Vallabh Joshi
Offer for sale for achieving minimum public shareholding is not exempted from provisions of regulation 4 of PIT
Summary: In a case involving Glenmark Life Sciences Ltd (GLS), SEBI clarified that an offer for sale (OFS) to achieve minimum public shareholding (MPS) does not exempt promoters from the insider trading contra trade provisions under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT regulations). After acquiring a 75% stake in GLS from Glenmark Pharmaceuticals, Nirma Ltd was categorized as a promoter on March 6, 2024. To comply with MPS requirements, Nirma planned to sell part of its stake through an OFS. However, SEBI highlighted that since Nirma’s promoter status applied from March 6, 2024, any share transactions within six months would be subject to contra trade restrictions. SEBI also stated that the obligation to meet MPS arose when GLS was listed in 2021, not from Nirma’s acquisition. Consequently, the sale through an OFS to fulfill MPS norms does not fall under the PIT regulation exemption, thus attracting the contra trade provision. This guidance underscores SEBI’s stance that transactions required for MPS compliance are not shielded from insider trading regulations, affecting promoter actions in listed companies.
Facts of the case: Glenmark Life Sciences Ltd (‘GLS’) is a public limited company listed on stock exchange on August 6, 2021. Glenmark Pharmaceuticals Ltd [GPL’] was holding 82.34% of GLS as on date of listing.
Nirma Ltd (‘Acquirer’) decided to acquire 75% of shares of GLS from GPL by way of share purchase agreement on September 21, 2023. Pursuant to this equity shares got transferred to Nirma Ltd on March 6, 2024, [‘55%’] and March 12, 2024 [20%].
Post acquisition on March 6, 2024, Nirma ltd was categorized as promoter of GLS alongwith GPL. As on March 31, 2024, promoter and promoter group holding in GLS was 82.35%. Pursuant to rule 19A of Securities Contract Regulation, Rules promoter and promoter group had to reduce their shareholding to 75% by August 5, 2024.
Acquirer as a majority promoter shareholder decided to sell a part of the stake in GLS through an offer for sale to comply with MPS. Hence the question that had arisen was whether sale of shares for achieving minimum public shareholding would attract contra trade provisions under Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘PIT regulations’]?
Question of law as posed by GLS:
Q.1 Whether the relevant date for the purpose of computation of 6 months (in relation to contra trade restrictions as per Para 10 of Schedule B under regulation 9(1) of PIT regulations is the date on which the shares have been agreed to be acquired?
Ans. SEBI stated that Acquirer was designated as promoter from March 6, 2024. Hence the provisions of PIT regulations became applicable to them from this date. So the acquisition by Acquirer on March 12, 2024 would be considered as relevant date for computation of 6 months in relation to contra trade and not date of entering into share purchase agreement.
Q.2 If the commencement date for the purpose of computation of 6 months contra trade restrictions is the acquisition date, whether the proposed sale by acquirer (which is necessary for compliance with MPS requirement) is in accordance with PIT regulations and in particular contra trade restrictions?
Ans. Regulation 4(1) of PIT regulations allows insider to deal in share of listed company when in possession of UPSI if the dealing is pursuant to statutory or regulatory obligation. SEBI stated that obligation to reduce stake for achieving MPS had arisen when GLS got listed on stock exchange (i.e. August 6, 2021). Irrespective of the fact that share purchase agreement was entered, GLS was under an obligation to reduce stake to meet MPS norms. Obligation for MPS is not arising out of acquisition of stake by Nirma ltd. It does not appear that proviso to regulation 4(1) of PIT regulations covers such scenario. Hence the sale of stake through offer for sale for achieving MPS norms would be subject to contra trade provisions.
PIT regulations and comprehensive FAQs on PIT regulation does not exempt disposal of securities through offer for sale from contra trade restrictions. FAQ no. 39 is not applicable to the Acquirer.
This Article is written by Vallabh Joshi Senior Manager R& D Department – MMJC
https://www.sebi.gov.in/enforcement/informal-guidance/nov-2024/in-the-matter-of-glenmark-life-sciences-limited-under-sebi-prohibition-of-insider-trading-regulations-2015_88292.html
https://www.sebi.gov.in/enforcement/clarifications-on-insider-trading/mar-2023/comprehensive-faqs-on-sebi-pit-regulations-2015_69639.html
Q.3 Whether the restriction on execution of contra trade in securities is applicable in case of buy back offers, open offers, rights issues, FPOs, OFS, share split, bonus, exit offers, merger/amalgamation, demerger, etc. by/of listed companies?
Answer: Any acquisition of securities by way of Rights issue, Follow-on Public Offer (FPO), Offer for Sale (OFS), Bonus issue, Share Split, Merger/Amalgamation, Demerger, would not attract restriction of ‘contra-trade’, provided the initial transaction of disposal was completed in accordance with PIT Regulation. Similarly, any disposal of securities by way of Buy-back, Open offer, Exit offer, Merger/Amalgamation etc. would not attract restriction of ‘contra-trade’, provided the initial transaction of acquisition was completed in accordance with PIT Regulations
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