Exemption order under regulation 11 of SEBI (SAST) Regulations, 2011 in the matter of "KIFS Financial Services Limited"

WTM/GM/CFD/ 32/2018–2019 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 11(1) AND SECTION 11(2)(h) OF THE SEBI ACT READ WITH REGULATION 11(5) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011. IN THE MATTER OF PROPOSED ACQUISITION OF SHARES AND VOTING RIGHTS IN – TARGET COMPANY KIFS FINANCIAL SERVICES LIMITED ACQUIRER KHANDWALA FAMILY TRUST

BACKGROUND –

1.1 KIFS Financial Services Limited (“Target Company”) was incorporated on March 29, 1995, under the Companies Act, 1956 as Khandwala Financial Services Limited. The aforesaid name was changed to Khandwala Capital Services Limited w.e.f. September 22, 1995. The aforementioned name was subsequently changed to KIFS Financial Services Limited w.e.f. January 23, 2009. The Registered Office of the Target Company is at B–81, Pariseema Complex, C. G. Road, Ellisbridge, Ahmedabad–380006, Gujarat, India. The shares of the Target Company are listed on BSE Limited (“BSE”). The Target Company is also a non–deposit accepting non–banking financial company (“NBFC”) registered with the Reserve Bank of India (“RBI”).

1.2 An Application dated June 30, 2017 (“Application”) seeking exemption from the applicability of inter alia Regulations 3(1) and 4 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) in the matter of proposed acquisition of shares and voting rights in the Target Company, was received by SEBI from Vimal P. Khandwala, Trustee of Khandwala Family Trust (“Acquirer Trust”).

1.3 Regulation 3(1) of the Takeover Regulations states – “Substantial acquisition of shares or voting rights. 3. (1) No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise

Order in the matter of KIFS Financial Services Limited twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations. … (3) For the purposes of sub-regulation (1) and sub-regulation (2), acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert. …

Acquisition of control. 4. Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.”

1.4 In the aforementioned Application, the following was inter alia stated – i. The Acquirer Trust is a private family trust incorporated under a deed of trust dated September 15, 2015 for the benefit of Khandwala Family members and their lineal descendants.

ii. The Acquirer Trust does not hold any shares in the Target Company.

iii. As on the date of application, the Promoter i.e. Khandwala Commercial Private Limited, holds 74.41% of the equity shares and voting rights in the Target Company.

iv. The pre–acquisition shareholding in the Target Company as on June 30, 2017 along with the proposed post–acquisition shareholding in the Target Company, are provided below:

TABLE A – SHAREHOLDING IN THE TARGET COMPANY (SOURCE: APPLICATION) SR. NAME PRE – ACQUISITION POST – ACQUISITION NO. NO. OF % NO. OF % SHARES SHAREHOLDING SHARES SHAREHOLDING A. PROMOTER 1. KHANDWALA COMMERCIAL PRIVATE LIMITED (‘TRANSFEROR’) 80,50,000 74.41 0 0.00 2. KHANDWALA FAMILY TRUST (‘ACQUIRER TRUST’) 0 0.00 80,50,000 74.41 TOTAL 80,50,000 74.41 80,50,000 74.41 B. PUBLIC SHAREHOLDING 27,68,000 25.59 27,68,000 25.59 C. TOTAL (A + B) 1,08,18,000 100.00 1,08,18,000 100.00

TABLE B – SHAREHOLDING IN KHANDWALA COMMERCIAL PRIVATE LIMITED (SOURCE: APPLICATION) SR. NAME NO. OF SHARES % SHAREHOLDING NO. 1. RAJESH P. KHANDWALA 1,08,75 49.1100 2. VIMAL P. KHANDWALA 1,08,75 49.1100 3. PRIYANKA P. KHANDWALA 3,945 1.7800 4. SONAL R. KHANDWALA 25 0.0100 5. KUSHAL J. KHANDWALA 2 0.0010 6. MINAXI P. KHANDWALA 1 0.0005 7. BHOOMI R. KHANDWALA 1 0.0005 TOTAL 2,21,100 100.0000 v. The proposed acquisition of shares by the Acquirer Trust will occur as under – a. The Target Company is a subsidiary of Khandwala Commercial Private Limited in which 100% shareholding is of Khandwala Family members.

b. The Acquirer Trust proposes to acquire 80,50,000 (74.41%) equity shares of the Target Company from Khandwala Commercial Private Limited (“Transferor”).

c. Since the Target Company is a registered NBFC, the Acquirer Trust will also be obtaining approval from RBI for the abovementioned acquisition.

