Parag Basu
Deputy General Manager
Corporation Finance Department
Division of Issues and Listing-II
Phone: +91 22 2285 0451-56, (Extn: 410) 22871582
Fax: +91 22 2204 5633. Email: paragb@sebi.gov.in
CFD/DIL/MISC/IG/PB/PR/ /2005
May 12, 2005
Shri Parvez Farooqui
Executive Director
Mukta Arts ltd.
6, Bashiron, 28th Road,
Bandra,
Mumbai - 400 050
Sub: Request under Securities and Exchange Board of India
(Informal Guidance) Scheme, 2003
1.0 Please refer your letter dated September 15, 2004 seeking ‘Interpretative Letter’ under SEBI (Informal Guidance) Scheme, 2003 and subsequent letters dated November 29, 2004 and December 6, 2004 in this regard. The Intrpretive letter has been sought on three set of queries raised under -
(A) SEBI (ESOP & ESPS) Guidelines, 1999;
(B) SEBI (Prohibition of Insider Trading) Regulations, 1992; and
(C) SEBI {Substantial Acquisition of Shares and Takeovers} Regulations, 1997
2.0. In view of the facts set forth in your aforesaid letter and in terms of paragraph 7 of the Guidance Scheme, our views in relation to the issue raised in your letters under reference are as follows:
A. Queries under the SEBI (ESOP & ESPS) Guidelines, 1999 (“ESOS Guidelines”):
A.1. It is inter alia informed by you that:
a. Mukta Arts Ltd. (“Mukta”) is desirous of having a trust (MAL Employees Welfare Trust (“MAL Trust”) formed to promote and for the benefit and welfare of its existing and future employees, which will hold equity shares of Mukta as part of its corpus. Being a trust, MAL Trust will have to hold all of its properties including Mukta’s shares, in the name of its trustees.
b. The objects of the MAL Trust are, inter alia, to operate one or more schemes for providing incentives, motivation, benefits and/or amenities to employees, and for providing assistance to employees in various forms.
c. Options will be granted to employees by MAL Trust. The MAL Trust will acquire the shares from the open market through the Trustees. Also, one or more of the Trustees may transfer part of their existing shareholding to the MAL Trust in one or more off-market transactions.
A.2.You have submitted that –
(a) The grant of options to the employees of Mukta by the MAL Trust may be deemed as amounting to an “Employee Stock Option Scheme (ESOS)” under the provisions of ESOS Guidelines in view of the definition of the terms “Employee Stock Option” and “Employee Stock Option Scheme”. Given that objectives of the MAL Trust, the MAL Trust (and its scheme) do not amount to an Employee Stock Option Scheme. However, as a matter of good Corporate Governance practice, Mukta shall comply with the provisions of Clause 6.1, 6.2 (a) to (h) and 6.3 of the ESOS Guidelines.
(b) As regards accounting polices specified or referred to in the ESOS Guidelines, the same are relevant where fresh shares of a company are to be allotted. No fresh shares of Mukta are to be allotted to the MAL Trust (or to employees of Mukta in lieu of any options vested in them by the MAL Trust). Accordingly, there is no economic impact on Mukta, which is required to be accounted for and reflected in its financial statements.
A.3. Interpretative/no-action letter has been sought on the issues:
(i) that the provisions of ESOS Guidelines do not apply to the constitution of MAL Trust and also to any of its schemes for granting options and transferring shares of Mukta to employees of Mukta. (or)
(ii) Even if the provisions of ESOS guidelines do apply to the constitution of MAL Trust and also to any of its scheme for granting options (and transferring shares of Mukta) to employees of Mukta, Mukta will not be required to comply with the provisions of Sub-Clauses (i) to (k) of clause 6.2, and Clause 13 of the ESOS Guidelines.
A.4. Our views:
In terms of paragraph 7 of the Guidance Scheme, our views in relation to the issue raised in your letter under reference are as follows:
a. Clause 22A of the ESOS Guidelines, makes specific provision in case of ESOS / ESPS administered through Trust route. Thereby the intention is made clear that allocation to employees of shares by a Trust set up by a company for employees benefit in exchange for options issued by it to employees would be within the fold of the ESOP guidelines.
b. Further, clause 2.1.2A defines employee stock options to mean the option given to certain employees of the company which gives such employees the right or benefit to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. The requirement of this clause would be fulfilled even if the options are granted and securities are offered to employees by a Trust which is created and supervised by the company. This would be irrespective of whether it is by issue of new shares to the trust or by providing finance for secondary market acquisition to the trust.
