1 October, 2013



This article attempts to analyse the term ‘Control’ essentially with respect to the SEBI Takeover Code and further discusses the view that has been taken by the regulatory authorities in the light of certain case studies.




It has been more than two decades since India witnessed the dawn of economic liberalisation, wherein it broke the shackles of stringent government policies, the system of license raj and limited international trade.


Since the liberalisation of the economy in 1991, India is now one of the fastest growing nations in the world. The world has acknowledged the economic potential of the country and has been on a high growth trajectory since the last two decades.


The economic liberalisation in India has opened the doorways for the world and with that there has been a steady entry of foreign players, thereby bringing the funds along with the technological advancement. Over the years, India has witnessed a steady stream of inbound acquisitions that have contributed to the growth story of India. Inbound mergers and acquisitions (“M&A”) into India total US $9.86 billion for the year 2013, the highest in Asia. Even in 2012, foreign direct investment (FDI) into India was approximately US $29.3 billion.


M&A is a specialised field and its economic implications being immense to international trade and commerce, is a highly regulated activity. There are several regulatory authorities that govern M&A transaction in India such as the Foreign Investment Promotion Board, Reserve Bank of India Act, 1934, the Income Tax Act, 1961, Securities and Exchange Board of India Act, 1992 and Competition Commission of India.


The Securities and Exchange Board of India (“SEBI“), established under the SEBI Act, 1992, has since played an instrumental role in regulating and developing the securities/ capital market and protecting the interests of investors (including foreign investors) who invest their hard earned money in the securities market.




Amongst the various rules and regulations laid down by SEBI, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Code“) provides the regulatory framework for the direct and/or indirect acquisition of shares or voting rights in, or control over, an Indian company listed on a stock exchange.


The term “control” has two aspects – de jure control and de facto control. When a person (acquirer) exercises control over the management and affairs of an entity due to his holding majority or substantial stake in such entity, then such acquirer is said to have a de jure control over the target entity. Whereas, when the acquirer is able to exercise control over the target entity irrespective of its shareholding in such target entity, the acquirer is said to have a de facto control over the target entity.


There are various Indian laws which define/explain the term “control” and the term thus has to be understood in the context of the relevant law. This article essentially focuses on the term “control” vis-à-vis the Takeover Code.


Control as defined under the Takeover Code


The term “control” has been defined under Regulation 2(1)(e) of the Takeover Code and the extract of the same has been reproduced hereunder:


“Control” includes 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:


Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.”


The term “control” under the Takeover Code is an inclusive definition and thus leaves a lot of room for interpretation which has to be analysed on a case to case basis. It is indeed difficult to define the term “control” which can encompass or regulate the various modalities or complexities of different transactions undertaken in recent times.


From the aforesaid definition of “control” under the Takeover Code, one understands that an acquirer or person acting in concert can acquire control of the target company by virtue of (i) his shareholding; or (ii) management rights; or (iii) shareholders agreements; or (iv) voting agreements; or (v) in any other manner, is entitled to either (a) appoint majority of the directors of the target company; or (b) control the management or policy decisions of the target company.


Whereas, an open offer to the public shareholders of the target company is required to be made in the following circumstances (i) acquisition of shares and/ or voting rights above the prescribed thresholds (Regulation 3 of the Takeover Code); (ii) acquisition of control, directly or indirectly, over the target company irrespective of acquisition or holding of shares or voting rights in a target company (Regulation 4 of the Takeover Code); and (iii) an indirect acquisition of shares or voting rights in, or control over the target company by way of acquiring shares or voting rights in, or control over, any company or other entity (other than the target company) that would enable the acquirer to exercise such percentage of voting rights in, or control over, the target company, the acquisition of which would otherwise attract the obligation to make an open offer (Regulation 5 of the Takeover Code). In addition to the above circumstances, an acquirer can also opt to make voluntary open offer on certain terms and conditions laid down in the Takeover Code.


The consequence of acquiring control, either directly or indirectly, over the target company triggers the requirement (on the acquirer) to make an open offer to the public shareholders of the target company thereby the acquirer is required to acquire a minimum quantum of shares from the public, at the open offer price, determined as per the Takeover Code. This essentially provides an exit opportunity for the public shareholders of the target company.


While making open offer on acquisition of shares/ voting rights is fairly clear or less disputed, the open offer with respect to acquisition of control, irrespective of the acquirer’s holding in the target company, is a complex issue being a subjective matter. Determination of control is relatively ambiguous and depends highly on the facts of the matter and intentions, perception, and objectives of the acquirer.




