Introduction
One of the cornerstones of takeover regulation is the required bid rule (MBR), which requires an acquirer who gains “control” over a target firm to make an offer to buy the shares of the remaining owners. It is not entirely clear what constitutes “control,” as some jurisdictions take a quantitative approach based on a specific shareholding threshold, such as 30% voting rights, while others take a qualitative approach based on a subjective assessment based on a number of factors, such as the specific rights that an acquirer would have under a shareholders’ agreement or the target’s governing documents.
This paper analyses the combined approach undertaken by the Indian takeover code and attempts to examine Veto rights under their ambit. And how even till date, veto rights as an aspect of ‘control’ remains a subjective test.
Page Contents
Two Approaches To Control
In terms of takeover regulations, the concept of “control” refers to the process by which one corporation (the acquirer) buys another (the target).
The mandatory Takeover Bid (MTB), which is in effect in most jurisdictions, is a more precise pillar of takeover regulation. It requires takeover bidders who successfully take control of a target to approach the target’s remaining shareholders with an offer to buy their shares. Since the MBR is predicated on gaining “control” over the target, a number of variables that differ by jurisdiction might be linked to its trigger.[1] It can be based on a (i) bright-line test based on a specific shareholding threshold, like 30% voting rights (the quantitative approach), or (ii) a qualitative determination of control based on the target’s shareholding pattern, specific rights available to the acquirer under a shareholders’ agreement or the target’s constitutional documents, among other relevant factors. [2]
The qualitative approach seeks de facto control, which is a fact-based determination (or at least a mixed question of law and fact), while the quantitative approach pursues de jure control (or at least a proxy thereof) as a matter of legal principle.[3]
The majority of jurisdictions, including the European Union (EU), Singapore, and Hong Kong, have chosen the quantitative approach since it not only brings about certainty but also the necessary simplicity of interpretation and application for market participants and regulators. Instead, certain jurisdictions (namely Brazil, India, Indonesia, and Spain) have chosen the qualitative method,[4] which allows the courts and regulators to make a decision based on the specific facts and circumstances of each case. This would make sure that people buying shares are unable to get around the MTB by cleverly arranging their transactions to avoid falling under its scope.
The models’ natures are obviously quite diverse. The threshold restrictions for the trigger vary wildly in shareholding percentage terms, notwithstanding commonalities among the jurisdictions that use the quantitative approach. The nature and reach of the term of “control” vary greatly, even across jurisdictions that adhere to the qualitative approach. Even if certain developments indicate efforts to harmonize the threshold for “control” as it relates to the MBR, each jurisdiction has its own definition of “control.”[5]
The Combined Approach of India
More specifically, India adopts a hybrid strategy while considering the MBR trigger. In addition to having a numerical cap of 25% voting rights, it also has a flexible definition of control, and acquirers would be subject to the MTB(Mandatory takeover Bid) if they met any of the two requirements.[6] The Indian takeover procedure stands out among other jurisdictions due to its low numerical threshold and expansive subjective meaning. It may be perceived as strongly promoting minority shareholders and being hostile to potential buyers. Furthermore, the idea of “control” has recently gained the close attention of regulators, courts,[7] and critics, leading to a broad discourse that is worthwhile of study.[8]
More recently, in 2010 in the much-discussed case of Subhkam Ventures (I) Pvt. Ltd. v. SEBI,[9] SAT dramatically altered its position. According to Regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997,[10] Subhkam in this case bought more than 15% of the target firm and made a public statement. When the draft letter of offer was sent to SEBI, the latter requested that Subhkam also submit it in accordance with Regulation 12, owing to the rights that the shareholder agreement granted it, including the right to reject business policy.[11] The SAT established a distinction between positive control and negative control, holding that the acquisition of a negative or reactive power would not be construed as the acquisition of control under the takeover law because such power is essentially granted to the person for the purpose of protecting his investment.[12]
Accordingly, SAT stated: “Control, by definition, is a proactive ability rather than a reactive power.[13] It is a capability by which an acquirer can order the target business to carry out his wishes. Control actually refers to taking the initiative to create or manage a situation. Control by itself is not the ability of an acquirer to do anything other than prevent a company from doing what it wants to do. In that case, the acquirer is merely responding and not taking charge. It is not a negative power, but rather a good power. The key question is whether the acquirer is in control. The Supreme Court interestingly left the point of law open on appeal, which brought it back to square one. [14]
Veto Rights Under Control In Takeover Code
De jure control and de facto control are the two connotations of the word “control” in the context of a firm. One may say that a person has de jure control over the target entity when they exert control over the administration and affairs of an entity because they own a majority or significant portion of it. However, regardless of ownership of the target company or the power to choose its management, a person may be considered to have de facto control over the entity if they are able to exercise control over it.[15]
