Trustee companies not exempted from open offers

The Securities and Exchange Board of India (Sebi), has said trustee companies, which provide loans against pledged shares, would not be exempted from open offer obligations.

The market watchdog took the above stand while offering an ‘informal guidance’ to IL&FS Trust Company Ltd (ITCL), a Sebi-registered debenture trustee.

ITCL provides fiduciary services to banks, financial institutions and corporates. A fiduciary company’s business involves holding assets in trust for another person. It’s also engaged in acceptance of pledged shares of listed companies as security against loans on behalf of banks and financial institutions.

ITCL, an arm of Mumbai-based IL&FS, had sought Sebi’s ‘interpretive guidance’ on whether the company ,being a pledgee on behalf of banks and financial institutions, was exempt from the takeover regulations of making public announcements, in other words an open offer.

According to current Takeover Regulation norms, an acquirer has to make a mandatory open offer of 26 per cent if its shareholding in a listed company crosses the threshold of 25 per cent. The regulations, however, provide an exemption to banks and public financial institutions as pledgee on their own account from making an open offer.

“Whether ITCL, in its capacity as trustee being a pledgee for and on behalf of such banks and public financial institutions, will not be considered as an ‘acquirer’ and would be exempt for the purpose of making public announcement under the regulation, both before and after invocation of such pledged shares due to an enforcement action?” ITCL wrote to Sebi, seeking its advice.

The company further sought clarification on whether it is exempted from the Takeover Code since it does not enjoy any voting rights and its only economic interest is the fees. Voting rights remain with the end-beneficiary, which is the financial institution.

After analysing the submissions made by ITCL, Sebi in its reply said, “ITCL is a debenture trustee and there is no express provision in either the erstwhile or present takeover regulations providing exemption to ‘debenture trustees’ acting as custodian for the pledged shares on behalf of the lenders. Therefore, in the absence of such provisions, you may be required to be governed by the relevant provisions.”

Under Sebi’s Informal Guidance Scheme, any market participant can seek interpretation or clarification on any provisions of Sebi’s pronouncements in the form of a no-action letter or interpretive letter.