vi. The Settlor, Trustees and Beneficiaries of the Acquirer Trust are as under – ACQUIRER TRUST SETTLOR TRUSTEES BENEFICIARIES* RELATIONSHIP* Minaxi P. 1. Kinnary J. Khandwala 1. JPK Family Trust Rajesh P. Khandwala and Vimal P. Khandwala 2. Rajesh P. Khandwala 2. RPK Family Trust Khandwala are sons of Minaxi P. 3. Vimal P. Khandwala 3. VPK Family Trust Khandwala. Kinnary J. Khandwala is the wife of Jayesh P. Khandwala (who is the other son of Minaxi P. Khandwala).

vii. Details in respect of the Beneficiaries Trusts are as under – BENEFICIARY TRUST 1 – JPK FAMILY TRUST SETTLOR TRUSTEES BENEFICIARIES Minaxi P. Khandwala 1. Kinnary J. Khandwala 1. Jayesh P. Khandwala 2. Kushal J. Khandwala 2. Kinnary J. Khandwala 3. Kushal J. Khandwala 4. KJK Family Trust* *KJK Family Trust has Kinnary J. Khandwala and Kushal J. Khandwala as its Trustees. Kushal J. Khandwala is the sole beneficiary.

BENEFICIARY TRUST 2 – RPK FAMILY TRUST SETTLOR TRUSTEES BENEFICIARIES Minaxi P. Khandwala 1. Rajesh P. Khandwala 1. Rajesh P. Khandwala 2. Sonal R. Khandwala 2. Sonal R. Khandwala 3. Bhoomi R. Khandwala 4. Aanshi R. Khandwala 5. ABRK Family Trust* *ABRK Family Trust has Rajesh P. Khandwala, Sonal R. Khandwala, Bhoomi R. Khandwala and Aanshi R. Khandwala as its Trustees. Bhoomi R. Khandwala and Aanshi R. Khandwala are the beneficiaries.

BENEFICIARY TRUST 3 – VPK FAMILY TRUST SETTLOR TRUSTEES BENEFICIARIES Minaxi P. Khandwala 1. Vimal P. Khandwala 1. Vimal P. Khandwala 2. Priyanka V. Khandwala 2. Priyanka V. Khandwala 3. Niomi V. Khandwala 4. Kiah V. Khandwala 5. NKVK Family Trust* *NKVK Family Trust has Vimal P. Khandwala and Priyanka V. Khandwala as its Trustees. Niomi V. Khandwala and Kiah V. Khandwala are the beneficiaries.

viii. The Board of Directors of the Target Company (as provided in the Application) is as follows –

NAME DESIGNATION 1. RAJESH P. KHANDWALA MANAGING DIRECTOR 2. SONAL R. KHANDWALA DIRECTOR 3. DEVANG M. SHAH INDEPENDENT DIRECTOR 4. DHARMENDRA N. SONI INDEPENDENT DIRECTOR 5. DURGESH D. SONI COMPANY SECRETARY/KMP 6. BHAVIK J. SHAH CHIEF FINANCIAL OFFICER/KMP ix. Grounds for seeking exemption – a. The proposed acquisition for which exemption is sought will take place pursuant to a private family arrangement, which is intended to streamline Khandwala Family Trust’s shareholding in the Target Company and facilitate succession planning and welfare of Khandwala Family members. b. Pursuant to the proposed acquisition, no outsider will acquire shares, directly or indirectly, of the Target Company as the acquisition takes place between the Khandwala Family Trust and Khandwala Commercial Private Limited in which 100% shares are held by Khandwala Family members only. Ultimately, the control of Khandwala Family Trust is with Khandwala Family members only. c. There will be no change in control/management of the Target Company. d. The Acquirer Trust has provided for ‘Child Trusts’ as beneficiaries as against children directly in order to facilitate smooth succession planning for the children’s families as well. It may be noted that the beneficiaries of these Child Trusts are restricted to their lineal descendants. The shares of the Target Company would be held by the master trust and the child trusts would have no control over the decisions of the master trust or decision as shareholders of the Target Company. Such decisions would continue to be taken by the trustees in their individual capacity. As already provided in the trust deeds, the children would automatically become trustees of the master trust on the demise of the parents. We may also mention that the child trusts are currently under the control of the same trustees who are trustees of the master trust. Post demise of the parents, it is the individual children who would then be appointed as trustees in their respective child trust. As trustees, their role would be restricted to deciding on the allocation of the income distributed from the master trust (if any). Hence, the child trusts serve a limited purpose of accumulating wealth for the children’s respective families and do not have any direct role in the administration of the master trust i.e. Khandwala Family Trust.

