Sebi to define 'control', proposes 25% voting right threshold

For better clarity on change of control in mergers and acquisitions, regulator Sebi today decided to launch a public consultation for defining 'control' and proposed fixing 25 per cent voting rights as a threshold.
In this regard, Sebi will initiate public consultation on bright line tests for acquiring control in a listed entity.
The approval of the proposal by the Sebi board today comes against the backdrop of instances of ambiguity and concerns over control in some listed entities.
During the meeting today, the board approved the proposal for public consultation process regarding "bright line tests for acquisition of control under Sebi (SAST) Regulations, 2011".

The watchdog will come out with an illustrative list of protective rights that will not amount to acquisition of control and grant of such rights will be subject to obtaining public shareholders' approval.
"Considering the international practices and the current regulatory environment in India, the definition of control may be amended such that control is defined as the right or entitlement to exercise at least 25 per cent of voting rights of a company irrespective of whether such holding gives de facto control and/or the right to appoint a majority of the non-independent directors of a company," the release said.

Other options will also be considered after the public consultation.

Currently, assessment of control requires consideration of facts and circumstances of each case. As a result, there have been multiple shades of opinion.
Besides, multiple regulators apply the test of control from different perspectives resulting in ambiguities.
Under Sebi regulations, control is based on certain defined principles rather than on rules and there have been cases when a multitude of opinion give rise to different assessments of control over a listed company.
A bright-line rule or a bright-line test generally refers to a simple and basic standard that can be applied to remove ambiguity and resolve contentious issues.

In cases of mergers and acquisitions, an acquirer or any other entity would be considered to be gaining control of the target company if it fulfils the bright line tests with regard to acquisition of voting rights, control over operations and influence in board decisions.
There have been many cases, including in the much-talked about Jet-Etihad deal, when the issue of control was debated a lot and it was felt that Sebi needs to put in place specific guidelines defining bright lines to determine the control.
Sebi has received representations from various investor groups and other entities, seeking some kind of guidance with a view to providing more clarity on the definition of control and defining bright lines on the same.

Following CCI's observations, Sebi began looking into the
matter to determine whether the deal was leading to joint control over Jet by existing promoters and Etihad, which could have triggered a mandatory open offer for minority investors.
Sebi, however, eventually ruled that the deal did not attract provisions of the Takeover Code, as it found a lack of substantial controlling powers with Etihad.
It was said that Etihad had right to nominate only 2 out of 12 directors while promoters had powers to nominate the chairman of the board of Jet, who will have a casting vote. Besides, Etihad did not have any quorum rights at the board or general meeting, and there was lack of any veto or affirmative voting rights with Etihad, among others.