Sebi may peg M&A ‘control’ cap at 25%

Regulator’s move is aimed at removing ambiguities that companies confront during takeovers

Mumbai: The market regulator is set to clarify what the term ‘control’ means in the context of mergers and acquisitions (M&As) by pegging the shareholding threshold of an acquirer at 25%, two persons familiar with the development said.

The move is aimed at removing ambiguities that companies currently confront during takeovers, one of the two persons said, requesting anonymity.

Currently, the definition of ‘control’ under the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011—popularly known as the Takeover Code—doesn’t specify a threshold for shareholding.

“The numerical threshold for determining control is a globally accepted norm and should be the prescribed criteria along with the other factors which may signify control,” said Tejesh Chitlangi, a partner at law firm IC Legal.

The current takeover code states that an acquirer is in ‘control’ only if the board of the company that’s being acquired gives the former the right to appoint a majority of the directors, and have the final say on management and policy decisions.

The control of management or policy decisions is through shareholding or management rights or shareholders’ agreement or voting agreements.

“The Securities and Exchange Board of India board will clear a discussion paper on Saturday, which proposes to peg the numeric threshold of voting rights (shareholding) at 25% and giving protective rights to the acquirer,” said the second person, who also declined to be named.

A Sebi spokesperson did not respond to an e-mail seeking comment.

According to the discussion paper, there could be a framework for protective rights with an exhaustive list of rights that do not lead to acquisition of control.

These protective rights would be granted to the acquirer if they are cleared by 51% of the minority public shareholders.

“While it will be important to have a list which considers the commercial realities of merger and acquisition transactions, it may be a practically onerous task to have an exhaustive list that captures all the exempted protective rights and Sebi may need to grant an exemption on case-to-case basis,” the second person said.

According to Lalit Kumar, partner at J. Sagar Associates, there is currently no clarity on whether or not protective (veto) rights to investors will lead to control.

“This issue came up in the matter of Subhkam Ventures where Sebi held that protective rights lead to control. However, in appeal to the Securities Appellate Tribunal (SAT), SAT held that protective rights only lead to negative control and not positive control,” Kumar said.

“The matter went in appeal to the Supreme Court, which did not pass any order on this issue but said that SAT’s order will not act as a precedent. Therefore, presently, there is no decided case on this issue although the general view is that protective rights do not lead to control,” he explained.

Kumar’s reference is to private equity investor Subhkam’s 17.9% stake in MSK Projects. In 2007, when it bought the stake, Subhkam sought and received several so-called negative rights (such as the power of veto on key decisions). In 2008, Sebi ruled that this constituted control. On appeal, SAT ruled in favour of Subhkam. Sebi appealed the case in the Supreme Court which dismissed the case. However, because it said SAT’s order would not be a precedent, private equity investors are still not sure as to whether negative rights such as the one Subhkam had constitute control (such rights are common in agreements between promoters and private equity firms).

Some in the legal fraternity say the definition of control cannot be set in stone.

“The question of control is a nuanced one primarily of fact and secondly of law… Anything set in stone on defining control would lead to false positives and negatives. Sebi should adopt a more nuanced approach and go by court rulings as precedents,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi first started reviewing the definition of control in 2014. Finalizing a proposed framework took longer than expected, nearly 20 months, in wake of the number of suggestions.

Sebi decided to re-examine the definition of control following the 2013 acquisition of a 24% stake in Jet Airways (India) Ltd by Abu Dhabi-based Etihad Airways PJSC for Rs.2,058 crore.

In May 2014, Sebi ruled that the deal did not attract the provisions of the Takeover Code, as it found a lack of substantial controlling powers with Etihad after the transaction.

Private Equity