1.5 The Application was forwarded to the Takeover Panel in terms of the proviso to Regulation 11(5) of the Takeover Regulations and deliberated by the Takeover Panel in its meeting held on December 16, 2017. After deliberations, the Takeover Panel recommended that the proposed transaction does not warrant grant of exemption as the transferor i.e. Khandwala Commercial Private Limited, has not been disclosed as a Promoter in the shareholding pattern filed with Stock Exchanges for at least 3 years. Further, the Takeover Panel observed that there is a layering in the trust structure as the beneficiaries of the acquirer trust are trusts and the beneficiaries of the said beneficiary trusts, amongst others, are other trusts.

PERSONAL HEARING –

1.6 An opportunity of personal hearing in the matter of the Target Company was granted to the Applicant/Acquirer Trust on April 16, 2018, which was attended by the authorised representative for the Applicant/Acquirer Trust.

1.7 During the course of the hearing, the authorised representative for the Applicant/Acquirer Trust was informed of the abovementioned recommendations made by the Takeover Panel. The authorised representative reiterated the contents of the Application dated June 30, 2017 and also confirmed that the Transferor i.e. Khandwala Commercial Private Limited, was only disclosed as the Promoter of the Target Company w.e.f. the Quarter ending December 31, 2015 (Target Company submitted requisite disclosure to BSE on January 13, 2016).

1.8 The authorised representative also stated that a reply will be submitted to SEBI within a period of 3 days from the date of personal hearing inter alia regarding – a. Details concerning Promoters of the Target Company prior to Khandwala Commercial Private Limited being declared as a Promoter w.e.f December 31, 2015; b. Layering of Trusts including constitution of Sub–Trusts; c. Acquisition by Khandwala Family Trust through an LLP arrangement, etc.

1.9 Vide an e–mail dated May 3, 2018 the Applicant/Acquirer Trust submitted a revised application dated April 30, 2018 (“Revised Application”) inter alia stating the following – i. The shareholding pattern of erstwhile Promoter i.e. KIFS Securities Private Limited (“KSPL”), which was holding 74.41% of the Target Company to substantiate the fulfillment of criteria of Regulation 10(1)(a)(ii) of the Takeover Regulations, 2011 w.r.t. requirement of Promoter’s shareholding in the Target Company for not less than 3 years prior to the proposed acquisition, is provided below –

TABLE C – SHAREHOLDING IN KIFS SECURITIES PRIVATE LIMITED SR. NAME 31.03.2013 31.03.2014 31.03.2015 NO. NO. OF % NO. OF % NO. OF % SHARES SHARES SHARES 1. RAJESH P. KHANDWALA 62,50,000 49.1100 62,50,000 49.1100 62,50,000 49.1100 2. VIMAL P. KHANDWALA 62,48,600 49.1000 62,48,600 49.1000 62,48,600 49.1000 3. PRIYANKA P. KHANDWALA 2,27,240 1.7800 2,27,240 1.7800 2,27,240 1.7800 4. SONAL R. KHANDWALA 1,400 0.0110 1,400 0.0110 1,400 0.0110 5. KUSHAL J. KHANDWALA 20 0.0002 20 0.0002 20 0.0002 6. MINAXI P. KHANDWALA 10 0.0001 10 0.0001 10 0.0001 7. BHOOMI R. KHANDWALA 10 0.0001 10 0.0001 10 0.0001 TOTAL 1,27,27,280 100.0000 1,27,27,280 100.0000 1,27,27,280 100.0000 ii. Possibility to remove the second level Sub–Trusts (Children Trusts) considering Takeover’s Panel recommendations – “During the hearing, our representatives submitted the pictorial chart depicting the present owners of the Promoter/Transferor as well as proposed owners of Promoter/Transferor, which is once again submitted below – Target Company

74.41% owned by Khandwala Commercial Private Limited

Present Owner – KCPL Proposed Owner – KCPL 100% owned by Family members 100% owned by Acquirer Trust (beneficiaries RPK RPK (49.11%); VPK (49.10%); (33.33%), VPK (33.33%) and JPK (33.34%) PVK (1.78%) and (0.01%) other Family Trusts) through its investment arm – KIFS family members International LLP.

However, w.r.t. discussions with Hon’ble Whole Time Member to remove second level sub trusts (children trusts) so as to consider Takeover Panel’s remarks, we would like to state that we had internally discussed the issue amongst the family members and have concluded that we should carry on with the said internal settlement derived as per Khandwala Family Trust (Master Trust) deed which is, in general, settled to safeguard the harmony, peace and welfare of the Khandwala Family members as per the settler’s desires and intentions. In view of this, please be informed that we would like to continue second level sub–trusts (children trusts). Accordingly, we will not be able to remove second level sub trusts (children trusts).”