c. The method of secondary market acquisitions by the ESOP Trust being financed by the company is recognized in the relevant circles as amounting to an ESOP administered through trust.
e. From the point of view of employees and good corporate governance, the method at (c) above is not much different from the other methods. It is felt on a perusal of the scheme of the Guidelines that the intention was not to regulate ESOSs solely from the point of view of dilution of equity of the existing shareholders. Thus, from this viewpoint also it is felt that it would not be advisable to distinguish method (c) as one to which the Guidelines would not apply.
f. Further, proviso (b) to section 77(2) of the Companies Act, which removes certain finances made by a company to an employees benefit trust from the prohibition in the main section, also does not distinguish between shares allotted to the trust and those acquired by the trust from the secondary market.
g. Therefore, it is opined that ESOS & ESPS Guidelines applies to the proposed transaction also.
B. Queries under the SEBI (Prohibition of Insider Trading) Regulations, 1992: (PIT Regulations)
B.1. It is, inter-alia, informed by you that -
a. Mukta Arts Ltd. (MAL) is desirous of having a trust (MAL Employee Welfare Trust “MAL Trust”) for the benefit of employees. Mr. Subhash Ghai (SG) and Mr. Parvez Farooqui would be trustees of the Trust.
b. Since, SG (and/or the other Trustees) are individually “insiders” (as defined under Regulation 2 (e) of the PIT Regulations), it may be deemed that SG (and the other Trustees) are “dealing in securities” (as defined under Regulation 2 (ha) of the PIT Regulations) while acquiring the shares from the open market or through off market deals. Knowledge of the fact that MAL Trust intends to acquire shares of Mukta upto a pre-specified limit (being the limit decided by the Trustee) and/or the constitution of MAL Trust itself could be deemed as price sensitive information.
c. Under Regulation 13(4), Directors and Officers of Mukta have to disclose to Mukta any change in their shareholding or voting rights if the change exceeds Rs. 5 lac in value or 25000 shares or 1% of the total shareholding or voting rights, whichever is lower. The Trustees who are Directors/Officers of Mukta may be required to make the aforesaid disclosure under Regulation 13(4) in respect of shares/voting rights acquired/disposed by them as trustees on behalf of the MAL Trust.
B.2. No action / Interpretative Letter sought on:
In view of the facts set forth above, you have sought Interpretative/No action letter on the following two issues–
a. SG (and/all other Trustees) shall not be deemed to be insiders ‘dealing in securities’ under the PIT Regulations while acquiring shares of Mukta including from the open market, to the extent SG (and/or any other Trustees) are doing so in their capacity as trustees of the MAL Trust and not in their individual capacity;
b. SG (and/all other Trustees) shall not be deemed to be insiders ‘dealing in securities’ under the PIT Regulations while acquiring shares of Mukta including from the open market, to the extent SG (and/or any other Trustees) are doing so in their capacity as trustees of the MAL Trust and not in their individual capacity;
B.3. Our views:
In terms of paragraph 7 of the Guidance Scheme, our views in relation to the issue raised in your letter under reference are as follows:
a. The position under the Company Law is that the shares cannot be held by a Trust in its own name. As an inference from Section 153 of the Companies Act, shares of the Trust would necessarily have to be held in the name of one or more trustees. Further, as per Regulation 3 (i) of SEBI (Prohibition of Insider Trading) Regulations, 1992, “No insider shall - (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or (ii) Communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities.”
b. SG/other trustee are insiders as per Regulation 2 (c) of the Regulations; hence Regulation 3(i) will be applicable to SG/other trustee in their individual capacity as well as a Trustee of the MAL Trust. Therefore, SG/other trustee cannot trade in their individual capacity or on behalf of the Trust while in possession of unpublished price sensitive information. Hence, trustees of the MAL trust would be hit by the prohibition even in respect of their dealings on behalf of the MAL trust.
c. As per Regulation 13 (4) “Any person who is a director or officer of a listed company, shall disclose to the company, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings from the last disclosure made under sub-regulation (2) or under this sub-regulation, and the change exceeds Rupees 5 lac in value or 25000 shares or 1% of total shareholding or voting rights, whichever is lower. For the purpose of this regulation the holding may include the holding in any capacity whatsoever.
d. Therefore, to prevent any possible misuse of trust and to ensure transparency in operations, SG/other trustee should make proper disclosures as per the said Regulation whether they hold shares in their individual name or in the name of the Trust.
