On March 14, the Securities and Exchange Board of India (Sebi) published a discussion paper on ‘Brightline tests for acquisition of control under Sebi takeover regulations.’
The draft explains the crux as follows: In cases of rights accruing through contractual agreements, such assessment becomes complex and requires consideration of facts and circumstances of the case. Therefore, definition of control is based on certain defined principles, rather than being rule-based. It is only while applying these principles on a set of facts that there is a rise of multitude of opinions, leading to litigation. Multiple definitions by different sectoral regulators have added to the confusion.
So, the paper discusses options for identifying ‘bright lines’ of control. The first is to come up with a framework of permissible protective or veto rights, which, if incorporated in shareholder agreements, would not amount to control. The second is to fix the numerical threshold of 25 per cent of voting rights or a right to appoint a majority of non-independent directors of a company. Among the two, Sebi appears inclined to implement the second latter, citing clarity and reduction in uncertainty. On the other hand, Sebi seems to feel an attempt to define a framework of rights under the first option could lead to ambiguity and further complexities in defining control.
There are multiple instances in the past, where experts have gone into detail into the vexed question of what amounts to control. The Bhagwati committee and the Achuthan committee which studied the takeover scenario in detail in 1994 and 2010, respectively, had also felt the need for a case-by-case consideration by Sebi.
While discussing the first option, the paper refers to the famous Subhkam Ventures case. Where, in 2008, Sebi had asked the former to make an open offer for certain clauses in the shareholding agreement with the target company, MSK Projects. The Securities Appellate Tribunal SAT struck this order down in 2010. Sebi moved the Supreme Court, which disposed of the matter, leaving the question of law open, in 2011.
The Achuthan committee had representatives from all walks of the corporate world and had undertaken an elaborate consultative process. It had said: “The existence or non-existence of control over a listed company would be a question of fact or, at best, a mixed question of fact and law, to be answered on a case to case basis. The committee also recognised that any blanket provision, whereby a right to say no is in all circumstances deemed to either constitute control or not to constitute control may be liable to misuse.”
The Sebi discussion paper does not discuss enough this aspect of misuse. It does not say clearly what protection the minority investor will have when control is acquired in this manner. Can Sebi wash its hands off the issue simply because it is ‘complex’? Look at what is happening in the SpiceJet deal, where investors are getting to know basic details from court proceedings almost a year later.
Sebi’s reference to the international scenario is also ambiguous. Of the 23 countries it refers to, only eight have strict numerical thresholds, the kind it wants to move to. Four, including America, do not have any definition and six have definitions similar to the current Indian one. The remaining five have the clause “directly or indirectly,” which is open for interpretation.
However, Sebi concluded in the paper: “From the above, it is seen that in most of the countries, control has been defined in terms of the specified voting rights, irrespective of de facto control.”
Sebi should articulate clearly why it now feels ‘control’ is no longer a “mixed question of fact and law” and what new protection the minority shareholders have, so that it can completely surrender its right to examine these contractual agreements with veto rights by choosing option two. The paper is open for public comments, that can include policy options other than these two, till April 14.