It is not particularly difficult to understand “control” under the SEBI takeover rules. The Takeover Regulations, 2011, and the Takeover Code, 1997, both have a two-part definition of “control” that is currently in effect. The first right that is under de jure control, is the right to appoint a majority of the directors on the board of a company, which is fairly easy to determine.Second, is concerned with de facto control, that is the right to control the management and policy decisions of a company, which is where things tend to become a little murky, especially when it comes to the case of a minority shareholder exercising veto or affirmative vote rights. [16]
Veto powers have been viewed ironically in merger and acquisition transactions, when the focus is on corporate law. In an M&A deal, veto rights are mutually agreed upon during discussions; however, depending on whether the entering investor is a pure financial investment or a strategic investor, such rights may be protective or participatory.[17]
The very fact that veto rights exist prevents equality among shareholders because they are granted to a certain stakeholder (often the investor), and as a result, these rights amount to control in the investor’s hands. How does an investor put checks and controls in place to safeguard his investment, then, if we take this reasoning into consideration? Or how can a shareholder protect their capital from any obvious actions taken by the majority of shareholders? Because of these factors, determining whether veto rights constitute “control” is a subjective call.
Although there have been instances before SEBI where management control has changed from one group of people to another without any overt acquisition of substantial quantities of shares, generally speaking, a change in control of a company simpliciter cannot occur without an accompanying acquisition of shares. Therefore, it would be accurate to say that a takeover or gaining control over a business, as opposed to simple investing, is the most frequent leitmotif for the significant purchase of shares.[18]
Only once has an open offer been triggered solely by a change in the company’s control which was in accordance with Regulation 4 of the Takeover Regulations,[19] since the Takeover Regulations’ implementation. of that situation, the promoter sold all of his firm stock, which amounted to 12.2% of the voting equity share capital, and as a result, the company’s board of directors was changed to benefit the purchaser, which led to a change of control. In circumstances when the promoter holding is below the threshold requirement yet there may actually be a change in control when the promoter departs the company, a combined approach may be helpful to determine “control” or rather a change in control.[20]
Whether veto or affirmative voting powers in a publicly traded business constitute “control” is one hotly debated topic. Although SEBI holds the position that these rights equate to the acquisition of “control,” courts and appellate tribunals have demonstrated an inclination to have a different perspective. However, there hasn’t yet been a consensus on this. A discussion paper outlining precise bright line tests for the interpretation of the term “control” was produced by SEBI with the goal of increasing clarity about the definition of “control”. In this discussion paper, among other things, a set of protective (as opposed to participatory) rights that would not be considered “control” were outlined. The regulator later clarified that it does not intend to formally incorporate these rights into the Takeover Regulations, but rather intends to maintain the ambiguous meaning of “control” and decide what exactly qualifies as “control” on a case-by-case basis.
Investors may desire the ability to veto all corporate decisions and policies. For instance, a shareholder may want to have the power to veto charter revisions that would allow the corporation to engage in other activities because he is only ready to invest in a specific type of business. However, a shareholder who contributes the majority of the capital to a business may well seek a veto over matters such as wage raises, dividend distributions, the acquisition or retirement of the corporation’s capital, and the issuance of debt. [21]
The fundamental rule that can be used is that veto rights that do not amount to the acquisition of control may be of a protective rather than participatory nature, meaning that they may be intended to allow the investor to safeguard his investment or avoid dilution of his shareholding. At the same time, the investor shouldn’t be able to influence either the formulation of policies or the day-to-day operations of the company.[22]
SEBIi’s Approach On Such Veto Rights
In the Subhkam Ventures case,[23] Sebi believed that veto rights translated into control over the target company.[24] In a reversal of the Sebi’s ruling, the Securities Appellate Tribunal (SAT) held that veto rights are “protective” powers and should not lead to the purchaser gaining “control.” Sebi appealed this order to the Supreme Court after being upset with it. Unfortunately, the top court did not reach a conclusion about this intriguing legal issue, leaving it unresolved. This is due to the fact that by the time the appeal was scheduled for its final court hearing,[25] the facts of the case had significantly changed, and the court decided not to rule on the merits, leaving the issue unresolved. The court, in an interesting ruling, ruled that the SAT order would not be regarded as precedent. The problem didn’t get fixed as a result. The effect of veto rights in an agreement on control over a corporation does not appear to be clear as of yet.[26]
More recently, in March 2017 in the case of Kamat Hotels (India) Limited,[27] Sebi noted upon review of the veto rights clauses in the agreement that the covenants appeared to enable exercising of certain checks and controls on the existing management of the target company for the purpose of protecting their interest as investors rather than formulating policies to run the target company more efficinetly. The case provides some advice as to how the regulator currently views the issue, even though Sebi did not fully resolve the control question at that time due to certain facts of this case. There is nothing wrong with determining the acquisition of control pursuant to veto rights on a case-by-case basis, but it is a good idea to have some clear guiding principles from the regulator on this frequently observed right—the so-called veto rights—when there is a growth spurt in acquisition deals and deal-making seems to get complex.
