SEBI Applies Substance-over-Form Test While Granting Exemption Under Takeover Code for Share Transfers to Private Trusts

 Succession planning for promoter families has emerged as a critical priority for business-owning families. It necessitates a structured evaluation of legal and regulatory considerations, including compliance with the SEBI framework, particularly the takeover regulations when transferring control of a listed company to the next generation.

The SEBI Takeover Regulations trigger an open offer obligation where an acquisition of shares or control entitles an acquirer to exercise 25% or more of the voting rights in a listed company. This applies to both direct and indirect acquisitions, including transfers of shares in holding entities. While certain bona fide transactions such as inter-se promoter transfers, transfers among immediate relatives, and succession-related transfers are exempt, no blanket exemption is available for transfers to family trusts. However, SEBI Master Circular permits case-specific exemptions upon application to SEBI, subject to conditions, including that the settlor must have been disclosed as a promoter for at least three years.

In the exemption application filed by Tega Industries Limited, the promoter family proposed to transfer shares of NFSPL, which held 49.71% in the company. During its review, SEBI observed that one of the settlors had not been formally disclosed as a promoter of Tega Industries Limited. However, she had held shares in NFSPL since 2006, and NFSPL itself had been disclosed as a promoter of Tega Industries Limited since its listing in 2021. Based on these facts, SEBI concluded that the requirement of being “disclosed as a promoter for three years” was substantively met and accordingly granted the exemption.

This is a positive development, with SEBI adopting a substance-over-form approach in assessing the conditions applicable to transfers of shares of a listed company to a private trust. However, succession planning must be executed with rigorous diligence requiring a comprehensive evaluation of SEBI’s conditions alongside broader legal, tax, and regulatory considerations, to mitigate execution risk and avoid unintended triggers under the regulatory framework.