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“Control” Redefined

The Supreme Court of India (“SC”) disposed of an appeal by the Securities and Exchange Board of India (“SEBI”) challenging the decision of the Securities Appellate Tribunal (“SAT”) in the case of SEBI Vs. Subhkam Ventures (I) Pvt. Ltd, without giving any rest to the question as to whether veto rights and/or negative rights in a company constitutes ‘control’ or not.

The SC went on to state that, “the impugned order passed by the SAT will not be treated as a precedent”, consequently the question of law relating to what constitutes ‘control’ still remains open.


Shubkam Ventures (I) Pvt. Ltd (“SVPL”) acquired more than fifteen per cent (15%) shares in MSK Projects Limited (the “Target Company”). In terms of the SEBI (Substantial Acquisitions of shares & Takeovers) Regulation, 1997 (“Takeover Code”), it was mandatory for any acquirer to make a public offer under Regulation 10 if it had acquired shares or voting rights, exceeding 15%, in a company.

SVPL filed a draft letter of offer with SEBI specifically stating that, it is merely a financial investor and that the acquisition would not result in a change in control of the Target Company and therefore, compliance with Regulation 12 of the Takeover Code, 1997 will not be required. However, based on its interpretation of various clauses of the subscription and shareholders agreement executed between SVPL and the Target Company (the “Agreement”), SEBI insisted that the acquisition would lead to change in control in the Target Company and directed SVPL to amend the offer letter to reflect that the open offer was also being made under Regulation 10 and Regulation 12 of the Takeover Code, 1997.

SVPL, who had been emphasizing that the acquisition will not result in control of the Target Company, accordingly preferred an appeal to SAT.

SAT’s Observations:

On appeal, SAT made a comprehensive analysis of various clauses of the Agreement and SEBI’s observations thereon, before distinguishing between what may constitute proactive power (positive control) and reactive power (negative control).

A matrix of SEBI’s observations and SAT’s take on the various clauses of the Agreement is detailed below:


Nature of Provisions SEBI’s Observations SAT’s Observations

Nomination on the Board of Directors of Target Company and its Committees


Power of SVPL to nominate its director on the Board of the Target Company and the committees of the Board, results in SVPL’s control over the Target Company.



1 nominee out of 3-4 directors cannot constitute majority, and hence, grant control. The single nominee director of SVPL is in microscopic minority and the main purpose of having him on the Board is simply to keep SVPL apprised of developments in the Target Company.


“Standstill” Provisions


“Standstill” provision which provided that between the signing of the Agreement and allotment of shares to SVPL, the Target Company would not change its basic contours, indicate SVPL’s control exercised over the Target Company.



It is purely a transitional provision which ceases to operate on allotment of shares. Further, it is merely a protection to SVPL against change in the basic structure of the Target Company (based primarily on which, the investment would be made) until investment has been made. Thus, it cannot be regarded as conferring control on SVPL.


Quorum of meetings of the Board of Target Company


The presence of SVPL’s nominee director to constitute the quorum of the Board of Target Company indicates control over the Target Company as the Board of Target Company will not be able to approve any actions in absence of SVPL’s nominee.


It cannot be termed as “control” as subsequent clauses provide that if adequate quorum is not present, the matter would be adjourned by a week where the directors then present would constitute the quorum (except for the reserved matters which will not be dealt with by the directors unless SVPL’s nominee is present).


Affirmative Voting Rights


Actions that require SVPL’s affirmative consent indicate that SVPL would be in a position to influence major policy decisions of the Target Company.


Such veto/affirmative voting rights are meant to (a) ensure standards of good corporate governance, (b) protect the interest of an investor (SVPL) from the “whims and fancies of the promoters” of the Target Company and (c) are usual in such arrangements.


Upon an individual assessment of each affirmative voting right matter, it was observed that such matters are not in the nature of day to day operational control over the business of Target Company, or control over the management and policy decisions thereof.

The SC Face-off:

Not happy with the SAT’s view, SEBI preferred an appeal against its order to the SC. While most resident and non-resident investors and private equity funds eagerly awaited SC’s verdict on the issue, SC disposed off the appeal based on an application filed by SVPL in January, 2011 stating that SVPL did not appoint its Director on the Board of Directors of the Target Company and had, save and except for about 6%, sold off its stake in the Target Company. What comes as a set-back is that the SC went on to observe that the SAT’s order “will not be treated as a precedent”, keeping the question of law open.


An entity exercising ‘control’ in a public listed company is required to make a myriad of disclosures and compliances in terms of SEBI’s extant regulations and investors prefer to avoid being burdened with such obligations by structuring their investments accordingly. However, in the absence of conclusive judicial determination on the issue of ‘control’, it will not be surprising if similar disputes arise in the future.

In terms of SEBI’s recent notification of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“New Takeover Code”), the threshold for making a public announcement for open offer in case of acquisition of shares of a target company has been upped from the existing 15% to 25%, which has been considered as a welcome move by many investors. The offer size for such public offer has also been increased from the existing 20% to 26% of the total shares (including equity and preference shares) of the target company, thus leading to a majority acquisition if the public offer is so exercised.

Notwithstanding the above, the legal interpretation of the term ‘control’ remains open and investors will need to continue walking the fine line between control and reasonable protection of investment through structured negative control mechanisms under the investment documents.