FINDINGS –

2.1 I have considered the Application along with the Revised Application submitted by the Applicant/Acquirer Trust; the recommendations of the Takeover Panel and other material available on record.

2.2 From the preceding paragraphs, it is noted that –

A. The Application submitted is in respect of the proposed acquisition of shares and voting rights in the Target Company i.e. KIFS Financial Services Limited.

B. The aforesaid acquisition is proposed to be made by Khandwala Family Trust i.e. the Applicant/Acquirer Trust, in the following manner – i. As on the date of the Application/Revised Application, the Promoter/Transferor i.e. Khandwala Commercial Private Limited, holds 74.41% of the equity shares and voting rights in the Target Company.

ii. The Target Company, a registered NBFC, is a subsidiary of the Promoter/Transferor in which 100% shareholding is held by the Khandwala Family members.

iii. The Applicant/Acquirer Trust proposes to acquire 80,50,000 (74.41%) equity shares of the Target Company from Khandwala Commercial Private Limited, as under –

TARGET COMPANY PRE – ACQUISITION POST – ACQUISITION NO. OF % OF NO. OF % OF SHARES SHARES SHARES SHARES KHANDWALA COMMERCIAL PRIVATE LIMITED 80,50,000 74.41 0 0.00 KHANDWALA FAMILY TRUST 0 0.00 80,50,000 74.41 iv. The proposed acquisition is further to an internal reorganization within the Promoter Family and is intended to streamline succession and promote welfare of Promoter Family.

2.3 Upon a consideration of the aforementioned, I am of the view that for an exemption as sought for in the Application to be granted under the Takeover Regulations, 2011, the Applicant/Acquirer Trust has to inter alia satisfy the condition specified under Regulation 10(1)(a)(ii) of the aforesaid Regulations, which states – “General Exemptions. 10. (1) The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor, – (a) Acquisition pursuant to inter se transfer of shares amongst qualifying persons, being, – (i) … (ii) Persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or these regulations for not less than three years prior to the proposed acquisition;”

2.4 Regulation 10(1)(a)(ii) of the Takeover Regulations, 2011 exempts acquisitions pursuant to inter– se transfer of shares amongst ‘qualifying persons’ being Promoters provided they are named as such in the shareholding pattern filed by the Target Company in terms of the Listing Agreement or the Takeover Regulations, 2011 for not less than 3 years prior to the proposed acquisition.

2.5 I note that the condition of a pre-existing relationship of at least 3 years has been specified under Regulation 10(1)(a)(ii) of the Takeover Regulations, 2011 in order to curtail the abuse of introducing new entities within the definition of ‘qualifying persons’ under the said Regulations. I find that in the instant case, the Transferor has not been named as a Promoter in the shareholding pattern filed by the Target Company with the Stock Exchanges for at least 3 years. The aforesaid fact was also confirmed by the authorised representative for the Applicant/Acquirer Trust during the personal hearing on April 16, 2018 wherein he stated that the Transferor was only disclosed as the Promoter of the Target Company w.e.f. the Quarter ending December 31, 2015 (Target Company submitted requisite disclosure to BSE on January 13, 2016). Upon a consideration of the aforesaid, I am of the opinion that granting exemption from the requirement contained under Regulation 10(1)(a)(ii) of the Takeover Regulations, 2011 would defeat the very objective of why the norms were made stricter. In this regard, I agree with the recommendation of the Takeover Panel to the extent that the proposed acquisition does not warrant grant of exemption since the Transferor has not been disclosed as a Promoter in the shareholding pattern filed with Stock Exchanges for at least 3 years.

2.6 As the Applicant/Acquirer Trust does not meet with the stipulated mandate of 3 years’ disclosure as Transferor, the issue of grant of exemption to acquire shares of the Target Company, as proposed in the Application, is not being taken up for consideration in this Order.

ORDER –

3.1 I, in exercise of the powers conferred upon me under Section 19 read with Section 11(1) and Section 11(2)(h) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and Regulation 11(5) of the Takeover Regulations, hereby reject the request for exemption to the Proposed Acquirer, viz. Khandwala Family Trust, from complying with the requirements of Regulations 3(1) and 4 of the Takeover Regulations with respect to the proposed acquisition/exercise of voting rights in respect of the Target Company, viz. KIFS Financial Services Limited, by way of proposed acquisition as mentioned in the Application read with the Revised Application.

3.2 The Application dated June 30, 2017 read with the Revised Application dated April 30, 2018, filed by Vimal P. Khandwala, Trustee of Khandwala Family Trust, is accordingly disposed of.

Place: Mumbai G. MAHALINGAM Date: June 28, 2018 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA