In India, the law and practice in relation to property and inheritance have traditionally been more patriarchal. Unfortunately, married daughters were quite often not regarded as the heir apparent to a family’s estate and business; and sons continue to be the ‘chosen ones’. Many business families remain reluctant to pass their business wealth and assets onto their married daughters due to the perceived risk that the property ends up being controlled by the in-laws of the daughters. This becomes even more pronounced for ‘promoter’ families with significant holdings in public listed companies. How can such Promoters pass on their business wealth to their daughters, and can they do so without losing control over the company?
The issue of passing listed companies’ shares onto daughters, in the lifetime of a promoter, was explored in a recent case, as discussed below.
SEBI’s Informal Guidance
The recent informal guidance (IG) passed by the Securities and Exchange Board of India (SEBI) dealt with the issue of a promoter gifting his shares to his married daughters, and the implications under relevant listed company regulations.
Source: Business Times
The IG Application
By way of an application dated March 12, 2020 (Application), Mirza International Limited (Company) had sought an IG from SEBI in relation to the Promoter/ Promoter Group reclassification norms as applicable to listed companies.
The application stated that Mr. Rashid Mirza (Mr. Mirza), the Promoter and Managing Director (MD) of the Company, holding 11.27% shareholding, wished to gift his shareholding to his daughters (Proposed Transfer). The Application states that as Mr. Mirza’s daughters were living their independent lives and did not have any role in the management of the Company, and at the time did not hold any shares in the Company, their names were not listed in the Promoter/ Promoter Group of the Company.
According to the Application, subsequent to the Proposed Transfer, the names of the daughters of Mr. Mirza would need to be included in the Promoter Group of the Company, in line with the definition given under regulation 2(1)(zb) of the SEBI (Issue of Capital and Disclosure Requirements), 2009 (ICDR). According to ICDR, Promoter Group includes:
- The Promoter;
- An immediate relative of the Promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
Thus, the daughters of Mr. Mirza would also qualify as part of the Promoter Group of the Company.
Given this issue, the MD’s daughters were desirous of having their names re-classified from the Promoter Group of the Company to the ‘public’ category. However, Regulation 31A(3)(a)(i) of the SEBI (Listing Obligation and Disclosure Requirements), Regulation, 2015 (LODR), provides that the Promoters seeking re-classification shall make a request for re-classification to the listed entity, including a rationale for seeking such a re-classification. Regulation 31A(3)(b) of the LODR further provides the Promoters seeking re-classification shall not together hold more than 10% of total voting rights in the listed entity (Reclassification Threshold).
Accordingly, pursuant to the proposed transfer, the daughters would qualify as part of the Promoter Group of the Company, and if they sought re-classification from the Promoter Group to public shareholders of the Company, their cumulative shareholding would need to fall below the Reclassification Threshold.
Hence, the Application was filed seeking an IG to clarify whether the married daughters of the MD would be eligible to be re-classified to public shareholders on the basis that they live their separate lives and do not participate in the management of the Company.
The IG passed by SEBI on June 10, 2020, stated that by virtue of the definition of ‘Promoter Group’ under the ICDR, the daughters of Mr. Mirza (who is a promoter of the Company) are his immediate relatives, and hence would automatically form a part of the promoter group. Daughters of Promoters, who even though they are married and living independently, and even if not involved in the company in any managerial capacity, would still need to be treated as part of the Promoter Group of the Company.
According to SEBI, the daughters would be a part of the Promoter Group not only by virtue of being immediate relatives of the MD, but also on the basis of regulation 31A(6) of LODR, which states that in case of gift of shares held by a Promoter/ person belonging to the Promoter Group, immediately upon such event, the recipient of such shares shall be classified as a Promoter/ person belonging to the Promoter Group.
SEBI stated that regulation 31A(3)(b) of LODR clearly lays down the conditions to be eligible for reclassification from the Promoter Group to public. However, by virtue of Mr. Mirza’s daughters collectively holding more than the Reclassification Threshold in the Company, pursuant to the Proposed Transfer, they do not satisfy the condition laid down under LODR and hence would not be eligible to seek re-classification.
Hence, SEBI has clarified by way of the IG that both married and unmarried daughters would have equal footing under the definition of immediate relatives as defined under regulation 2(1)(zb) of the ICDR.
What can families do about this?
This IG brings to light SEBI’s line of thinking, which is to treat Promoter Groups strictly, treating daughters of Promoter Groups, irrespective of their marital status or involvement in the business, as Promoters. However, now, some families may utilise this as another ground or excuse to not let their married daughters share in the business wealth of the fathers/ Promoters.
It may be worth mentioning here that such IGs are non-binding and are specific to the case in hand, so one hopes that SEBI will come up with a more nuanced policy to deal with family dynamics and more specifically the Reclassification Threshold.
Is there anything families can do to overcome this? Yes, the issue above can be handled through careful planning. Instead of gifting such shares to children/ daughters directly, a Trust can be a better tool. Trusts can, in addition to shifting the administrative burden from the hands of the children, also transfer all economic benefit of the underlying shares to the children or beneficiaries of such Trusts. Parents like Mr. Mirza can set up discretionary Trusts for their daughters/ children, and can continue to stay as trustees of those Trusts. This would even allow them to retain a certain extent of control over the shares. The assets of the said Trusts may include shares of the listed company, which need to be transferred to Trusts in line with SEBI’s circular dated December 22, 2017.
If done properly and carefully, the parents as trustees can continue to manage the underlying shares and the business, preserving the consolidated holding within the father’s block, and allowing the children to enjoy any dividend and capital gain benefits that may arise. Further, it may also stipulate varied terms for children who are married and those who are unmarried and how they may inherit any assets being bequeathed to them. Of course, it still remains a father’s prerogative to decide how and when he may want to pass on the shares to his daughter, via a Trust or otherwise.
Once the daughters have received the assets in their personal names, careful planning should be undertaken by them to ensure that the said assets are passed on correctly – it is each family’s prerogative to see if the assets need to be passed along the lineage of the in-laws or not. Often, intestate succession laws provide for undesirable outcomes. If succession planning tools are employed during their lifetime, such as executing a Will, there is proper control over how assets are passed on. Early and proper steps must be adopted by Promoters as well as their family members to weigh the various succession planning options available to them and understand how best to utilise them to avoid adverse implications under law.