Understanding “Control” under the SEBI SAST Regulations
The concept “control” is regulated by Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The provision states that “control” means the right to appoint a majority of the directors or control the management or policy decisions of a company. Such control may be exercised directly or indirectly, individually or through persons acting in concert, and may be exercised through shareholding, management rights, shareholder agreements, voting agreements or “in any other manner”.
Two aspects of this definition are of considerable significance. First, the definition is inclusive rather than exhaustive. Second, it is not about shareholding but effective influence over management or policy decisions. This is an approach of the substance where the law tries to determine who is actually directing the affairs of the company, rather than the shareholder who only holds shares.
Regulation 3 sets numerical thresholds for substantial acquisition where crossing 25% voting rights triggers an open offer, and for holdings between 25% and the maximum permissible non-public shareholding, further acquisitions beyond 5% in a financial year also trigger an open offer. These mechanical thresholds are designed to prevent stealth accumulation of control.
Regulation 4 is independent of shareholding in that any acquisition of control, either direct or indirect, results in an open offer. Thus, even a minority stake, if combined with the fact that contractual rights will have policy decision influence, may constitute control.
For instance, an investor with 15% stake may have the right to block important decisions such as business plan, management appointments, budgets, etc. This does not breach the 25% threshold of application of Regulation 3, but it does mean that there can be an effective influence on strategic decisions.
Under Regulation 4, such indirect acquisition of control still results in an open offer obligation. This regulatory design differentiates between the shareholding levels, which track ownership concentration and the concept of control, which is centred on the decision-making power independent of equity. The primary purpose of it is to safeguard the minority shareholders because control change must create a “control premium,” which provides a fair exit price for public shareholders with new management. Thus, regulatory focus is not limited to mere ownership, but includes the effective power of corporate governance.
Judicial Interpretation and the Ambiguity of Control
Despite its wide definition, the determination of control in practice is not an easy task, because rights are acquired through contractual arrangements instead of shareholding.
This problem was evident in Subhkam Ventures (I) Pvt Ltd v. SEBI, where Subhkam Ventures had acquired certain affirmative voting rights and board-related protections in the target company. SEBI originally considered such rights to be control. Nevertheless, the Securities Appellate Tribunal [“SAT”] held otherwise and brought the difference between positive control and negative control. As defined by SAT, control entails proactive powers to influence the decisions made by companies and veto rights only allow an investor to stop some activities. The tribunal found such protective rights to be prevalent in investment contracts and are aimed at protecting financial investment as opposed to providing control.
With all due respect, the author finds this reasoning conceptually flawed.
Being able to veto the budgets, strategy, or even key appointments is a great way to influence the direction that a company is taking because without the consent of the investors the management is not able to do anything.
Control is therefore not just on directing decisions but an ability to block them. This case went on to the Supreme Court, but it refused to resolve this question, leaving the law on control remain ambiguous. A similar approach was seen in Kamat Hotels v. SEBI, where the quorum and affirmative voting rights were regarded as safeguarding investors. However, in case the governance requires the involvement of an investor, there is a great influence of the investor.
These cases point to a structural problem, that a principle-based, fact-sensitive definition leads to inconsistent interpretation. What is perceived as control in one situation may be interpreted as no more than protection in another, creating uncertainty for businesses and making it difficult to structure transactions.
Given this uncertainty, an important regulatory question arises: Should the concept of control remain open-ended, or should India adopt a bright-line numerical test to determine control?
Arguments in Favour of a Bright-Line Rule
A numerical criterion to determine control based on shareholding levels in a bright line would be more certain. Investors could easily be aware when an open offer liability would become effective, and the litigation and interpretation of the regulations would be minimised. Predictability is imperative in terms of business. Transaction lawyers and investors like straightforward rules that will enable them to craft deals without the prospect of retrospective application of the regulations.
The numerical test would also restrict the discretion of the judicial system and minimise the chances of making varying judgments. Moreover, the fact that the present framework is ambiguous puts the control determination in the hands of the regulators and tribunals. The same rights of the contract can be interpreted differently by various adjudicating officers.
This ambiguity adds to the compliance cost, and it discourages investment, especially by foreign investors who like regulated environments based on rules. This is the reason why countries like the UK have a strict bright-line rule to define control. In such a way, a bright-line rule seems to be desirable in the context of clarity, predictability, and administrative efficiency.
Why a Bright-Line Rule Would Fail in India
Despite all these advantages, the author believes that India should not try to adopt a rigid, bright-line numerical definition of control.
In the long term, a bright line would undermine the regulatory framework in some way and defeat the purpose of regulation of takeovers in the first place. Corporate control is a highly complex idea which is contextual in nature. Attempting to make it a rigid number would open up possibilities for evading regulations and distort the operation of the regime of takeover.
A bright-line rule would provide encouragement for regulatory arbitrage, with acquirers able to stay just below the threshold, e.g., 24.9%, while obtaining extensive veto and governance rights, thereby obtaining effective control without open offer obligations and without giving minority shareholders the benefit of the control premium.
Moreover, control is context-specific and differs from company to company and sector to sector. In promoter-driven companies, even 30% may not result in control, whereas in dispersed or start-up companies, 18-20% with some strategic rights may be the deciding factor in the direction of the company. Sectoral differences make control even more complex: in regulated sectors, even small stakes might enjoy effective control, but in promoter-led conglomerates, even similar rights may not, making rigid thresholds inaccurate.
Furthermore, Indian corporate ownership is very different from jurisdictions such as the UK, where there is widespread institutional shareholding, and where “bright-line” numeric rules can approximate control In contrast, the Indian market is highly dominated by promoter-driven companies, family ownership, and it has a complex group structure, which means that control cannot be inferred from just shareholding. Importing of bright-line rules from radically different environments of ownership would be inappropriate in the Indian context.
Refining Control: Balancing Flexibility with Regulatory Clarity
The issue is not the flexibility of the definition of control, but the lack of clarity in its application. Instead of exhaustively defining control, SEBI is better set forth what is not control by defining safe harbours like rights to information, veto rights limited to extraordinary matters and minority rights in this way giving certainty without eliminating the case-by-case review. This is necessary since the business environment is constantly changing. What is not controlled right now might become a form of influence tomorrow. When the law strictly concentrates the control in a specific formula, there is a chance of that the formula becoming outdated and exert a spurring effect on more and more advanced evasion techniques.
In addition, too much rigidity can deter investment and entrepreneurial adaptability. The businesses have to be able to organise investment arrangements according to their needs. An excessively mechanistic regulatory system will scare off investors who perceive an unwanted exposure to excessive takeover requirements. The capital markets of India are in a state of development, and they rely on both local and foreign investments. A certain level of flexibility in regulation will guarantee the flexibility of investment structures to fit other industries, corporations, and governance structures.
Finally, the notion of control is not a percentage ownership business but an aspect of real control over corporate decision-making. The principal approach enables the regulators to look at what is being done and to avoid back-door acquisitions of control that would otherwise not be noticed. Although that strategy might imply a certain level of interpretational complexity, it would be more appropriate to the facts of the Indian corporate environment. These are the reasons why India needs to keep the principle-based definition of control that needs to be complemented by more concrete regulations rules instead of strict numerical rules. This would maintain the protection of minority shareholders, eliminate regulatory arbitrage, and address the heterogeneity of corporate forms that the Indian economy is characterised by.
Views are personal.