C. Queries under SEBI {Substantial Acquisition of Shares and Takeovers} Regulations, 1997:
C.1. It is inter alia informed by you that -
(a) MAL is desirous of having an Employee Welfare Trust (‘MAL Trust’) to promote and for the benefit and welfare of its existing and future employees. The MAL Trust will hold equity shares of MAL as part of its corpus. Being a trust, the MAL Trust will have to hold all of its property including MAL’s shares, in the name of its trustees viz, Mr. Subhash Ghai and Mr. Parvez Farooqui (“Trustees”).
(b) The trust will acquire the shares from the open market through the Trustees and also, one or more of the Trustees may transfer part of their existing shareholding to the Trust in one or more off-market transactions.
(c) Mr. Subhash Ghai and persons acting in concert currently hold (in the aggregate) 70.25% of the total shares and voting rights in MAL. As per the definition of “persons acting in concert” (Regulation 2(e)(1) of the SAST Regulations), it may be deemed that Subhash Ghai and the Trust have a common objective or purpose and thus the Trust may be deemed to be a “person acting in concert”.
(d) The shares are being acquired (and held) in Subhash Ghai’s name because:
(A) trust property is required to be held in the names of the trustee(s); and
(B) under Section 153 of the Companies Act, 1956 a company cannot take notice of any trust, express, implied or constructive, on its register of members.
(e) Therefore, the shares and voting rights are to be acquired and held by Shri Ghai and other Trustees (and not the MAL Trust) due to statutory reasons. Furthermore, Shri Ghai and any person(s) acting in concert will not be beneficiaries of the Trust and specifically, will not be entitled to nor be awarded any options (and consequently shares) by the Trust.
C.2. Interpretative Letter sought on:
In view of the facts set forth above, you have sought Interpretative/No action letter on the following issues –
a. The Trust and also each of the Trustees (in their capacity as a trustee) are not and will not be deemed as a “person(s) acting in concert” with Shri Subhash Ghai (and/or with any other Trustee in their individual capacity);
b. Shares (and voting rights) held by the Trust (through the Trustees) do not have to be aggregated with the shares (and voting rights) held by Shri Ghai (and/or any other Trustee in their individual capacity) and those held by persons acting in concert with the Trustees;
c. Shares (and voting rights) held by MAL Trust (through the Trustees) do not have to be aggregated with the shares (and voting rights) held by Shri Ghai (and/or any other Trustee in their individual capacity) for the purposes of disclosures under the SAST Regulations, as the case may be; and
d. That the shares (and voting rights) held by any Trustee (in his capacity as a trustee) in MAL on behalf of MAL Trust will not have to be aggregated with the holdings of any promoter and persons acting in concert (whether such trustee is a promoter of MAL or person having control of MAL or person acting in concert with any or all of them) for disclosure purposes under Regulation 8(2) of the SAST Regulations including where the Trustee in his individual capacity is a promoter or a person acting in concert.
C.3. No action letter sought on:
a. If the MAL Trust (and/or the Trustees in their capacity as a trustee) are deemed as PAC with Subhash Ghai (and/or with any other Trustee in their individual capacity), then even on Subhash Ghai and PACs, including the MAL Trust, acquiring such number of shares (and voting rights) as may trigger the threshold limits stipulated in Regulation 11(1), Subhash Ghai and PACs, including the MAL Trust are exempted from complying with the provisions of Regulation 11(1) to the extent stated hereafter.
b. Such exemption would be only to the extent the provisions of Regulation 11(1) would have been required to be otherwise complied with by the MAL Trust and the Trustees as a consequence of the shareholding of MAL Trust (held through the Trustees) being aggregated with Subhash Ghai and PACs. Accordingly, the Trustees (and also Subhash Ghai and PACs) would not have to make an open offer pursuant to provisions of Regulation 11(1) for acquiring shares of Mukta (in their capacity as trustees) from the open market on behalf of the MAL Trust.
c. It may be clarified that the no-action letter is being sought only in respect of the open offer obligations being triggered pursuant to provisions of Regulation 11(1) and by reason of acquisition of shares (and/ or voting rights) by the MAL Trust (through and in the name of the Trustees) in Mukta:
· Where such acquisition by the MAL Trust (through and in the name of the Trustees) individually crosses the limits contained in Regulation 11(1); and
· Also where, by reason of the acquisition, and when aggregated with shares/voting rights held or acquired by Subhash Ghai (in his individual capacity) and /or PACs, open offer obligations are triggered pursuant to the provisions of Regulation 11(1) (though such shares / voting rights acquired by SG (in his individual capacity) and or person(s) acting in concert with him do not by themselves trigger the open offer obligations pursuant to the provision of Regulation 11(1).
d. No Interpretative or No-Action Letter is being sought as regards the provisions of Regulation 10 or 12.
