Board Appointment Rights & Corporate Control: A Purposive Interpretation in InvIT Framework

Summary: The article examines whether an Investment Manager of an Infrastructure Investment Trust (InvIT) becomes the holding company of an SPV merely because the InvIT Regulations require the Investment Manager, in consultation with the Trustee, to appoint a majority of directors on the SPV Board. The issue arises from the interaction between the InvIT regulatory framework and the Companies Act, 2013, particularly Sections 2(27), 2(46) and 2(87), concerning control, holding company and subsidiary company relationships. While a literal reading of the Companies Act may suggest that the Investment Manager’s power to appoint a majority of directors constitutes control, the article argues that purposive interpretation requires examination of the source, purpose and capacity in which that power is exercised. The Investment Manager’s appointment power arises from the specialised regulatory framework governing the InvIT and its underlying assets, rather than necessarily from an ownership interest in the SPV. The article also considers MCA General Circular No. 20/2013, which clarifies that shares held or power exercised in a fiduciary capacity is not to be counted for determining a holding-subsidiary relationship, while expressly noting that the Circular does not establish that an Investment Manager’s regulatory powers are fiduciary powers. The article concludes that the mere existence of a power to appoint directors should not automatically be equated with an ownership-based holding-subsidiary relationship. The classification may have consequential implications, including related-party transaction requirements under Section 188 and financial reporting and subsidiary-related consequences, wherever applicable. The central enquiry is therefore why the power exists and in what capacity it is exercised.

Introduction 

While studying different laws, we have often noticed that the same issue can be governed by more than one legislation. At first, the provisions may appear to point in different directions. However, a closer reading usually shows that each law is trying to achieve a different purpose. The real challenge, therefore, is not deciding which law is correct, but understanding how both can be read together in order to meet the intent in letter and spirit.

A similar situation arose while studying the governance framework under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”). One of the parties of Infrastructure Investment Trust (“InvIT”) is Investment Manager. It refers to a company or LLP or body corporate which manages assets and investments of the InvIT and undertakes activities of the InvIT as specified under InvIT.

Pursuant to Regulation 18(3)(b) of the InvIT Regulations, the Investment Manager, in consultation with the Trustee, is required to appoint the majority of directors on the Board of the SPVs, which is inter-alia, a company and is thus bound to comply with the Companies Act, 2013 (“Act”).

Further, Section 2(46) defines a ‘holding company’ with reference to its subsidiary relationship, while Section 2(87) provides the test for determining whether a company is a subsidiary, including where the holding company controls the composition of its Board.

A question here now arises:

If the Investment Manager appoints the majority of directors, does that mean it becomes the holding company of the SPV, where the majority of the holding in SPV is held by the InvIT ?

If we go by the plain reading of the Act, the answer would probably be Yes that the Investment Manager would be considered as holding company of the SPV. After all, Section 2(46) clearly recognises control over the composition of the Board as one of the tests for determining a holding company.

This conclusion appears straightforward only when the Companies Act is read in isolation. However, the position becomes clearer once the InvIT are examined alongside it.

At this stage, the issue cannot be resolved merely by placing the Companies Act and the InvIT side by side and attempting to reconcile the two. The more fundamental question is:

What was the purpose for which the relevant provisions were enacted, and does treating the Investment Manager as a holding company merely because it has the power to appoint directors actually advance that purpose?

This brings us to the principle of purposive interpretation.

What Does Purposive Interpretation Tell Us?

Purposive interpretation requires a provision to be understood not merely by the words used, but also by examining the object which the legislature intended the provision to achieve. A literal interpretation may provide the starting point of statutory interpretation, but it may not always provide the complete answer. Where the literal application of a provision produces a result which is inconsistent with the object of the legislation or the context in which the provision operates, the purpose underlying the provision assumes significance.

In the present case, Section 2(46) of the Companies Act defines a holding company with reference to the relationship of control over another company, while Section 2(27) explains that “control” includes the right to appoint a majority of directors.

On a purely literal reading, therefore, the Investment Manager’s power to appoint a majority of the directors of an SPV may appear sufficient to satisfy the test of control.

But the question should not end there.

The relevant enquiry is whether the power to appoint directors is being exercised as an incident of ownership or control over the SPV, or whether it arises from a separate regulatory and governance responsibility imposed upon the Investment Manager.

The distinction is important because the same factual power may have different legal consequences depending upon the source, purpose and capacity in which that power is exercised.

The Purpose Behind the Holding-Subsidiary Test

The holding-subsidiary provisions under the Companies Act seek to identify a genuine relationship of corporate control between companies.