In the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors,[28] the understanding of control as a positive control construct, as decided in the Subhkam Case, experienced something of a resurrection. The Supreme Court relied to the definition of “control” as established by, among other things, the Takeover Regulations, 2011 when it was interpreting, among other things, the term “control” unde the Insolvency and Bankruptcy Code, 2016.[29] The Supreme Court held that “control” under Section 29A(c) of the IBC only refers to positive control, therefore the mere ability to veto a company’s special resolutions does not constitute control. The Supreme Court made favourable reference to the Subhkam Case and determined that the SAT’s findings can be used to construe “control” in accordance with Section 29A(c) of the IBC.
The precedent value of the Subhkam Case for the purposes of a takeover regime now appears to have been revived with the recent SAT judgement in the Vishvapradhan Commercial Pvt. Ltd v. SEBI . Although the Supreme Court in ArcelorMittal did not express an opinion on how to define “control”, its reliance on the SAT’s analysis in the Subhkam Case did open the way for the positive control concept advocated by Subhkam to resurface.[30]
In the recent case of Vishvapradhan Commercial Pvt. Ltd v. SEBI,[31] SEBI among other things, ordered VCPL to make an open offer to the NDTV public shareholders. In a ruling on appeal, the SAT determined that a thorough analysis of the aforementioned agreements does not in any way support the idea that VCPL has acquired ownership of NDTV. More significantly, the Tribunal also confirmed and renewed the significance of the Subhkam Case as a precedent during this process. SAT stated that in ArcelorMittal, the Supreme Court agreed with the Subhkam Case’s interpretation of “control,” concluding that the term “control” refers to “effective control.” The Subhkam Case can be used as precedent for further instances, according to SAT, who dismissed the argument that it cannot because it was upheld by the Supreme Court in ArcelorMittal.
The SAT pointed out that the VCPL’s affirmative/veto rights are intended to ensure that good governance requirements do not apply to daily operational control, management, or policy choices. VCPL cannot be said to have control over NDTV because it simply has a negative influence and no authority to demand that a specific course of action be taken. The Tribunal noted favourably that certain rights, such as affirmative consents for charter document amendments, the issuance of securities, the purchase of securities, the reduction or alteration of share capital, the raising of loans, and the creation of subsidiaries, did not amount to control.[32]
Negative rights are frequently included in Public M&A deals in practise as a crucial safeguard for an investor’s interests. These might take the shape of long-term veto issues or a quick standstill obligation between contract execution and closing. The extent of these negative rights, however, frequently varies; for instance, some investors may choose to seek extremely limited negative rights due to regulatory concerns, whereas others may seek a wider spectrum of rights at the risk of potential regulatory retaliation. The NDTV ruling (Vishvapradhan Commercial Pvt. Ltd v. SEBI,) which lessens the uncertainty surrounding negative rights triggering control provisions under the Takeover Regulations, gives existing investors who have requested negative rights in their deals a great deal of consolation. It also has the potential to encourage future deals.
