Sebi proposes 25% voting right threshold for 'control'

Seeking to define 'control' in case of merger and acquisitions involving listed companies, Sebi today proposed a 25 per cent voting right threshold or the right to appoint majority of directors as determining factors to identify the controlling entity.
Launching a public consultation process, the regulator said the final decision on putting in place 'bright-line tests for acquisition of control' under takeover regulations would be taken after looking into views of all stakeholders.
Sebi's board had decided to initiate a consultation process in this regard in its meeting on Saturday, which comes against the backdrop of instances of ambiguity and concerns over control in some listed entities.

Comments have been invited till April 14, Sebi said, while adding it is open to suggestions beyond the measures proposed in the consultation paper that broadly lists two options -- adopting a numerical threshold of 25 per cent voting rights, or putting in place a framework for protective rights such as veto powers.
Sebi has also proposed to learn from the systems and procedures in place in other parts of the world.
Sebi gave 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.

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.

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.
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.
Listing out options, Sebi proposed the right or
entitlement to exercise at least 25 per cent of voting rights of a company or the right to appoint majority of the non-independent directors of a firm.

In case this is adopted, acquisition of control through other means such as special rights would not necessitate an open offer requirement under Takeover Regulations. However, it would reduce the uncertainty in the assessment of acquisition of 'control' and bring clarity, as per the discussion paper.
Further, the extent of influence by the investor over the board of directors would also be ascertainable in all cases, it added.
In the second option, Sebi has proposed 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.

Having rights in decisions involving a significant change in the current business activity or that apply on exceptional circumstances would also be treated as a protective right, Sebi has proposed.
Among the illustrative list of rights include appointment of chairman, vice-chairman, observer, commercial agreements.
Citing pros and cons of this option, Sebi said investor having the protective rights would continue to be a public shareholder and acquisition of the said rights would not amount to acquisition of 'control' under Takeover Regulations.
However, this only being an indicative list, acquisition of other rights would be examined on the basis of the facts and circumstances of the case. In case such rights are deemed to be participative in nature, it would amount to acquisition of 'control' and necessitate an open offer under Takeover Regulations, 2011.

However, this approach may lead to further complexities in assessment of control and lead to ambiguity in interpretation.