INTRODUCTION

The definition of control under the takeover regulations is a controversial one. Over the
course of this paper, I will talk about the ambiguousness of the definition, the concept of and
debate around negative rights and affirmative rights, the TRAC proposal and the final
regulations and the difference between the 1997 and 2011 definition. I will try to answer the
question of balance between protective rights and control/participative rights, the importance
of intent and the importance of 50% voting rights to effect change in management. I shall
also look at the definition of control in other laws and regulations in India.
The definition of control under the takeover code can be divided into two parts:
1. The right to appoint majority directors.
2. The right to control the management or policy decisions.
If you have more than 50% shareholding, then you can appoint majority directors. There is no
doubt in that. But what amounts to the right to control the management and policy
decisions? This is the important question and the cause of much confusion.
The concept of control is central to the improvements which the Bhagwati Committee
recommended over the 1994 regulations. It believed that control w.r.t to only shares is not
enough. But it was also of the opinion that a precise definition might be counter-productive.
The committee also did not address the concept of negative rights; this is discussed later.
DIFFERENCE

BETWEEN THE

1997 REGULATIONS &

THE

2011 REGULATIONS

AND

TRAC

RECOMMENDATIONS

The definition adopted in the 1997 regulations isnt much different from the present one,
except that the explanations are removed. The primary definition is essentially the same.
One major difference although is that the whitewash provisions, given in regulation 12, have
been removed.1 This means that an open offer would not be required if the shareholders of the
target company were to pass a special resolution waiving the open offer in case of change in
control. The reasons provided for the same are:
1. In the absence of proper regulations regarding proxy voting and given the realities of
the Indian Market, this provision may not be in the best interests of investors at large.
2. Majority imposing a will on the minority is not agreeable, especially when the
regulations are made to protect them.
3. SEBI is taking steps to operationalise electronic voting.
1 Provided that nothing contained herein shall apply to any change in control which takes
place in pursuance to a [special resolution] passed by the shareholders in a general
meeting.["Provided further that for passing of the special resolution facility of voting
through postal ballot as specified under the Companies (Passing of the Resolutions by
Postal Ballot) Rules, 2001 shall also be provided.]

4. In any case, shareholders have the option of not tendering shares if they so desire.
There is no need of whitewash provisions.
The TRAC committee discussed the issue of affirmative rights and negative rights. It felt that
the provision of a blanket exemption for negative rights will not be in the best interests of all
the stakeholders. Also, at that time, the Subhkam case was in front of the SC and everyone
was waiting for the SC ruling on the matter. Therefore, the committee refrained from giving a
definite answer.
But it did give one suggestion; Ability should be added to the word right in the definition.
But SEBI did not accept this. Why? According to SEBI chairman, U.K.Sinha, this is a
subjective matter and the interpretations would vary. Some believe that in anticipation of the
SC ruling on the matter, SEBI refrained from amending the law.
Also, exemption from open offer obligation on account of change in control from joint
control to sole control is not covered, unlike the 1997 Code, in the Takeover Code.2
But this word, ability, is used elsewhere. The Competition Act, 2002 defines control as,
including controlling the affairs of the management. In the Network 18-RIL case, the CCI
regarded the mere acquisition of right to convert debentures into equity shares at a later date
amounted to conferring the ability to exercise decisive influence over the management and
affairs. In this case, the CCI gave an interpretation of Control. the ability to exercise
decisive influence over the management and affairs.
But there is a difference between the Competition Act and Takeover code. As per the CCI,
beyond a certain threshold the mere acquisition of convertible instruments could trigger a
merger analysis under Section 5 of the Competition Act, 2002, while obligations under the
Takeover Code arises only when such convertible instruments are actually converted to
voting rights beyond the prescribed thresholds.
But this cannot be applied to Takeover regulations as the objective is different. It was held in
the Jet-Etihad order that neither the language nor the object of the two legislations is similar.
The views of the Competition Commission cannot be the basis of assuming that there has
been a transgression of the Takeover Regulations, 2011.
What is the objective of the takeover code?
1. Protection of minority interest.
2. An exit option to the non-controlling shareholders in case of change in control.
3. To ensure uniformity and fairness in the exit price.
What is the objective of the competition act?
1. To promote and sustain competition in markets
2. To protect interests of consumers
2 https://www.pwc.in/assets/pdfs/indian-services/m-a-takeover-book-finallowres.pdf

