The concept of ‘control’ in the Indian takeover code had attracted a lot of limelight among corporate law scholars lately. The underpinning of the concept of control generally implies a situation wherein one company takes acquisition of another company. The acquisition means, as per the regulation, “means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company.”
The most significant part of the takeover regulation is the Mandatory Bid Rule (hereinafter M.B.R) which could be found in every jurisdiction. It mandates the one who is taking effective control of the target company (Acquirer) to propose to the outstanding shareholders, accessible to all, to purchase their portion of shares. The M.B.R is founded on the interpretation of control and it triggers perhaps in two ways one being the qualitative approach and another being the quantitative approach. Most of the legal systems in the world such as the European Union have introduced a quantitative approach and the rest including India, Brazil have chosen the qualitative approach that allows the adjudicating authority to adjudicate according to the facts of every litigation.
The Notion of Control and the Mandatory Bid Rule(MBR)
To understand the concept of control in India let us first delve into the ways by which the various jurisdiction interprets/ analyse. As stated earlier the approach could be of two types 1) Quantitative Approach and Qualitative Approach. The Quantitative approach, as followed in the EU, applies a certain numerical threshold of right beyond which an Open Bid has to be offered to the existing Shareholder. It got appraisal from various jurisdictions and to speak, the countries which started their takeover regulation with a qualitative approach have shifted to the quantitative approach. For example, in Belgium, Austria. The remaining legal system adopted a qualitative approach. The Qualitative approach deliberately evades any reference to voting rights or its threefold. A definition in the act allows the court to interpret the word “ control” according to every situation. After this comes the M.B.R. It is based on the premises firstly, on the Equal Opportunity Rule, which implies that the shareholders who sell their part of the shares to the acquirer which in turn allows it to cross the limit must be mandated to share their benefit with all other shareholders. Secondly, It allows an opportunity for the minority shareholder or the dissenting shareholder an exit opportunity in the circumstances of a company being acquired. The M.B.R, as suggested by the name, prescribes that after having control of the company, as may be prescribed by the various jurisdictions’ takeover codes, the acquirer needs to make an open offer to the outstanding shareholder for the purpose of buying their shares.
The Intricate Scenario Of India
In the case of India, the Indian authority follows a combined approach of qualitative and quantitative approaches. The SEBI( SAST) Regulation defines control as “comprises of the authority to employ the 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”. Significantly, the definition includes inter alia board control and management control. In the Indian scenario, the MBR has to comply with two of the following situations. The first of the situations comes into the picture when the acquirer gains a considerable share in the intended corporation, which is perhaps underneath the twenty-five per cent, nonetheless, the acquirer is the lone largest stakeholder. Another condition which triggers MBR occurs as soon as the acquirer gains noteworthy shareholding in the corporation. Then, in detail, an open offer must be given to the existing shareholders, if the acquirer triggers two of the following conditions 1) exceeds the numerical limit of 25% and 2) A subjective meaning of control. It is a settled view that the takeover code in India protects the interest of minority shareholders and vehemently opposes an acquisition.
At this juncture, it might seem good nonetheless, it has some lasting consequences. The developments because of this regulation are rather controversial than noble. One such situation arises when an investor invests in a company for the purposes otherwise than to acquire the company, which is less than the threshold i.e. 25%, however, ironically, he still is required to make an offer should he be said to have control over the company. The sole purpose of the contract may be to provide funds for maybe expansion or other needs. Further, in this situation, the investor might seek certain defensive rights to protect investments by way of covenant, in addition to board representation, and in some cases a right to veto. These additional rights are only meant to protect the interest of the investor. In this scenario, it is never the intention of the investor to acquire any control of the company other than to secure the investments.
There seems to have relief for the investors after the decision of SAT(Security Appellate Tribunal) in Subhkam Ventures Private Limited, eschewing the facts, here, a financial investor took a stake of 19.91% in the target company, the tribunal here analysed the contract with deliberation and concluded that mere nominating one director into the board consisting of several directors provides no control. Likewise, the rights which are given to the financial investor such as veto rights and affirmative rights are the protective right and work as safety measures for the investment. Further, the SAT went on to say that the “Control, pursuant to the definition, is merely a protective right and not a reactive right. Control really means the power to take initiative. A power which only precludes the corporation doing something which it deems fit is not a control of itself.” In that way, it said that the acquirer is only reacting in nature rather than taking the initiative of its own. Nonetheless, the succour had a short life, for SEBI went on appeal against the decision to the Supreme Court. The decision, while pending, the parties settled the matter. Salt to an open wound happened when the Supreme Court, keep the bone of contention regarding the law open and forbade the order of the SAT to treat as a precedent. Therefore, the SEBI gets the freedom to apply its subjective determination. From an investor’s viewpoint who only cares for a high return on investment and no other things, increases the burden which in consequence may have a chilling effect on the financial market.
Lately, it has been seen that the firm stance of SEBI seems to have relaxed with the latest view in the matter of Kamat Hotels(India) Limited, whereof, Clearwater Capital made a public announcement of bidding as they increased their stake from 24.50% to 32.23% which is due to the conversion of bonds held by them. As a consequence of it, the corporation was asked by the SEBI to file the draft offer document having a clause thereof stating that the offer was made as a consequence of the acquisition of control of the target company. Expectedly, it was rebutted by the Clearwater Corporation and later the SEBI allowed it to proceed with the offer after adequate disclosure. The SEBI ordered that the protective covenants of the agreement do not constitute the ‘control’.
As this examination put forward, the view of the SEBI regarding whether protective rights constitute control or not is shaky and varies based on the fact of the cases. Additionally, it does not establish a reversal of the policy.
In conclusion, it could be said that the perception of ‘control’ under SEBI(SAST) Regulation in India remains a complex matter. What it follows is a complex amalgamation of the subjective approach to the definition and the quantitative approach, whereof the courts did not get the opportunity to interpret and the regulator continued to pursue to retain leeway to flag a transaction as acquisition and others as the mere protective right despite the fact that most of the emerging market and developed market have changed their stance and shifted to a quantitative approach. It is noteworthy to say, SEBI issued a public consultation regarding the concept of control that remains in the public domain for years, nonetheless, reverted to the same stance.
Author(s) Name: Sagnik Aditya (St. Xavier’s University, Kolkata)
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Reg 2(b).
Id. at 214.
Id. at 214.
 SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 2011Reg. 3(1)
UmakanthVarottil, Defining “Control” in Takeover Regulations, IndiaCorplaw (15-06-2022, 10:26) <https://indiacorplaw.in/2013/05/defining-control-in-takeover-regulations.html>
Umakanth, supra note 2, at 224.
<https://www.sebi.gov.in/satorders/subhkamventures.pdf> Appeal No 8 of 2022.
Clearwater Capital Partners Ltd. v. SEBI, 2014 SCC OnLine SAT 23