Harmonious Reading And Affirmative Rights
A brightline test to determine whether positive voting rights fall inside the definition and ambit of the term “control” is currently lacking. The recent Jet-Etihad deal gave regulators the chance to explain their stance on “control” and explain the motivation behind the differences in the various regulatory definitions. Etihad Airways, an airline company with its headquarters in Abu Dhabi, proposed to acquire 24% (twenty four percent) of Jet Airways.[33]
The parties had agreed to a number of legal agreements governing the target company’s operations as part of the Jet-Etihad deal. Regulators paid attention to the proposed transaction documents because some clauses (such as rights in favour of Etihad where it could appoint its nominees on the board of Jet, the right to appoint a vice-chairman and members of the audit committee, the right to a say in the appointment of officials of senior management, etc.) were seen as giving Etihad excessive powers. According to SEBI’s assessment of the final agreements made, the target firm was not subject to the acquirer’s purchase of control. [34]
The CCI noted that these agreements,[35] along with the governance structure envisioned, established the acquirer’s joint control over the target company, particularly over the assets and operations of Jet, while allowing the combination. Following the CCI’s decision, SEBI sent Etihad a show-cause letter saying that Etihad had gained control over Jet and requesting that they provide justification for why they should not be obliged to make an open offer as a result. However, SEBI has since determined that these agreements do not necessitate making an open offer in accordance with the Takeover Regulations.[36]
These new events have further complicated the situation, so it is crucial that clarification is offered as soon as possible. A solid legal and regulatory environment is necessary for inbound M&A activity to be successful in India. While the prospect of a new investor-friendly government has raised some hopes and expectations, certain matters, like the scope of control, still call for clarification because they may have unfavourable effects on those hopes and expectations. The level of subjectivity and resulting uncertainty can be greatly reduced by the government setting out guidelines with respect to certain protective rights that may not be considered as acquiring control, even though each transaction is unique and would require a subjective analysis.[37]
Conclusion
The SAT had helpfully determined in Subhkam Ventures that protective (or negative) rights do not constitute “control.” However, because to conflicting judgements and the lack of a clear precedent, this position has been in flux over time. The SAT’s decision in the NDTV case may be subject to an appeal, but in the meanwhile, it can be said to have established Subhkam Ventures’ history as our ultimate definition of “control,” and the clarity it offers is unquestionably a step in the right way. But as has been illustrate the issue of veto rights and affirmative rights under the concept of ‘control’ remains murky and unsettled. The government should take the lead in ensuring that investor trepidations and worries, particularly uncertainty around policy, are addressed. India will be portrayed to investors as an economy that is open for business and that has a welcoming investment climate if there is a sense of investment protection and regulatory certainty.
[1] Srinivas, Gautham; Agarwal, Pranav; and Rachkonda, Sai Sanket (2020) “Indirect Acquisitions under the
Takeover Code: The Fairness-Efficiency Spectrum and Lessons for Regulation,” National Law School
Business Law Review: Vol. 6: Iss. 1, Article 3
[2] Umakanth Varottil, Comparative Takeover Regulation and the Concept of ‘Control’, 2015 Sing. J. Legal Stud. 208, 215
[3] Bhavya Nahar, Reviewing the Ambit of ‘Control’ Apropos to the Objective of ‘Mandatory Bids’: An Analysis under the Takeover Regulations, 11 NUJS L. REV. 1 (2018).
[4] Yozua Makes, Challenges and Opportunities for the Indonesian Securities Takeover Regulations: A Comparative Legal Analysis, (2013) 8 University of Pennsylvania East Asia Law Review 83, 98.
[5] Umakanth Varottil & Wai Yee Wan, The Divergent Designs of Mandatory Takeovers in
Asia, 55 VAND. J. Transnat’l L. 89 (2022).
[6] Varottil, Umakanth, The Nature of the Market for Corporate Control in India (December 2, 2015). In Umakanth Varottil & Wai Yee Wan eds., Comparative Takeover Regulation: Global and Asian Perspectives (Cambridge: Cambridge University Press, 2017) 313-343, NUS Law Working Paper No. 2015/011, NUS – Centre for Law & Business Working Paper No. 15/05, NUS – Centre for Asian Legal Studies Working Paper No. 15/08.
[7] Rhodia SA v. SEBI, (2001) 34 SCL 597.
[8] Srinivas, Gautham; Agarwal, Pranav; and Rachkonda, Sai Sanket (2020) “Indirect Acquisitions under the
Takeover Code: TheFairness-Efficiency Spectrum and Lessons for Regulation,” National Law School
Business Law Review: Vol. 6: Iss. 1, Article 10.
[9] Subhkam Ventures (I) Pvt. Ltd. v. SEBI, [2010] 99 SCL 159 (SAT-MUM).
[10] Shaun J. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities, 2007 COLUM. Bus. L. REV. 800 (2007).
[11] Shweta Nimwal, Ekta Nimwal & Korra Anand Nayak, CCI vs SEBI: An Analysis of Overlapping Regimes in India, 5 INDIAN J.L. & LEGAL Rsch. 1 (2023
[12] Afra Afsharipour, Corporate Governance and the Indian Private Equity Model, 27 NAT’l L. Sch. INDIA REV. 17 (2015).
[13] Anurag Gupta & Sushma Reddy, SEBI’s Brightline Test: The Right Way to Move Forward, 2 J. oN GOVERNANCE 50 (2017).
