What are Off-market Shares or Grey Market Shares ?:
Off-market shares are shares that are sold outside the official distribution channels, such as stock exchanges or depositories. Off-market shares are also known as grey market shares, as they are not regulated by any authority, such as SEBI or exchanges, and all transactions are mutually settled. Off-market shares are usually traded before the listing of a company’s shares on the stock exchanges, when there is a high demand and expectation for the shares.
For example, shares of Paytm and Zomato were heavily sold in the grey market before their listing, fetching a premium over their issue price. Off-market shares offer an opportunity for buyers to make profits by buying shares at a discounted price or selling them at a premium before listing. However, off-market shares also involve various legal risks and challenges, such as lack of transparency, validity of title, compliance with statutory requirements, taxation issues, ethical implications, etc. The buyers of off-market shares may face difficulties or disputes while registering their transfer with the company or may suffer losses due to breach of contract or negligence or misrepresentation by the sellers.
The buyers may also face legal action from SEBI or company law authorities for violating the securities laws and regulations. Moreover, some companies may restrict or prohibit the transfer of their shares to third parties, especially if they are issued under employee stock option plans (ESOPs). For instance, Infosys had blocked the registration of ESOPs to third parties if employees sold them in the off-market or grey market.
What are Statutory Provisions Regarding this ? :
The statutory provisions that govern the transfer of shares in India are mainly contained in the Companies Act, 2013 and the SEBI regulations. Some of the relevant provisions are:
- Section 2 (68) of the Companies Act, 2013 defines a private company as a company which has a minimum paid-up capital of one lakh rupees, restricts the right to transfer its shares by its articles of association, limits the number of its members to two hundred (excluding QIBs and employees under ESOP scheme), and prohibits any invitation to the public to subscribe for any securities of the company.
- Section 44 of the Companies Act, 2013 provides that shares are movable property transferable in any manner provided by the articles of association.
- Section 56 of the Companies Act, 2013 provides that a company shall not register a transfer of shares unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and transferee has been delivered to the company along with share certificate or letter of allotment within sixty days from the date of execution.
- Section 58 of the Companies Act, 2013 provides that if a private company refuses to register a transfer of shares, it shall send notice of refusal to both transferor and transferee within thirty days from date on which instrument of transfer was delivered to it. The transferee may appeal against such refusal to NCLT within thirty days from date of receipt of notice or sixty days from date on which instrument was delivered to company.
- Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014 provides that a private company may refuse to register a transfer of shares on any sufficient cause. However, complete prohibition on transfer is not allowed.
- Regulation 4(2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 provides that no issuer shall make an offer or allotment through private placement basis or otherwise to more than two hundred persons in aggregate in a financial year. However, this limit does not include QIBs and employees under ESOP scheme.
- Regulation 40(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that every listed entity shall ensure that all transfers/transmissions/splitting/consolidation/renewal/ exchange/duplicate issue/endorsement/cancellation/rectification/ conversion/pledge/hypothecation etc., in respect of securities issued by it are effected only through registered depositories.
- Regulation 3(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015 provides that no insider shall communicate or procure communication or allow access to unpublished price sensitive information relating to a company or securities listed or proposed to be listed to any person including other insiders except where such communication is in furtherance of legitimate purposes or performance of duties or discharge of legal obligations.
What are Case Studies on this Subject ? :
Some of the case studies that illustrate the legal risks and analysis related to buying off-market shares in India are:
- In?Sandeep Kumar Jain vs. Reliance Industries Ltd.?(2016),?Rajendra Kumar Agarwal vs. Reliance Industries Ltd.?(2017) and?Sandeep Kumar Jain vs. Reliance Industries Ltd.?(2018), the Delhi High Court and the Supreme Court held that a company cannot refuse to register a transfer of shares on the ground that they were purchased from the grey market, as long as the transferor had valid title to the shares and complied with the statutory requirements for transfer. The courts also observed that a company cannot question the source or mode of acquisition of shares by a transferee, unless there is a statutory bar or prohibition. The courts also rejected the contention of Reliance Industries Ltd. that it had a right of first refusal over the shares issued under ESOP scheme and that it could refuse to register the transfer on that basis. The courts also held that Reliance Industries Ltd. had not complied with the provisions of Section 58 of the Companies Act, 2013 and Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014, which require a company to send notice of refusal to register a transfer within thirty days from the date on which instrument of transfer was delivered to it. These cases show that the buyers of off-market shares have a right to get their transfer registered by the company if they have valid title and comply with statutory requirements. However, they also show that the buyers may face difficulties or delays in getting their transfer registered due to refusal or rejection by the company on various grounds.
- In?Nanalal Zaver v. Bombay Life Assurance Co. Ltd?(1950) and?Sahara India Real Estate Corporation v. SEBI?(2012), the Supreme Court held that existing shareholders must be given first option by way of preemption rights before transferring shares to outsiders . The court also held that Section 81 of the Companies Act of 1956 (now Section 62 of the Companies Act, 2013) presumes a preemptive right on existing shareholders to a new issue of shares. These cases show that the buyers of off-market shares may not be able to purchase shares if the existing shareholders exercise their preemption rights over them. They also show that the buyers may have to pay a higher price for the shares if they are offered to them after giving preemption rights to existing shareholders.
