SEBI aborts brightening of fine lines of control

By CS Vinita Nair, (

SEBI at its Board meeting held on March 12, 2016[1] discussed and decided on several important matters, one of them being approving for initiation of public consultation process regarding Bright line Tests for Acquisition of ‘Control’ under the SEBI (SAST) Regulations, 2011[2] (SAST). Acquisition of control, in case of listed entities, entails making an open offer under SAST.

Control has been defined, by way of an inclusive definition, under various laws in India and internationally. The crux of the definition of ‘control’ under various laws has been discussed in Annexure 1. Primarily, the salient features of definition of ‘control’ are as under:

  • The right to appoint a majority of directors
  • The right to control the management
  • The right to control the policy decision

Such rights may be exercised by a person, directly or indirectly. The rights may accrue by virtue of shareholding, management rights, shareholder agreements, voting agreements or in any other manner. However, in case of contractual agreements, assessment of acquisition of control becomes complex and requires consideration of facts. It has been represented to SEBI to amend the definition of control, thereby shifting it from a principle based definition to rule based definition, in order to avoid multitude of opinions. In a given scenario multiple regulators may all be applying the test of control from different perspectives and arriving at differing results which may lead to ambiguity and confusion in the market

In view of the same, SEBI, in the Discussion paper, had proposed following two options to identify bright lines for control:

Option 1:- Framework for Protective Rights

Option 2:- Adopting a numerical threshold

The definition of ‘control’ under the SAST may be amended such that control is defined as:

(a) the right or entitlement to exercise at least 25% of voting rights of a company irrespective of whether such holdings gives de facto control; and/or

(b) the right to appoint majority of the non-independent directors of a company.”

This article analyses the proposed definition of control in the light of past judgments, committee reports etc. The Discussion paper was put open for public comments till April 14, 2016.


‘Control’ as explained in case of Subhkam Ventures v/s SEBI

Decision of Securities Appellate Tribunal (SAT) in case of M/s Subhkam Ventures (I) Private Limited versus SEBI[3] . The recital of the agreement entered into with MSK Projects (India) Limited and its promoters, provided that Subhkam is only a financial investor and will neither be regarded as the promoter nor acquire control and management of the target company for any reason. Subhkam argued that open offer was made under Regulation 10[4] of SAST, 1997 while SEBI insisted that control was acquired and therefore Regulation 12[5] was also required to be disclosed to enable shareholders to make an informed decision.

SAT explained the difference in case of proactive and reactive power and clarified that control, means creating or controlling a situation by taking the initiative and not reacting. It is a positive power and not a negative power. In case of Subhkam, the intent behind incorporating protective clauses in the shareholder’s agreement was to ensure that the target company does not undergo any paradigm shift from its present position without Subhkam’s knowledge and approval. Such provisions did not grant control but enabled Subhkam to oppose a proposal, provided fetters to protect the investment made. SAT allowed the appeal by inferring that none of the clauses of the agreement, individually or collectively demonstrates control in the hands of the appellant.

Being a key issue, SEBI appealed the SAT order before Supreme Court. Supreme Court, on November 16, 2011 stated that ‘keeping in view the above changed circumstances, it is in the interest of justice to dispose of the present appeal by keeping the question of law open and it is also clarified that the  impugned order passed by the SAT will not be treated as a precedent.

Deliberations on ‘Control’ in TRAC[6] report

The Committee concluded that a holding level of 25% of voting rights permits the exercise de facto control (Para 2.6). The existence or nonexistence of control over a listed company would be a question of fact, or at best a mixed question of fact and law, to be answered on a case to case basis. Any blanket provision whereby a right to say “no” is in all circumstances deemed to either constitute “control” or not to constitute “control” may be liable to misuse (Para 3.3). Acquisition of de facto control, and not just de jure control should expressly trigger an open offer (Para 3.6). The Committee had recommended the definition of “control” be modified to include “ability” in addition to “right” to appoint majority of the directors or to control the management or policy decisions would constitute control. It further clarified that a director or officer of the target company would not be regarded as being in control merely by virtue of holding such position (Para 3.7).

