Sebi scraps 'bright line' control test proposal

Stakeholders fear change in definition of 'control' could increase risks of abuse

The Securities and Exchange Board of India (Sebi) on Friday said it has dropped the proposal of adopting the "bright line test" to determine the acquisition of "control".

In March 2016, the market regulator had floated a discussion paper on "bright line tests for the acquisition of control under Sebi (Substantial Acquisition of Shares and Takeovers) Regulations". The proposed test is a different approach to defining control, which prescribes a list of protective rights that do not amount to the acquisition of control.

The current framework is largely formulae-based with one of the criteria being the acquisition of 25 per cent stake or voting rights. Determining change of control is critical as it triggers an open offer to the public shareholders.

"The relevant issues have been examined intensively and in view of the aforesaid comments received and the current regulatory environment, it has been decided to continue with the practice of ascertaining acquisition of 'control' as per the extant definition in the takeover regulations," Sebi said in a release.

"It is felt that any change or dilution in the definition of control would have far-reaching consequences since a similar definition of 'control' is used in the Companies Act 2013 and other laws," the regulator further said.

Sebi had received a mixed response on the discussion paper with some supporting the idea for bright line test, while terming it a substantial step towards ease of doing business. However, key stakeholders including the Ministry of Corporate Affairs (MCA) recommended against it.

The MCA told Sebi that changing the current definition of 'control' may reduce regulatory scope and increase risks of abuse. It told Sebi that it would be more appropriate to take decisions on a case-to-case basis.

Moving to the "bright line" method would have entailed preparing an exhaustive list of situations, which could have posed a big challenge to Sebi.

"In a given set of facts, Sebi has to say if it feels there is control or not, and then you have a right to appeal. Defining control based on various protective rights may be a bad policy. It has to be principle-based to be applied on a case-to-case basis. Let jurisprudence develop from courts and judgements," said Sumit Agrawal, partner, Suvan Law Advisors.