Interpretation of control in the new Companies Act

HIDAYATULLAH NATIONAL LAW UNIVERSITY,RAIPUR

COMPANY LAW PROJECT

INTERPRETATION OF THE WORD CONTROL

UNDER THE NEW ACT
Submitted to:
Mr. SHYAMTANU PAUL

Submitted by:
KRITIKA MISHRA
Semester V
Section B
Roll no. 78

Submitted on : 08/10/2015

Interpretation of control in the new Companies Act

ACKNOWLEDGEMENT

With a deep sense of gratitude, I acknowledge the help of all those people who have made the
completion of this project possible. I would like to thank my Company Law teacher Mr.
SHYAMTANU PAUL for his help and guidance and also for putting his faith on me by giving
me such a topic to work on. Sir, thanks for the opportunity which helped me grow.
My gratitude also goes out to the staff and administration of HNLU for the infrastructure in the
form of our library and IT Lab that was a source of great help for the completion of this project.

Interpretation of control in the new Companies Act

TABLE OF CONTENTS
INTRODUCTION............................................................................................01
REVIEW OF LITERATURE..........................................................................02
RESEARCH PROBLEM.................................................................................03
SCOPE AND OBJECTIVE.............................................................................03
HYPOTHESIS..................................................................................................03
RESEARCH QUESTIONS..............................................................................03
ANALYSIS OF DEFINITION UNDER COMPANIES ACT 2013............04-12
Two kinds of control
Term Control defined in Blacks Law Dictionary
The Dilemma of Control : Subhakam Ventures(I)(P) Limited V/s SEBI
MECHANISMS OF CONTROL..................................................................07-13
Internal Mechanism
External Mechanism
CONTROL UNDER OTHER ENACTMENTS........................................08 -14
The Companies Act , 1956
SEBI Regulations
FDI Policy issued by the Reserve Bank of India
The Competition Act , 2002
Control under the Companies Bill 2009
CONTROL vs. SUBSIDIARY......................................................................15
CASE STUDY................................................................................................17-20
CONCLUSION................................................................................................21

Interpretation of control in the new Companies Act

ABBREVIATIONS
AS

Accounting Standards

CCI

Competition Commission of India

CLB

Company Law Board

FDI

Foreign Direct Investment

FIPB

Foreign Investment Promotion Board

ICDR

Issue of Capital and Disclosure Requirements

Ltd

Limited

MCA

Ministry of Corporate Affairs

Pvt

Private

SAT

Securities Appellate Tribunal

SEBI

Securities and Exchange Board of India

LIST OF CASES
Subhakam Ventures(I)(P) Limited V/s SEBI [2010] 99 SCL 159
Rhodia SA v Securities and Exchange Board of India

(2001) 33 SCL 570

Sandeep Save v Securities and Exchange Board of India 2003 41 SCL 47 SAT

Interpretation of control in the new Companies Act

INTRODUCTION TO RESEARCH METHODOLOGY

INTRODUCTION
Companies Act, 2013 made an attempt to reduce the content of the substantive portion of the
related law in comparison to the Companies Act, 1956 (1956 Act). The Companies Act, 2013,
envisages significant changes in the provisions related to governance, management, compliance
and enforcement, disclosure norms, auditors and mergers. It also includes several new concepts
like one Person Company, small companies, dormant company, class action suits, registered
valuers and corporate social responsibility etc. The introduction of the word control included in
the new Act is on one such important significance.The changes in the 2013 Act have great far
reaching implications and are all set to significantly change the manner in which corporates
operate in India.
The chapterization of this project is done in a manner so as to specifically throw light on the
relevance of the word control introduced as a new term in the Companies Act of 2013 which
was not defined in the 1956 Act.
The first chapter deals with the definition in particular of the word control under the new Act
which takes our attention to Section 2(27) of the Act which further deals with proper alalysis of
the elements of this definition meanwhile explaining certain other definitions of the word.
Further the same chapter also deals with the dilemma of the nature of control whether should be
only positive or it can even include negative rights in it.
The subsequent chapter of the project mainly highlight the mechanisms through which control
can be exercised under corporate law which is further followed by the chapter highlighting the
relevance of the word control in other corporate legislations and rules where it is briefly
explained how its interpretation differs in evry other area/situation.
Analysing the fact that the definition under the new Companies Act is same as that defined under
the SEBI takeover regulations.
The last chapter has concluded the project after dealing with a case analysis pointing towards the
issue of governance and controversy that has arised regardinging interpretation of control.

REVIEW OF LITERATURE
G K Kapoor, Sanjay Dhamija, Companies Act, 2013, Taxman Publications, 20th Edn (2015)
This book has rightly dealt with explanation of the various important changes introduced under
the new companies act comparing it with the old 1956 legislation. Specifically talking about the
definition under section 2(27) i.e. of the word control, the book has aptly described the manner
of the interpretation and application of this word under various circumstances along with reliance
on certain real examples and relevant case laws.