The Committee examined the possibility of introducing a whitewash provision in the Takeover Regulations on the lines of international practice i.e. an open offer would not be required if a material majority of the shareholders of the target company were to pass a resolution waiving the open offer. The rationale for such a framework is that an open offer is ultimately made for the benefit of the shareholders and it is well within the shareholders‘ rights to renounce such a benefit if they so desire (Para 12.17). However, the whitewash provisions were not incorporated in SAST, 2011 in the absence of robust regulations on proxy solicitation, and given the realities of the Indian market, any provision for shareholder waiver for an open offer may not be in the best interests of investors at large.

Veto rights – protective rights not amounting to exercise of ‘control’

As was explained under SAT order in case of Subhkam Ventures v/s SEBI, veto rights are protective in nature rather than participative in nature. Veto rights are fetters for the purpose of good governance and aimed to protect the investments made from the whims and fancies of the promoters who manage the company. On similar lines, an illustrative list of protective rights has been provided which may be granted to an investor subject to following conditions is provided by way of Annexure 2:

  • The investor must invest atleast 10% or more in the target company;
  • Approval by way of majority of minority i.e. approval of public shareholder’s needs to be obtained and such rights needs to be incorporated in Articles of Association.
  • In case of IPO, the existing agreements to stand cancelled/ modified or suspended till approval is obtained in the aforesaid manner post listing of shares.

However, there still remains a likelihood of this leading to further complexities in assessment of control owing to ambiguity in interpretation.

Adopting numerical threshold

In view of the provisions relating to passing of special resolutions under Companies Act, 2013 and trigger limit for determining control under SAST being 25%, it was proposed to regard 25% as the threshold level for trigger of control in Indian listed companies. Further, it was proposed to determine control on the basis of right to appoint non-independent directors and not majority of directors. The reason for the same being Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribes the composition of Board.

As compared to aforesaid option, this approach would reduce the uncertainty in assessment of acquisition of ‘control’, however, will not be able to capture control derived by way of special rights.

Stakeholders’ Comments and opinions

SEBI vide a Press Release dated September 08, 2017[7] informed that a number of comments from various stakeholders including industry bodies, intermediaries, advocates and investors were received on the Discussion paper issued on March 14, 2016. No particular option garnered overwhelming support amongst the stakeholders. SEBI also received the views of the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India in this regard.

Few stakeholders including the MCA opined that changing the current definition of ‘control’ may reduce the regulatory scope and may be prone to abuse and hence, the current definition of ‘control’ may not be changed. Instead the stakeholders opined that it would be more appropriate to take decisions on a case-to-case basis. Further, it may be noted that the Justice Bhagwati Committee which was constituted in the year 1995 to review the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, had recommended a broad definition of control and opined that it should be left to SEBI to decide whether there has been an acquisition of control on the basis of facts of each case.


SEBI intended to align the definition of control, in line with the recommendations and deliberations made in report submitted by TRAC, justification given in the aforesaid SAT order. However, pursuant to the comments and opinions received from the various stakeholders and authorities it is felt that any change or dilution in the definition of control would have far reaching consequences since a similar definition of ‘control’ is used in the Companies Act, 2013 and other laws.  Consequently, it has been decided to not to proceed with the amendment and to continue with the practice of ascertaining acquisition of ‘control’ as per the extant definition in the SAST.

Annexure 1

Sr. noAct/ RegulationsParameter for determining controlExclusions, if any
1.SEBI (SAST) Regulations, 2011·         right to appoint majority of the directors or to

·         control the management or policy decisions


exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

·         Mere holding of position of a director or officer in the target company.
2.SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015As defined under SAST 
3.SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009As defined under SAST, 1997 (same as above)·         Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management:

Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3.

4.Companies Act, 2013Similar to definition under SAST.Exclusions not included.
5.Consolidated FDI Policy, 2015 & FEM ( Transfer or issue of security by a person resident outside India) Regulations, 2000Similar to definition under SAST.Exclusions not included.
6.Competition Act, 2002·     controlling the affairs or management by—

o   one or more enterprises, either jointly or singly, over another enterprise or group[8];

o   one or more groups, either jointly or singly, over another group or enterprise;

7.AS-18·     (a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or

·     (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or

·     (c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise

8.Ind AS-27·     power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 
9.IFRS 10·     Ownership of more than half the voting right of another entity  Power over more than half of the voting rights by agreement with investors

·     Power to govern the financial and operating policies of the other entity under statute/ agreement

·     Power to remove/appoint majority of directors

·     Power to cast majority of votes.

