to note that this is the second disclosure in which the company is involved apart from the one made under Regulation 30 of the SEBI (LODR) Regulations 2015.
3. SEBI (Substantial Acquisition and Takeover) Regulations 2011: Regulation 10
A. Regulation 10(1):
Regulation 10(1)(a)(ii) of the SEBI (Substantial Acquisition and Takeover) Regulations 2011 provides that the “inter-se transfer between persons named as promoters in the shareholding pattern filed by the target company in terms of the listing regulations or as the case may be, the listing agreement or these regulations for not less than three years prior to the proposed acquisition shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 of the SEBI (Substantial Acquisition and Takeover) Regulations 2011.”
Comment: In the event the 3-year criteria is not fulfilled, the obligation to make an open offer shall be trigged, as the case may be, depending on the threshold limits provided under the provisions of the SEBI (Substantial Acquisition and Takeover) Regulations 2011. Accordingly, it is must that the promoters have been named as such in the shareholding pattern filed by the company in the preceding three years to avail the exemption from making the open offer.
B. Regulation 10(5)
As per Regulation 10(5) of the SEBI (SAST) Regulations 2011, disclosure is required to be made by the acquirer to the stock exchanges where the shares of the company are listed at least four working days prior to the proposed acquisition and the stock exchanges shall disseminate such information to the public. The format of the disclosure is provided in Annexure – II of the Master Circular for Substantial Acquisition of Shares and Takeovers.
C. Regulation 10(6):
As per Regulation 10(6) of the SEBI (SAST) Regulations 2011, the acquirer shall file a report with the stock exchanges where the shares of the target company are listed, in such form as may be specified not later than four working days from the acquisition. The format of the disclosure is provided in Annexure – II of the Master Circular for Substantial Acquisition of Shares and Takeovers.
D. Regulation 10(7):
Further, as per Regulation 10(7) of the SEBI (SAST) Regulations 2011, the acquirer shall make a disclosure to the SEBI and pay a fee of Rupees 150000/- within 21 working days. The format is provided in Annexure – II of the Master Circular for Substantial Acquisition of Shares and Takeovers.
Comment: The aforementioned disclosures numbered B, C, and D are made regardless of the number and value of shares transferred. While the disclosures under Regulations 10(5) and 10(6) are made to the stock exchanges, the disclosure under Regulation 10(7) is made to the SEBI. The obligation to make the disclosures is on the acquirer.
4. SEBI (Substantial Acquisition and Takeover) Regulations 2011: Regulation 29
As per Regulation 29(2) of the SEBI (Substantial Acquisition and Takeover) Regulations 2011, “any person together with persons acting in concert with him, holds shares or voting rights entitling them to five percent or more of the shares or voting rights in a target company, shall disclose the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below five percent if there has been a change in such holdings from the last disclosure made under sub-regulation (1) or under this sub-regulation; and such change exceeds two percent of total shareholding or voting rights in the target company, in such form as may be specified.”
“As per Regulation 29(3), the disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within two working days of the receipt of intimation of allotment of shares, or the acquisition or the disposal of shares or voting rights in the target company to every stock exchange where the shares of the target company are listed and the target company at its registered office.”
Comment: This disclosure shall be made by the acquirer as well as the promoter gifting the shares subject to the threshold specified under Regulation 29(2). In Case 1, it would not be applicable as the number of shares being gifted is less than 2%. Nonetheless, it would be prudent to make a disclosure of the change in the shareholding from the last disclosure made either under Regulation 29(1) or Regulation 29(2). Now, regarding Case 2, disclosure shall be made by the acquirer as the threshold limit of 2% is breached and the promoters are already holding more than 5% shares or voting rights in the company.
System Driven Disclosures:
SEBI has from time to time issued circulars concerning automation of the disclosures to be made under Regulation 7(2) of the SEBI (Prohibition of Insider Trading) Regulations 2015 and Regulation 29 of the SEBI (Substantial Acquisition and Takeover) Regulations 2011. It has done away with the need for manual filing of the disclosures; for example, under Regulation 7(2) of the SEBI (Prohibition of Insider Trading) Regulations 2015, provided, the entity has complied with the procedural requirements for implementation of the system driven disclosures. Nonetheless, manual disclosures might be required to be made in the event the promoter’s PAN is not updated in the system or where the company is listed on a stock exchange that does not have a robust infrastructure for automated disclosures.
Conclusion:
In conclusion, the gifting of shares by promoters of listed companies is regulated by SEBI. While there is no bar on gifting, there are various disclosures that are required to be made under the provisions of the SEBI regulations, viz., SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, SEBI (Substantial Acquisition and Takeover) Regulations 2011, and SEBI (Prohibition of Insider Trading) Regulations 2015. While some of the disclosures are subject to the threshold limits, others are required to be made irrespective of the number or value of shares gifted. Accordingly, if the promoters wish to gift the shares, they may do so after complying with the SEBI regulations.
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Disclaimer: This is not professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a company secretary. Any comments and/or suggestions concerning this article may be sent to shukla_ashutosh@outlook.com.
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