In a conventional corporate structure, the right to appoint directors would generally arise from ownership, shareholding, voting rights or other arrangements through which one company exercises control over another.

Therefore, the purpose of the provision is not merely to identify who has the ability to appoint directors, but to determine whether such power represents corporate control over another company.

This distinction becomes relevant in the InvIT structure, where the Investment Manager’s power to appoint directors arises from the regulatory framework governing the InvIT.

The Purpose Behind the InvIT Governance Framework

The InvIT Regulations establish a specialised governance framework for the management of the InvIT and its underlying assets. The Investment Manager is entrusted with specified roles and responsibilities relating to the management and administration of the InvIT and its assets.

In this framework, the Investment Manager’s power to appoint directors to the SPV Board arises from the regulatory framework and enables it to discharge its responsibilities in relation to the InvIT and its underlying assets. Accordingly, the power may be understood as being exercised for and in the interest of the InvIT and its unitholders, rather than as an independent ownership right of the Investment Manager.

Does Every Right to Appoint Directors Amount to Corporate Control?

Section 2(27) of the Companies Act, 2013 defines “control” to include the right to appoint a majority of directors:

“Control” shall 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.

Accordingly, on a literal reading, the Investment Manager’s right to appoint the majority of directors may appear to satisfy the test of “control”. However, the relevant enquiry is whether such power represents ownership-based corporate control or arises from a regulatory responsibility imposed upon the Investment Manager. The source, purpose and capacity in which the power is exercised therefore become relevant.

The MCA Circular on Fiduciary Capacity

This distinction finds support from MCA General Circular No. 20/2013 dated 27 December 2013. The Circular clarified, in the context of determining a holding-subsidiary relationship under Section 2(87) of the Companies Act, that shares held by a company or power exercisable by it in another company in a fiduciary capacity shall not be counted for determining the holding-subsidiary relationship.

Although the Circular does not specifically deal with InvITs, it provides a relevant interpretative principle: the determination of a holding-subsidiary relationship need not be based solely on the existence of a power; the capacity and purpose for which the power is exercised may also be relevant. Importantly, the Circular does not establish that the Investment Manager’s regulatory powers are themselves fiduciary powers. Rather, it supports examining the nature of the power before equating it with ownership-based corporate control.

Why Is the MCA Circular Relevant to an InvIT?

The MCA Circular does not establish that every power exercised by an Investment Manager under the InvIT Regulations is a fiduciary power. However, it provides an important interpretative principle: where a power is exercised not as an incident of ownership but as part of a responsibility entrusted to an entity, its legal character requires examination before it is treated as corporate control.

Applying the Purpose of the Provisions

If Section 2(46) is applied mechanically, the Investment Manager could be regarded as the holding company of the SPV merely because it has the power to appoint the majority of its directors. However, such an interpretation may overlook the purpose for which the appointment power has been created under the InvIT framework.

The power arises within the specialised regulatory structure of the InvIT and does not necessarily arise from an ownership interest of the Investment Manager in the SPV. Therefore, the mere existence of the power should not, without further examination, automatically be equated with an ownership-based holding-subsidiary relationship.

Why Does the Classification Matter?

The classification is not merely one of terminology. Treating the Investment Manager as the holding company of the SPV could have consequential implications under the Companies Act – for instance, transactions between the Investment Manager and the SPV could attract the related-party transaction approval and disclosure requirements under Section 188, and the SPV’s financials could be drawn into the Investment Manager/Manager’s consolidated financial statements, in addition to broader implications for subsidiary status and related disclosures, wherever applicable.

Conclusion

The question of whether the Investment Manager becomes the holding company of an SPV cannot be answered solely by identifying who has the power to appoint the majority of its directors.

While a literal reading of Sections 2(27) and 2(46) may indicate the existence of control, a purposive interpretation requires consideration of the source, purpose and capacity in which the power is exercised. The MCA General Circular No. 20/2013 lends support to this approach: it does not establish that the Investment Manager exercises its powers in a fiduciary capacity, but it does confirm that a holding-subsidiary determination is not a mechanical exercise, and that the nature and purpose of a power may bear on that determination.

Accordingly, in the InvIT context, the Investment Manager’s power to appoint directors should be viewed within the specialised regulatory framework under which that power is conferred. The mere existence of such power should not automatically be equated with an ownership-based holding-subsidiary relationship.

The real question, therefore, is not merely “Who has the power to appoint the directors?”, but “Why does that power exist, and in what capacity is it being exercised?”

Rutuja Umadikar-Deputy Manager