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SEBI Directs Prior Approval for Change in Control by Transfer & Transmission

SEBI Directs Prior Approval for Change in Control by Transfer & Transmission
| Updated: Apr 21, 2021 | Category: SEBI Advisory

On 25.03.2021, the Apex Market Regulator, i.e., SEBI has directed all the intermediaries to seek prior approval for Change in Control by Transfer & Transmission. The same has been by way of SEBI Circular No SEBI/HO/MIRSD/DOR/CIR/P/2021/42.

Also, it shall be noted that the said circular is in furtherance to Circular No CIR/MIRSD/14/2011, issued on 02.08.2011.

Moreover, the SEBI has passed this circular under the ambit of the powers given by section 11 (1) of the SEBI Act 1992 to protect the investor’s interest and to promote development and regulation of the securities market.

In this learning blog, the keep point of focus will be the different types of prior approval for changes in control by transfer & transmission.

Concept of Transfer of Shareholding

The term transfer of shareholding means the process of transferring the already existing shares, their associated rights, and liabilities from one person to another.

Further, a transfer of share can only be initiated against the existing shares and existing shareholders. However, it shall be noted thatthe transferee can either bethe existing shareholder or not of the company.

Concept of Transmission of Shareholding

The term Transmission of Shareholding denotes a process by operation of law wherein the shares are allotted in a company in the name of the deceased person or an insolvent person or are registered in the name of his/ her legal heirs by the company, on the proof of insolvency or death as the case may be.

Further, it shall be noted that the transmission of shares shall take place only when a registered member dies or is adjudicated lunatic or insolvent by a competent court.

Different types of Prior Approval for Changes in Control by Transfer & Transmission

The different types of prior approval for changes in control by transfer & transmission are as follows:

In the case of “Unlisted Body Corporate Intermediary”

In the following scenarios, change in the shareholding of the intermediary shall not be construed as a change in control:

  1. Transfer of Shareholding among the immediate relatives will not result in the change in control. However, it shall be noted that an Immediate relative will be construed as explained under Regulation 2(l) of the SEBI SAST Regulations[1], which inter-alia comprises any spouse of that person, or any brother, sister, parent, or child of that person or of spouse;
  2. Transfer of shareholding through the transmission to the immediate relative or not, will not result in the change in control;

In the case of “Proprietary Firm Type Intermediary”

In the case of an intermediary being a proprietary firm, the transfer or the bequeathing of the business or capital, by way of the transmission to another person, is the change in the legal formation or the ownership. Therefore, by the definition of the change in control, such a transfer or transmission will be considered as the change in control.

Also, it shall be noted that the legal heir or transferee in such cases is needed to obtain prior approval, and thereafter a fresh registration will be obtained in the name of such legal heir or transferee.

In the case of “Partnership Firm Type Intermediary”

It shall be noted that the change in partners and the ownership interest of a partnership firm type intermediary will be dealt with in the manner as follows:

Transfer of Ownership

In the case, where a SEBI registered entity is incorporated as a partnership firm with two or more than two partners, then, in that case, inter-se transfer among the partners will not be termed to be a change in control.

Also, it shall be noted that where the partnership firm comprises of only two partners, then, in that case, the same will considered as dissolved upon the death of either of the partners.

However, if in case a new partner has been inducted into the firm, then, in that case, the same will be termed as a change in control, needing fresh registration and the prior approval of SEBI.

Transmission of Ownership

Wherein the partnership deed comprises of a clause that in the case of death of a partner, the LRs (legal heir) of the deceased partner can be admitted, then, in that case, the legal heirs may also become the partners of the said partnership firm.

Also, it shall be noted that in such a scenario, the partnership firm is reconstituted.

However, it shall again be noted that the bequeathing of partnership right to legal heirs, by way of the process of transmission, will not be termed as a change in control.

In the case of “Incoming Entities”

All the Incoming entities or shareholders becoming a part of the controlling interest in the intermediary, in consequence, to transfer of shares from the immediate relative or transmission of shares (immediate relative or not), requires to fulfil the fit and proper person criteria prescribed in the Schedule II of the SEBI (Intermediaries) Regulations 2008.

Conclusion

In a nutshell, SEBI has directed all the intermediaries to seek prior approval for Change in Control by Transfer & Transmission. The same has been effected through a SEBI Circular No SEBI/ HO/ MIRSD/ DOR/ CIR/ P/ 2021/ 42, issued on 25.03.2021.

Also, Read: SEBI Advises Registered Entities to Follow TRAI’s TCCCP Regulations 2018

Official Copy of the SEBI Circular

1616685668546

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Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

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