Bahu is a relative, but not by SEBI definition? The takeover rule dilemma & the need for reforms
By Pranav Sayta and Puneet SachdevThe Securities and Exchange Board of India (SEBI) plays a significant role in shaping the rules for company takeovers and protecting investors interest, amongst other things. SEBI’s takeover regulations are meant to protect public shareholders when there is a significant change in ownership or control. Under the rules, acquisition of 25% or more shares in a listed company (or more than 5% in a financial year by a shareholder(s) already owning 25% or more), or gaining control, requires the acquirer to make an open offer, giving minority shareholders an opportunity to exit.The regulations also recognise that not every transfer of shares results in a change of control. As a result, certain exemptions are available, including for transfers of shares by promoters to private family trusts.Over the past decade, private family trusts have become a commonly used structure for holding promoter shareholdings in listed companies. Families use these trusts for various purposes including in particular to manage succession & ownership across generations, ensure continuity and reduce the risk of disputes.Trustees play a key role in these arrangements. They hold and manage the shares for the benefit of the beneficiaries, exercise voting rights and oversee the administration of the trust. In 2017, SEBI came out with rules and approval process for using ‘Private Family Trusts’ for succession planning by Promoters of Listed Companies. SEBI, through its approval process under these regulations, allows transfers of shares to family trusts without triggering open-offer obligations, provided the structure meets specific conditions. One of those conditions is that the ‘trustees’ must be “immediate relatives” of the promoter.The definition of ‘relative’ under SEBI’s takeover code, compares it with other Indian laws, and discusses the implications for succession planning. The intent is to bring out key regulatory constraints and highlight the need for a balanced approach that protects investors while enabling family businesses to plan for the future.Definition of ‘Relative’: SEBI vs. Other Indian LawsUnder current SEBI takeover regulations, the term ‘immediate relatives’ is limited to spouses, parents, siblings, and children. Notably, sons-in-law and daughters-in-law are excluded from this definition. This narrow framing does not always align with the realities of promoter families, where daughters-in-law may actively participate in governance or be beneficiaries of family trusts. In contrast, Indian income tax law includes daughter-in-laws (and son-in-laws) as relatives, making gifts to them exempt from taxation. Company law also adopts a broader scope, recognising daughters-in-law for governance and disclosure purposes. Such differences can create confusion and regulatory challenges for families seeking to appoint trustees or plan succession.Succession Planning constraints: Trustees in absence of “Relatives”While SEBI may look to redefine the scope of “relatives”, there is also a case for allowing regulated professional or institutional trustees, such as bank trustee, to manage family trusts where promoter “relatives” are not available. Where beneficiaries remain family members and control stays within the promoter group, the risk of misuse can be seen as limited. For example, in both the UK and Singapore, family related trusts are treated as part of the promoter group for takeover purposes, with no restriction on who may act as trustee so long as control remains within the family. Indian income tax law follows a similar principle, granting exemptions based on who benefits from a trust, not who manages it. SEBI could consider safeguards and disclosures to ensure such structures are not misused.Under the current regulations, SEBI does review trust structures to determine whether they serve legitimate succession planning or are intended to circumvent open-offer obligations. SEBI retains the authority to intervene if it believes that minority interests are at risk or if exemptions are being misused. This approach aims to balance the flexibility needed by families with the requirement to protect investors.Conclusion: Need for Balance and Possible ReformsThe current definition of ‘relative’ under SEBI regulations and the associated succession planning constraints highlight the need for regulatory reform. Families require greater flexibility to appoint trustees and transfer shares, while SEBI’s mandate to protect investors must remain intact. A broader and more inclusive definition of ‘relative’, harmonised with other Indian laws, could help address these challenges. Ultimately, a balanced framework will support both family businesses and investor confidence, paving the way for sustainable growth in India’s corporate sector.(Pranav Sayta is Partner and National Leader, International Tax and Transaction Services, EY India, and Puneet Sachdev is Tax Partner, EY India. Shilpi Gupta,Tax Consultant, EY India also contributed to the article)