As far as acquisition of shares/voting rights or control of a company is concerned, it has been seen time and again that the acquirer has tried to devise strategies to avoid making open offer to the public shareholders, required under the Takeover Code. Whereas on the other hand, SEBI has always endeavoured to protect the interest of the public shareholders by ensuring that the acquirer of the target company adhere to the applicable provisions of the Takeover Code, both in letter and in spirit.


The acquirer who acquires substantial stake (which may not be necessarily a majority stake) in the target company would expect protection of its right and interest therein such as by way of nominating its representatives on board of the target company, demanding certain affirmative rights etc. Undoubtedly, an acquirer does enjoy additional rights, as compared to public shareholders, but such additional rights may not be of such nature which will influence the day to day affairs or policies of the target company.


However, SEBI has always been circumspect on such arrangements as they may indirectly give control to the acquirer without following provisions of open offer under the Takeover Code.




In Rhodia S.A. vs. SEBI (in the matter of Rhodia S.A. vs. Securities & Exchange Board of India & Others. Order dated November 7, 2001 passed by the Securities Appellate Tribunal in Appeal No. 36/2001), the Securities Appellate Tribunal (“SAT”) observed that “….(acquirer) though not directly owned any shares or controlled Danube (being, subsidiary of the target company), it was in a position to control its affairs. The extent of the acquirer’s role in the management of Danube etc, is evident from the contractual requirement of obtaining its approval in all major matters, affecting these companies’ affairs.


…It is evident from the terms of the agreement between the Appellant (acquirer) and Donauchem GmbH extracted above that major decisions on structural and strategic changes in Danube etc., required the approval of the Appellant….”


SAT has inter-alia concluded that acquirer had obtained indirect control of the target company in India although it did not directly hold any shares in such target company, thereby triggering the provisions of open offer under the erstwhile takeover regulations.


In Sandeep Save vs. SEBI (In the matter of Sandeep Save vs. Securities and Exchange Board of India. Order dated November 27, 2002 passed by the Securities Appellate Tribunal in Appeal No. 22/2002; Application No 17/2002), the SAT observed that there was no change in control despite the presence of veto rights in favour of the foreign body corporate as it had only two nominee directors on the board of directors of the target company and the board composition did not suggest a change in control and as it had never actually interfered in the management of the company.


Further, in In Re NRB Bearings India Ltd. (In Re NRB Bearings Ltd [2003] SEBI Order (29 May 2003) No CO/33/TO/05/2003), an acquirer, who was indirectly holding certain minority stake in the target company had certain affirmative rights in the target company which inter-alia included right to appoint one ex-officio director on the board, right to appoint vice-chairman of the target company and the presence of its nominee director to constitute a valid quorum for the board meeting of the target company.


The SEBI in such case observed that “….I find merit in the submissions that Nadella (acquirer) as on date is not in control of the Target company in light of facts of the present case viz. Nadella has only two directors on the board of the Target company compared to six directors of the Sahney family which is holding 59% stake in the Target company. Further, it is observed from the Letter of offer dated March 21, 2000 for the open offer of SNL made by Target company that Sahney family promoted NRB in collaboration with Nadella and Nadella is the technical and financial collaborator in NRB. As Nadella is not in control over Target company, the change in control over Nadella from IR to Acquirer, would not result in change in control over the Target company. Therefore, provisions of regulation 12 (of erstwhile takeover regulations) are not attracted in respect of the Target company by virtue of the then proposed acquisition of voting securities in Nadella by the Acquirer in terms of the Stock and Assets Purchase Agreement dated 16.10.2002…..”


Recently, the SAT had held (on an appeal by SEBI) in Subhkam Ventures (India) Pvt. Ltd. vs. SEBI (in the matter of M/s. Subhkam Ventures (India) Pvt. Ltd. vs. SEBI. Order dated January 15, 2010 passed by the Securities Appellate Tribunal in Appeal No. 8 of 2009) that acquisition of only positive or proactive power to direct over a company by taking initiative would amount to an acquisition of “control”, and that the acquisition of a negative (i.e. power to block resolutions) or reactive power would not qualify as an acquisition of control, since the definition of control required the acquirer to be in the “driving seat”. The SAT analyzed certain (negative) rights in the transaction documents, and held that they were only provided for the purposes of protecting the investment of the investor (which any investor, putting huge sums, would wish to have for ensuring his/ her interest) and did not amount to providing day to day control or management control to the acquirer. It also further observed that merely appointing nominees on the board and having certain affirmative voting rights in favour of the acquirer does not result in change in control of the target company. This decision of the SAT was heard in appeal by the Supreme Court. However, the appeal was disposed off (and SEBI decided not to pursue the case any further) in view of the subsequent developments in the matter, particularly being that the acquirer hadn’t appointed its director on board as well as it had sold off its certain shareholding in the target company. The Supreme Court however did not delve into the issue as to what kind of negative rights in a company would constitute ‘control’. The Supreme Court further stated that the order of the SAT would not be treated as precedent and thus it appears that the subject has again gone back to square one as the SAT order in the Subhkam case would not be binding on subsequent cases and therefore the question of law on this subject matter is open for final adjudication.




