Reality of Succession Planning: Does the Takeover Code require update to include Daughters-in-law?

Certain business families have approached the Securitiesand Exchange Board of India (“SEBI”) seeking permission to allowdaughters-in-law to step in as trustees of their privately owned trusts. Thereason being the definition of ‘immediate relative’ under theSEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) does not include daughter-in-law.

The Issue

The primary objective of the Takeover Code is to safeguard theinterests of minority shareholders, and one of the core safeguards to achievethis objective is the requirement of open offer. Under the Takeover Code, anacquirer who, together with persons acting in concert, acquires 25% or more ofthe voting rights in a listed company is required to make an open offer to thepublic shareholders for at least 26% of the total voting share capital of thecompany^[1]. However, this rule is subject to some exemptions, one ofwhich is that a transfer between ‘immediate relatives’ does not trigger an openoffer requirement.

The issue is that the definition of ‘immediate relative’ definedunder the Takeover Code covers spouses, parents, siblings, and children of theperson and of the spouse^[2]. It does not cover sons-in-law anddaughters-in-law, creating challenges in availing exemptions available forintra-family share transfers.

The Major Challenges

Even today, substantial number of listed companies in Indiaare family-run. Private family trusts are commonly used by the promoters to concentrateshareholding, enable orderly succession, and avoid dilution across heirs.Daughters-in-law are frequently part of these trusts, in the form of trusteesor beneficiaries, yet they are not formally recognised as an ‘immediaterelative’ under the Takeover Code.

 Without such recognition, promoter families mainly face two major challenges:

(a) Regulatory Uncertainty: In family trusts, appointing a relativeas trustee is critical to ensure that the trust is administered in accordancewith the family’s long-term intentions. As such, if a daughter-in-law isappointed as a trustee and the promoter shares are transferred to her (in hercapacity as a trustee), it may be viewed as a transfer to a non-relative, therebyautomatically triggering open offer obligations under the Takeover Code.

(b) Need for Case-by-Case Approvals: In order to avoid thisrisk, these families have no other option but to approach SEBI under Regulation11 of the Takeover Code for availing a case-by-case exemption. However, even ifgranted, these approvals delay succession and restructuring. Further, itcomplicates the matter by adding an additional layer of legal uncertainty to astraightforward internal family arrangement.

The Legal Mismatch

This seem-to-be minor issue highlights a much deeperinconsistency within India’s regulatory framework. Different laws define‘relatives’ differently, leaving family-run business to operate in an oftenconfusing and inconsistent compliance environment. Under the Income Tax Act,1961 (“Income Tax Act”), sons-in-law and daughters-in-law are treated asrelatives for gifting purposes, allowing such transfers to be free from tax. TheCompanies Act, 2013 (“Companies Act”) also considers sons- in-law anddaughters-in-law as relatives.

This fragmented approach ends up creating hurdles forpromoter families who are required to comply with multiple laws. Anintra-family transfer that is routine and tax-neutral under the Income Tax Actmay still fail to get similar treatment under securities laws, unexpectedlytriggering regulatory approvals or compliance obligations.

The Arguments

The contention for amending the definition ‘immediaterelatives’ to include the daughter-in-law could be based on the followingarguments:

(a) In today’s era, daughters-in-law often play active roles in governance, serving astrustees of the family trusts, or stepping in where heirs are unavailable.Excluding them from the legal definition of a relative will be a move disconnectedfrom today’s commercial and family realities.

(b) Aligning SEBI’s definition with other statutes would create consistency and generate aseamless and practical exemption regime.

(c) Some commentators further see the move as advancing gender equality by recognisingwomen’s substantive roles in corporate governance framework of family ledlisted entities.

The Best Approach?

SEBI may ultimately come up with one of several approaches.It could permit a limited inclusion of daughters-in-law for succession- ortrust-related exemptions; allow such inclusion subject to enhanced disclosuresand safeguards to protect the interests of minority shareholders; or firstissue a consultation paper to invite feedback from the market, investors, andexperts before implementing any rule change. Alternatively, instead of amendingthe definition of ‘immediate relative’, SEBI may consider providing aprinciple-based exemption focused on continuity of control. Under thisexemption, transfers would not trigger an open offer as long as there is nochange in promoter control, voting rights, or the identity of persons acting inconcert. A principle-based framework, supported by disclosures, declarations,and post-transaction reporting, could provide families with flexibility while atthe same time giving SEBI sufficient oversight.

 References

[1] Regulation 3, SEBI (Substantial Acquisition of Sharesand Takeovers) Regulations, 2011

[2] Regulation 2 (1) (l), SEBI (Substantial Acquisition ofShares and Takeovers) Regulations, 2011

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