NEGATIVE RIGHTS
The definition of control in the takeover regulations is an inclusive definition. In the 2008
case of Ramanlal Bhailal Patel v. St. of Gujarat3, the SC said that inclusive definitions do
not generally exclude the plain and ordinary meaning of the term. According to Websters
dictionary, the plain and ordinary meaning of control is the power of exercising restraint or
direction over something. This would cover negative rights too. Blacks law dictionary
defines Control as the 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.
Also, allowing veto rights to not amount to control would mean that an acquirer could gain
veto rights through agreements for almost every issue. This would go against the intention of
the law. To counter this, one might argue that only for those decisions which are not taken in
the ordinary course of business, in the day to day business, should veto rights be allowed. But
if you look at the decision in Rhodia4, veto rights over major decisions on structural and
strategic changes have been termed to give control to the acquirer. Some of them are
declaration of dividends, acquisition and disposal of assets, stock splits, changes in business
strategy, splitting of business etc were considered to give control to the acquirer.
In NRB Holdings5, Acquirer Company is acquiring voting securities of Nadella (French
company). Nadella holds 26% in the target company. According to the SHA between Nadella
and the target company, which was made in 1995, Nadella is entitled to appoint one exofficio director, Vice-chairman and quorum requirement. Nadella will choose 2 directors and
the promoters of the target company will choose 4 directors. Nadella will get veto rights for
certain matters like amendments to organisational documents, dividends, alteration in the
share capital etc. SEBI held that Nadella is not having any control over the target company.
So the indirect acquisition would not trigger open offer under Regulation 12.
Even in the Jet-Etihad6 deal, when FIPB and SEBI raised some doubts about effective
control and ownership, Etihad dropped or amended a few clauses like right to recommend
suitable candidates for senior management positions, right to deliver the casting vote, the
representation in the board of directors has been reduced from 3 to 2.

3 (2008) 5 SCC 449

4 SAT order dt. 7 November 2001, Appeal No. 36/2001
5 SEBI order dt. 29 May 2003, No. CO/33/TO/05/2003
6 This is an informal communication. http://www.businessstandard.com/article/companies/jet-etihad-timeline-hiccups-before-the-final-takeoff-113072900878_1.html

All this changed in the Subhkam7 case. In this case, it was held that the clauses are only
there to protect the investment and interest of the acquirer. Control is a proactive and not a
reactive power. It was also stated that the definition of control required the acquirer to be in
the driving seat. This case went to the SC and ultimately, it was held that this ratio does not
have a precedent value.
Protection clauses for the minority investor are a necessity. SEBI is not accepting any sort of
veto rights in normal situations. Instead of amending the regulations to allow veto rights
which will be counter-productive and destroy the objective of the takeover regulations, SEBI
should come out with a broad list as to what sort of negative rights will not be considered to
give control to the acquirer.
IMPORTANCE OF INTENTION
In Re NRB Holdings order, it is clearly stated that the element of intention is not necessary
for ascertaining the triggering of the provisions in the regulations. The argument that indirect
control is an unintended consequence and the acquirer had no intention of it was not accepted
by SEBI.
But in the case of Sandeep Save8, IDBIs(the acquirer) prior consent was required to be taken
on a wide range of matters relating to the target company. But it was held that it is not in
control as the parties had no intention that IDBI would be in control and also, IDBI never
actually interfered in the management of the company. But it is argued that this should be
looked from the angle of traditional indifference of financial institutions to the management
of their borrowers than as an exception to the concept of intention or veto rights. This change
of behaviour towards lenders might be because:
1. You should treat all shareholders equally. So giving the rights to equity investors is
different from giving them to lenders. An equity investor is no different from a typical
investor. But a lenders interest is legally and commercially different.
2. When a shareholder is investing, he might know that the company might borrow and
it is in the ordinary course of business. But equity investment after the IPO is not in
the ordinary course of business.

WOULD LESS THAN 50% SHAREHOLDING EVER LEAD TO CONTROL?

In Ashwin K Doshi v. SEBI, it was alleged that the acquirer took an interest in the company
which is almost equal to the shareholding of the promoters, the controlling body till then and
therefore is in a position to control. It was questioned whether the promoters controlled the
company with that percentage of stake or not; but the basic premise that an acquirer acquiring
7 SAT order dt. 15/1/2010, Appeal No. 8 of 2009
8 SAT order dt. 27 November 2002, Appeal No. 22/2002 and Application No.
17/2002.

the controlling persons shareholding also acquires control of the company was not
challenged. A year later, in Luxottica case, this issue popped up. It was held by SAT that the
sellers were in control of the company before selling the shares and therefore, the acquirer
acquiring 44.152% would also acquire control of the company.
The law should be slow to compel an acquirer to incur the significant expenses of an open
offer on account of control, the continuance of which, law does not assure him.
But we see this position changing in the recent WTM order in the case of Bhushan Energy
Limited. It was opined by the WTM member that the even a stake of 44.03% would not give
an acquirer enough control to force a change of management.
IS A BRIGHTLINE TEST NEEDED?
1. The decisive influence test or the ability test, as was proposed in the takeover
regulations complicates the matters further.
2. If only negative rights are acquired pursuant to an acquisition, it does not result in the
taking away of the de-facto (day to day) control from existing hands.
3. Broad guidelines should be framed to identify certain protective rights.