10.City Code on Takeovers and Mergers, UK·     Control means an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights (as defined below) of a company, irrespective of whether such interest or interests give de facto control. 
11.Takeover Guide, Canada·     A “control person” is a person (or person within a combination of persons who are acting in concert) which holds a sufficient number of shares to affect materially the control of the target (and, if the ownership is greater than 20%, the person(s) are deemed, in the absence of evidence to the contrary, to hold a sufficient number of shares to affect materially the control). 
12.The Singapore Code on Takeovers and Mergers·     Effective control means a holding, or aggregate holdings, of shares carrying 30% or more of the voting rights (as defined below) of a company, irrespective of whether that holding (or holdings) gives de facto control. “Acquiring effective control” of a company refers to a situation where a person and parties acting in concert with him, who previously held in aggregate less than 30% of the company’s voting rights, increase their aggregate holding of voting rights in the company to 30% or more.

·     “Consolidating effective control” in a company refers to a situation where a person and parties acting in concert with him, who already owned between 30% and 50% of the company’s voting rights, increase their aggregate holding of voting rights in the company by more than 1% within a 6 month period.

13.Malaysian Code on Takeovers and Mergers 2010·     Does not define control


14.Takeover Guide, Japan·     Does not define control 


Annexure 2

Illustrative list of protective rights that do not amount to exercise of “control”, including quorum[9] rights for meetings involving matters stated below:

  • Appointment of Non executive Chairman/ Vice Chairman without any casting vote;
  • Appointment of investor’s nominee as observer of Board, without any voting or participation rights;
  • Covenants stipulated by banks, NBFCs etc granting loan on commercial basis, provided the rights are customary to the lending business
  • Non exclusive and Mutually beneficial commercial agreements, approved by the Board where the Board of target company has the right to terminate the agreement;
  • Veto rights in case of following matters that are not part of the ordinary course of business[10] or involve governance issues would be regarded as protective rights.
    • Amendment of MoA & AoA adversely impacting the investor’s rights;
    • Alteration to the capital structure of the company;
    • Change of statutory auditors;
    • Material[11] divestment, transfer or disposal of an undertaking or material subsidiary of the target company;
    • RPTs entered not in ordinary course of business or not on an arm’s length basis;
    • Material[12] acquisition of any companies, bodies corporate, business, undertaking or joint ventures;
    • Incurring indebtedness, granting loans, providing guarantees or creating security in excess of thresholds prescribed under Act, 2013 without shareholder approval;
    • winding up of the company or making a general assignment for the benefit of the creditors of the company and/or the subsidiaries or admitting in writing the inability of the company to repay its debts when they become due;
    • write-off of any of the receivables, loans and advances, investment or investments or inventories outside the ordinary course of business[13]




[4] Acquisition of fifteen per cent or more of the shares or voting rights of any company.

[5] Acquisition of control over a company.

[6] Takeover Regulations Advisory Committee – set up under the chairmanship of Mr. C Achuthan. Report was submitted on July 19, 2010  –


[8] “group” means two or more enterprises which, directly or indirectly, are  in a position to —

(i) exercise twenty-six per cent or more of the voting rights in the other enterprise; or

(ii) appoint more than fifty per cent of the members of the board of directors in the other enterprise; or

(iii) control the management or affairs of the other enterprise;

[9] If two meetings are not quorate, the next meeting would be deemed to have quorum despite the absence of the investor nominees.

[10] The company will be required to formulate a policy defining the parameters that will be ‘outside the ordinary course of business’.

[11] The company will be required to formulate a policy defining the parameters that will be ‘material’.

[12] The company will be required to formulate a policy defining the parameters that will be ‘material’.

[13] The company will be required to formulate a policy defining the parameters that will be ‘outside the ordinary course of business’

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