[14] Mandal, Rudresh and Mandal, Rudresh and Subedi, Hardik, Demystifying the Concept of ‘Control’ in the Takeover Regime: Of Harmonization and Whitewash Provisions (June 24, 2018). Rudresh Mandal & Hardik Subedi, Demystifying the concept of „Control‟ in the Takeover Regime: Of Harmonisation and Whitewash Provisions, 5(1) NLUJ Law Review 27 (2018) .
[15] Varottil, U. (2015). Comparative takeover regulation and the concept of “control.” SINGAPORE JOURNAL OF LEGAL STUDIES, 208–231.
[16] Seksaria, Janhavi, Analysis of the Definition of Control Under the Garb of the Subhkam Case (April 10, 2011),SSRN
[17] Ahmad, Tabrez and Swain, Satya Ranjan, The Takeover Code in India : A Comprehensive Overview (August 28, 2012). International Journal of Mainstream Social Science, USA Vol 2, Number 1: Spring ,2012 PP. 27-42,.
[18] Rishi Shroff (2014) India’s Sweeping Regulatory and Policy Changes: Heralding a New Era in Investor Protection in M&A Transactions?, Oxford University Commonwealth Law Journal, 14:1, 105-125,
[19] Open offer of Synergy Infrastructures Limited.
[20] Varottil, Umakanth and Wan, Wai Yee, Hostile Takeover Regimes in Asia: A Comparative Approach (April 24, 2018). NUS Law Working Paper No. 2018/011, Singapore Management University School of Law Research Paper No. 01/2018.
[21] Nikhil Narayanan, An Introduction to the Key Concepts and Practical Considerations in Indian M&A Transactions for an International Lawyer, 19 Bus. L. INT’l 101 (2018).
[22] KS, Chalapati Rao and Dhar, Biswajit, Operation of FDI Caps in India and Corporate Control Mechanisms (December 1, 2010). ISID Working Paper No. 2010/11,
[23] Subhkam Ventures (I) Private Limited v. SEBI, Appeal No. 8 of 2009.
[24] Anurag Gupta & Sushma Reddy, SEBI’s Brightline Test: The Right Way to Move Forward, 2 J. oN GOVERNANCE 50 (2017).
[25] Securities and Exchange Board of India v. Subhkam Ventures (I) Private Limited, Civil Appeal No. 3371 of 2010.
[26] Bohra, Murtuza, Shubhkam Case – Definition of ‘Control’ in M&A Transaction: Negative Power or Positive Power? (December 1, 2010). Consolidated Commercial Digest, Vol. 27, December 2010,
[27] Re: Kamat Hotels (India) Limited, WTM/GM/EFD/DRAIII/20/MAR/2017.
[28] ArcelorMittal India Private Limited v. Satish Kumar Gupta (Civil Appeal Nos.9402 – 9405 /2018).
[29] Section 29A(c) of the Insolvency and Bankruptcy Code, 2016.
[30] Vaish, Varun, SEBI Increasingly Investor Friendly in View of Subhkam Ventures (I) (P.) Ltd. v. SEBI and Daiichi Sankyo Co. Ltd. vs. Jayaram Chigurupati Co. Ltd. (May 31, 2012).
[31] Vishvapradhan Commercial Pvt. Ltd v. SEBI, Appeal No. 293 of 2018 SEBI
[32] Varottil, Umakanth (2013) “Corporate Governance in M&A; Transactions,” National Law School of India
Review: Vol. 24: Iss. 2, Article 4.
[33] Order in the matter of acquisition of shares of Jet Airways (India) Limited (hereinafter referred as “Jet”) by Etihad Airways PJSC (hereinafter referred as “Etihad”) available online at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1399545948533.pdf
[34] Sethi, R., Dhir, S., & Agarwal, D. (2015). DEFINING CONTROL: A STUDY OF THE JET-ETIHAD CASE. National Law School of India Review, 27(2), 185–196
[35] Defining Control under the Indian Competition Act, Jain, Isha, Jain, Vanshaj, 12 NALSAR Stud. L. Rev. [27] (2017)
[36] Das, V. (2013). The New Takeover Code by the Securities and Exchange Board of India. Journal of Social and Development Sciences, 4(7), pp. 303-307.
[37] Rajat Sethi, Simran Dhir & ors, DEFINING CONTROL: A STUDY OF THE JET-ETIHAD CASE, National Law School of India Review, Vol. 27, No. 2 (2015), pp. 185-196
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