C.4. Our comments:
In terms of paragraph 7 of the Guidance Scheme, our views in relation to the issue raised in your letter under reference are as follows:
a. The two trustees Shri Subhash Ghai and Parvez Farooqui along with persons acting in concert with them are the existing Promoters of the Target Company holding 70.25% shares and are clearly in control over the target company. Further, by virtue of their being Trustees of the Trust, they would be required to hold shares in MAL. These shares may be acquired either from open market or one or more of the trustees may transfer their own stock to the Trust. Therefore, Subhash Ghai and Parvez Farooqui pursuant to being appointed as the Trustees of the proposed Trust would be end up holding shares/voting rights in the target company in two capacities viz as promoters of the target company and as trustees on behalf of the proposed Trust.
b. It is noted from the draft Trust Deed, the Trustees shall be entitled to vote in respect of any shares or securities held upon the Trust as the Trustees may think best for the benefit of the Beneficiaries thereunder. In view of the same, it is observed that although the beneficiaries of the trust would be the employees of the company, the right to exercise the voting rights accruing to the Trust would lie with the Trustees only and it is the Trust along with its trustees which would be required to comply with the Regulations, as may be applicable.
c. Further the draft trust deed confers discretionary power on the trustees for administration and execution of the trust which among other things include powers to invest funds in entities including the target company and its group. Therefore, the decision making of the trust clearly lies with the trustees, who belong to the promoter group of the target company. Any decision in respect of the Trust would actually rest with the promoters of the target company and would ultimately be decided by them. Further, in terms of regulation 2 (1) (e) of the Takeover Regulations it is noted that the MAL Trust the persons may be acting in concert with each other if they have commonality of object of acquiring shares or control in the target company. The concept of persons acting in concert is acquisition specific and the factors such as commonality of objectives, concerted action of objectives, concerted actions, co-operation etc. have to be seen in the context of each acquisition. In this context, it is noted that the MAL Trust may acquire shares from the market and in respect of such shares Mr. Subhash Ghai and Mr. Parvez Farooqui may exercise voting rights in the Mukta Arts ltd. Thus, Mr. Subhash Ghai and Mr. Parvez Farooqui acting as trustees of MAL Trust may acquire additional voting rights to increase their voting rights and controlling power. In addition, the beneficiaries are the employees including the directors of Mukta Arts Ltd. through whom the control may be exercised.
d. In view of the above, in the instant case, it is felt that the MAL Trust {holding shares through its Trustees} and Shri Subhash Ghai & Shri Parvez Farooqui who belong to the promoter group, holding shares in their individual capacity in the target company may be persons acting in concert with each other for the purpose of the Takeover Regulations.
e. Consequently, the shares held by the MAL Trust and its Trustees would have to be aggregated with the shares of Subhash Ghai, Parvez Farooqui and their PACs for applicability of Regulations 11 of the Takeover Regulations, as may be applicable and various disclosures to be made thereunder including disclosure required to be made under Regulation 8 of the Takeover Regulations.
3.0 You have submitted that in the event of the Trust/Trustees and Subhash Ghai/ other trustees considered as PACs, exemption should be granted from Regulation 11(1). In this regard, you may note that an exemption cannot be sought through an application under Informal Guidance Scheme, 2003.
4.0 This position is based on the representations and submissions made to the Division in your letters under reference. Different facts or conditions might require a different result. This letter expresses the Division’s position on applicability of the respective Regulations / Guidelines as referred above only in the instant case. It does not express decision of the Board on the questions presented. As regards your request for confidentiality under Clause 11 of the Informal Guidance Scheme, you are advised that in terms of said clause 11 of the Scheme, your request shall receive confidential treatment for a period of time not exceeding 90 days from the date of this letter.
5.0 You may note that the above views are expressed only with respect to the clarification sought on the applicability of the respective Regulations/Guidelines as referred above and do not affect the applicability of any other law or requirements.
Yours faithfully,
Parag Basu
