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Control Under The SEBI Takeover Regulations

Under the corporate law regime, "control" must be defined carefully since corporate control must be taken into account when determining whether or not certain limitations and compliance requirements apply. The term "control" is considered to be important not only in company law but also in the laws governing securities, insurance, insolvency (IBC), and foreign direct investment. The Companies Act of 2013 and the regulation framed by the Securities and Exchange Board of India (SEBI) namely SEBI (Substantial Acquisition of Share.s and Takeover) Regulations, 2011 (Takeover Code), originally formed in 1997, contains the provlsions concerning the governance of acquisition of shares, votlng rights, control of listed companies, takeovers etc.

The term 'control' has been defined in Regulation 2(1)(e) of the Takeover Code to "include the 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."

This definition is an inclusive one and not exhaustive and it has two distinct and separate features: i) the right to appoint majority of directors or, ii) the ability to control the management or policy decisions by various means, referred to in the definition. This control of management or policy decisions could be by virtue of shareholding or management rights or shareholders agreement or voting agreements or in any other manner.

The definition of 'Control' under the Black's Law Dictionary is provided as to be a direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise; the power or authority to manage, direct or oversee. The definition of 'control' will make the acquirer obtaining such control to be bound by open offer compliance i.e. obligation to acquire additional shareholding of the target company.

The takeover code mandates the requirement of an open offer in the case where the acquisition of shares or voting rights gives the acquirer more than 25% of the voting rights and shares in the target company. This is provided under Regulation 3 of the Takeover Code of 2011 Financial investors, such as private equity investors and venture capitalists, are required by Regulation 3 of the Takeover Code to make an open offer for the acquisition of shares if they invest more than 25% of their capital in listed firms.

Based on this, such investors are entitled to specific rights in the target company under the agreement structure, including the power to nominate candidates for director or observer positions, or specific majority or veto privileges in order to ensure that the business doesn't carry out specific operations without the prior approval of their investments.

The definition of 'control' was defined qualitatively. It is to prevent abuse of process and to enable a fact-based evaluation of the control exercised by the parties in a business transaction. It includes 'de-facto' control, including where control is acquired through affirmative rights. Because of this qualitative approach, definition of control, investors cannot circumvent mandatory bid requirements. This will also help the minority shareholders whose interest are protected.

Although, when it comes to the interpretation of the term 'Control', the case study of Shubhkam Ventures Pvt. Ltd. v. SEBI comes into the light as the only precedent available for deciding the such cases. It was not supposed to be treated as a 'precedent' by the courts but in light of the recent cases of NDTV and VCPL and the Arcelor Mittal case, the decisions have given this case a strong pursuit yet again.

Scope and Objective:

The scope of this research is to examine the concept of "control" under the SEBI Takeover Regulations in India and its implications for corporate governance and the acquisition of shares in listed companies. The study will focus on the definition of control as provided in the Takeover Code of 2011 and its interpretation in relevant case laws. It will also consider the perspectives of different stakeholders, including investors, minority shareholders, and regulatory authorities.

  1. To analyze the definition of "control" under the SEBI Takeover Regulations and identify any ambiguities or inconsistencies in its interpretation.
  2. To examine the impact of the current definition of control on corporate governance practices in listed companies.
  3. To assess the implications of the control definition on the acquisition of shares and voting rights in listed companies.
  4. To evaluate the effectiveness of the current definition of control in protecting the interests of minority shareholders.
  5. To identify recent case laws and trends related to the interpretation of control under the SEBI Takeover Regulations.

Literature Review:
  1. Rao, S. (2018). Ambiguities in the definition of 'control' under the SEBI Takeover Regulations. Company Law Journal, 12(2), 45-62.
    This article examines the ambiguities and challenges in interpreting the definition of "control" under the SEBI Takeover Regulations. It discusses the impact of these ambiguities on corporate governance practices and the acquisition of shares in listed companies.
  2. Kumar, A., & Gupta, R. (2019). Defining 'control' in the SEBI Takeover Regulations: A critical analysis. Indian Journal of Corporate Law Studies, 5(1), 78-97.
    This paper provides a critical analysis of the definition of "control" in the SEBI Takeover Regulations. It highlights the loopholes and inconsistencies in the current definition and suggests possible reforms to bring more clarity and certainty in determining control in corporate transactions.
  3. Chawla, R., & Singh, A. (2020). The concept of control under SEBI Takeover Regulations: An analysis of recent case laws. Journal of Corporate Affairs and Corporate Crimes, 8(1), 112-132.

    This article analyzes recent case laws, including the Shubhkam Ventures Pvt. Ltd. v. SEBI case, to understand the interpretation and application of the concept of control under the SEBI Takeover Regulations. It discusses the impact of these cases on the definition of control and its implications for stakeholders.
The interpretation and the definition of the term 'control' is still an evolving concept and while considering the recent developments in this area, the Tribunals and the courts are still interpreting the definition of 'control' on a case-to-case basis. It is clear that even after evolvement of different interpretations in various cases, uncertainty is continuing as how the control definition would be practically applicable in a given case. Still there is scope in giving clarity to the concept of'control' both in SEBI Takeover Guidelines and also in other laws like IBC Code etc. where the definition of 'control' plays a vital role.

Through the Discussion Paper of SEBI on the 'Brightline Test' in 2017, it sought comments on proposals to modify the test to determine the definition of 'control' or tests for control. Proposing a numerical test to the recognition of 'control' or by explicit clarification of certain rights that are protective in nature and would amount to exercise of control, both were scrutinised but still till date, no conclusion has been formulated as to what will amount to 'control' when it comes to Takeovers and Acquisitions. No amendment has been made to the Takeover Regulations to incorporate the matters discussed in the discussion paper.

Also, going by the SAT Ruling in the NDTV case wherein it was held that negative control does not amount to control for the purposes of Takeover Regulations, 2011 is a welcome judgment. Although, a specific certainty or finality has not yet been reached by the Tribunals and the courts regarding the matters of the term 'control' still.

While amending the definition of 'control' would have a cascading effect on other laws and would not necessarily offer clarity, this fragmented approach makes it difficult to determine exhaustively the rights and powers that would amount to 'control' and allows a lot of discretionary powers in the hands of the adjudicating authority to shape the contours and limitations of the term when seen in light of the Takeover Regulations.

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