There is no clarity on whether affirmative voting rights form part of the meaning and scope of the term “control”. When one was wondering as to what would be the stand of the regulators, especially SEBI, in the event a case similar to that of Subhkam comes to the fore, in came the recent Jet-Etihad deal, where Etihad Airways, an Abu Dhabi based airline company, proposed to acquire 24% (twenty four percent) shareholding in Jet Airways (an Indian listed airline company) and certain other commercial arrangements.


In April 2013, Jet Airways announced that Etihad would acquire 24% stake in Jet Airways, in a deal valued at over Rs.2,000 crore (the “Jet-Etihad deal”). However, the deal hit an air pocket as certain clauses (such as affirmative rights in favour of Etihad where it could appoint its nominees on the board of Jet, right to appoint a vice-chairman and members of the audit committee, say in the appointment of officials of senior management etc.) in the proposed transaction documents (the shareholders agreement/ commercial cooperation agreement etc.) were seen to be giving Etihad excessive affirmative rights and other powers, which attracted the attention of SEBI, the Department of Economic Affairs (DEA) and the Foreign Investment Promotion Board (FIPB).


The Foreign Direct Investment Policy of India, at that point in time, provided for 49% (forty nine percent) cap in the airline sector and also stipulated that the management control shall remain firmly in the hands of Indians and that the Chairman and at least two thirds of the Directors of the airline company would be citizens of India.


Etihad, however, had extracted certain concessions from Jet Airways’ promoters by having few clauses inserted in the shareholder agreement. It is this set of clauses that sparked a debate and blocked approval of the first foreign direct investment (FDI) deal in an Indian aviation sector since the relaxation of the FDI rules.


Concerns were raised that the deal could amount to Etihad getting “control” of Jet Airways with only a 24% stake. SEBI had been of the view that it was up to the Government to take a call on whether the “control” was going into foreign hands and the SEBI is only concerned about the Takeover Code and whether the deal required an open offer for public shareholders under the same. It seems that SEBI was of the view that Etihad might need to make an open offer or else they may have to alter the terms of the deal to ensure that Etihad is not getting any indirect “control” or affecting management or policy decisions of Jet Airways.


It was reported in certain sections of the media that Jet and Etihad revised the terms of the shareholders agreement to settle the apprehensions of the FIPB on the issue of Etihad would having control over Jet. Further, Etihad seemingly gave up the right of casting vote in favour of the chairman of Jet Airways, Mr. Naresh Goyal and also agreed to reduce its nominees on the board of Jet Airways.


The FIPB on July 29, 2013 granted approval to the amended proposal in the Jet-Etihad deal although subject to certain conditions which would keep control away from Etihad, such as the requirement of the parties seeking approval of the government for carrying out any change in the shareholders agreement and shareholding pattern, submitting the revised articles of associations of Jet Airways and requiring that any dispute between the shareholders be resolved under Indian law as opposed to English law, as was proposed earlier.




Most of the cases which have dealt with subject of “control” do not provide any clear answers as to what should be reckoned as control and thereby creating an environment of confusion and uncertainty.


A stable legislative and regulatory climate is a pre-requisite for inbound M&A activity in India to flourish. While the FDI threshold limits in certain sectors have been now increased, at the same time, issues that could deal a virtual fait accompli to any proposed M&A deal, such as the scope of control still requires clarity. Even though each transaction is distinct and would require to be examined through the lens of subjectivity and it may not be possible to define control in an exact manner, the level of subjectivity and resulting uncertainty can be reduced to a great extent by the Government by setting out guidelines with respect to certain protective rights that may not be considered as acquiring control. Such guidelines would go a long way in a clearer understanding of the law and government policies with respect to M&A transactions.


At this time when there is lot of global economic uncertainty, investors the world over have become apprehensive and are circumspect in making investments. India too has its own share of issues viz. perpetual currency depreciation, rising fiscal deficit, slack industrial productivity, various scams, policy paralysis et al. In such a scenario, the government of the day should take the initiative to ensure that all apprehensions and concerns of investors are addressed so as to provide seamless investment into India. Only a sense of protection of investment and clarity of policy and issues will enable investors to frame their long term business plans to do business in India.


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For Further information, please contact:


Ashish Parwani, Partner, Rajani Associates
Prachi Doshi, Rajani Associates
Mahesh Wasadikar, Rajani Associates



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