- In?Bishan Singh v. Khazan Singh?(1970), the Supreme Court held that preemption is a right to the offer of a thing being sold and not a right to the thing itself. This means that, unless other members agree to buy all of the shares intended to be sold, a member is not obligated to sell his or her shares to other members under the pre-emption clause. This case shows that the buyers of off-market shares may be able to purchase shares from a member who has offered them to other members but they have not agreed to buy.
- In?CIT (Central), Calcutta Vs. Standard Vacuum Oil Co?(1966), the Supreme Court held that a share is not just a sum of money but is an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of association of the Company. This case shows that the buyers of off-market shares may be entitled to diverse rights and benefits attached to them, such as dividend, bonus, rights, etc.
What are the remedies/recourse available to the aggrieved buyers ?:
- Appeal: The buyers can appeal against any refusal or rejection of transfer by the company before NCLT within thirty days from date of receipt of notice or sixty days from date on which instrument was delivered to company as per Section 58(3) of Companies Act, 2013. The buyers can also appeal against any order or direction or penalty imposed by SEBI before SAT within forty-five days from date on which such order or direction or penalty is communicated as per Section 15T of SEBI Act, 1992.
- Settlement: The buyers can seek settlement or compounding of any violation or dispute arising out of transfer by paying appropriate fees or penalties or undergoing any other remedial measures as prescribed by SEBI or NCLT as per Section 15JB of SEBI Act, 1992 and Section 441 of Companies Act, 2013.
- Damages: The buyers can claim damages or compensation from the transferor or the company for any loss or injury suffered due to breach of contract or negligence or misrepresentation as per Section 73 and 74 of Indian Contract Act, 1872 and Section 19A and 19B of Specific Relief Act, 1963.
- Arbitration: The buyers can resort to arbitration for resolving any dispute arising out of transfer by invoking an arbitration clause in their contract with the transferor or the company as per Section 7 and 8 of Arbitration and Conciliation Act, 1996.
- Mediation: The buyers can opt for mediation for resolving any dispute arising out of transfer by mutual consent and agreement with the transferor or the company as per Section 89 of Code of Civil Procedure, 1908 and Section 12A of Commercial Courts Act, 2015.
- Consumer Forum: The buyers can approach the consumer forum for redressal of any grievance or complaint arising out of transfer by alleging deficiency in service or unfair trade practice by the transferor or the company as per Section 2(1)(g) and 2(1)(r)of Consumer Protection Act, 2019.
Conclusion : The off-market shares are an attractive but risky avenue for buyers who want to buy shares before listing. The off-market shares are not regulated by any authority and involve various legal risks and challenges. The buyers of off-market shares should be aware of the statutory provisions and case studies that govern the transfer of shares in India. The buyers should also be careful and diligent in verifying the title and compliance of the transferor and the company. The buyers should also be prepared to face any difficulties or disputes arising out of transfer and seek appropriate recourses and remedies available to them.
PS : In my next Post , I will analyse how Off-market or grey market shares also affects companies regulatory and what we can learn from the international similar OTC markets for the same. Stay Tuned :)
- Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) vs. SEBI, (2012) 10 SCC 603.
- Sandeep Kumar Jain vs. Reliance Industries Ltd., 2016 SCC OnLine Del 3968.
- Rajendra Kumar Agarwal vs. Reliance Industries Ltd., 2017 SCC OnLine Del 12518.
- Sandeep Kumar Jain vs. Reliance Industries Ltd., (2018) 7 SCC 469.
- Nanalal Zaver v. Bombay Life Assurance Co. Ltd, AIR 1950 SC 172.
- Bishan Singh v. Khazan Singh, AIR 1970 SC 261.
- CIT (Central), Calcutta Vs. Standard Vacuum Oil Co, AIR 1966 SC 1391.
- Companies Act, 2013.
- SEBI Act, 1992.
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
- SEBI (Prohibition of Insider Trading) Regulations, 2015.
- SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
- Indian Contract Act, 1872.
- Specific Relief Act, 1963.
- Arbitration and Conciliation Act, 1996.
- Code of Civil Procedure, 1908.
- Commercial Courts Act, 2015.
- Consumer Protection Act, 2019.
- Ashworth, W. (2021, December 14). 6 Common Portfolio Protection Strategies. Investopedia. https://www.investopedia.com/articles/basics/11/5-portfolio-protection-strategies.asp
- Fisdom. (n.d.). Grey Market – Definition, Types, Terminologies & Process. https://www.fisdom.com/grey-market/
- Groww. (2023, May 30). How to Buy Unlisted Shares in India? https://groww.in/blog/how-to-buy-unlisted-shares
- Samco. (2023, January 2). Grey Market IPO – A Detailed Guide. https://www.samco.in/knowledge-center/articles/grey-market-ipo/
- Upstox. (2017, October 23). What are Risk Management While Investing in Share Market? https://upstox.com/learning-center/online-trading/difference-between-online-and-offline-trading/
