Mumbai: The Securities and Exchange Board of India (Sebi) said on Friday that it intends to retain its definition of ‘control’ of companies and drop the suggestions it had made to alter the definition after a March 2016 board meeting.
The capital markets regulator said in a statement that it had taken this decision after considering comments from various stakeholders, including the ministry of corporate affairs and the Reserve Bank of India (RBI).
Currently, Sebi’s takeover norms define ‘control’ as the power to appoint a majority of a company’s directors, the right to control the management or policy decisions of the company directly or indirectly, either through shareholding or management rights, or shareholders agreements or voting agreements.
After its March 2016 board meeting, Sebi released a note for public comments where it noted that this definition of control was at odds with the definitions in various other laws such as the Competition Act, 2002, and the Companies Act, 2013.
In that note, it proposed two options to sharpen the definition of control.
First, it proposed to create a new framework for protective rights which would not amount to exercise of control. This may include decisions such as the appointment of a non-executive chairman; appointment of an observer who does not have any voting or participation rights; and exercising agreements specified by lenders, if such rights are customary to the lending business and the lender has granted the loan strictly on a commercial basis.
Sebi also proposed that veto or affirmative rights in matters that are not part of the ordinary course of business or involve governance issues could also be considered protective in nature and may not amount to exercise of control over the target firm.
Under the second option, Sebi had proposed to adopt a numerical threshold. It defined control as the right or entitlement to exercise at least 25% of voting rights of a company, irrespective of whether such holdings give de facto control and/or the right to appoint a majority of the non-independent directors of a company.
None of these options got significant support from various stakeholders, and some said that changing the definition “may reduce the regulatory scope and may be prone to abuse", the Sebi statement said.
Moreover, the ministry of corporate affairs said that it would be “more appropriate for Sebi to take decisions on a case-to-case basis".
According to Sandeep Parekh, founder of Finsec Law Advisors, Sebi’s move is a reasonable one because the interpretation of the concept of ‘control’ may vary widely and sticking to one rule will create an unnecessary rigidity in the business.
“So, it is always better to treat the concept of ‘control’ as per the case law, while having one set of generic thumb rules in place. This is what Sebi is attempting to do and, hence, it was better to scrap the plan to change the definition of control by introducing concepts of protective rights or any other numerical thresholds. In cases of takeovers, wherein the controlling shareholder is less than 25%, this approach of Sebi (to follow case law) will help more. Also, there may be many examples in which there are passive investors such as PEs/VCs with large shareholding present in a firm. For such instances, adopting the case law approach will retard the rigidity of definition of control, which is something desired."
Case law is defined as the manner of dealing with a case according to the past rulings of courts or tribunals in similar matters. These interpretations are distinguished from statutory law and codes enacted by regulators or legislative bodies.