James P. Walsh and James K. Seward, On the Efficiency of Internal and External Corporate
Control Mechanisms, The Academy of Management Review Vol. 15, No. 3 (Jul., 1990), pp.
421-458 accessed at http://www.jstor.org
For explanation of various types of control mechanisms, the researcher has relied on the above
article where the entire paper has aptly dealt with the strength and shortcomings of both kinds of
control mechanisms that can be employed to help align the diverse interests of managers and
shareholders.
Inder Mohan Singh, Siladitya Chatterjee, Arya Tripathy, Control under Indian corporate
law accessed at http://www.inhouselawyer.co.uk
With regard to highlighting the definitions of the word control in legislations other than the new
companies Act, the researcher has adequately relied on this article where the matter has been
dealt quite appriopriately. This article examines the existing definitions of control under various
statutes, including the context in which the term has been used, the intent behind a particular way
of defining the term and the adequacy of such definition in light of their context. Further, any
proposed amendments to the term have also been sought to be covered. The multiplicity of
definitions of the term has at times created uncertainity and ambiguity in the corporate world and
among the investor community. In India, the term finds its place in number of legislations and
regulations.

RESEARCH PROBLEM
The lack of proper definitions and regulations with regard to the issue of control under
company law and varying definitions of the same as given under various other rules and
regulations has made the researcher work on the problem of solving the ambiguity over the
interpretation of the word and rigthly establish its actual relevance in the corporate world.

SCOPE AND OBJECTIVE

The scope of the research project is limited to areas of applicability of the word control
highlighting the need and manner in which the same is interpreted under varying situations and
circumstances.
The objective is to explain clearly how the word control should be interpreted according to its
definition under the new companies Act meanwhile differentiating the interpretation from other
regulations of similar nature. In addition, to understand whether the widely differing definitions
of the term control are sufficient in themselves or whether a certain degree of uniformity or
harmonisation in the definition is desirable.

HYPOTHESIS
The research project is based on the hypothesis that even after the term control being defined
variedly under differing regulations the ambiguity with regard to its applicability still prevails
even after it being defined specifically under the Companies Act, 2013 and hence, needs to be
addressed properly.
RESEARCH QUESTIONS
What is the proper meaning of the word Control with reference to Corporate law?
What are the essentials that constitute its definition as per the Companies Act 2013?
What are the various kinds of control mechanisms for proper corporate governance?
How the interpretation of the word control under Companies Act 2013 different from the
meanings of the same word introduced under other legislations and regulation?

ANALYSIS OF DEFINITION UNDER COMPANIES ACT 2013

Section 2(27) of the Act defines Control as :
Control shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements or in any other manner.
Mainly two kinds of control can be envisaged from this definition:
The definition of Control is an inclusive definition as it uses the word include and thus wide
enough to cover control as generally understood and specifically covers
(a) The right to appoint majority of the directors or
(b) Right to control the management exercisable by a person or persons acting individually or in
concert, directly or indirectly, including

by virtue of their shareholding or

management rights or
shareholders agreements or
voting agreements or
in any other manner

(c) Right to control policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including

by virtue of their shareholding or

management rights or
shareholders agreements or
voting agreements or
in any other manner

Term Control defined in Blacks Law Dictionary

The direct or indirect power to direct the management and policies of a person or entity, whether
through ownership of voting securities, by contract or otherwise; the power or authority to
manage, direct or oversee.
The definition of the term control under Companies Act of 2013 follows from the definition
definition of control as in the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations , 2011 and is entirely same as the latter. Therefore, in this regard one of the
important questions that comes to ones mind is
Whether Negative veto right is control?
The Dilemma of Control : Subhakam Ventures(I)(P) Limited V/s SEBI 1
The point of law that was being disputed in this case was whether the rights i.e. the right to
nominate a director on the board of the company, the right to be present to constitute quorum and
the affirmative voting rights all of which is essentially negative control rights constituted
control for the purposes of the takeover code regulations.
Subhkam Ventures filed an appeal to the SAT against SEBIs decision to treat the acquisition as
an acquisition of control. The SAT overturned SEBIs decision holding that control, as per
the definition of the term in the Erstwhile Takeover Code, is a proactive and not a reactive
power. It is a power by which an acquirer can command the target to do what he wants it to do.
The SAT in its order further held that control really means creating or controlling a situation by
taking the initiative. Power by which an acquirer can only prevent a company from doing what
the latter wants to do is by itself not control. SEBI, feeling aggrieved by the decision of the SAT,
appealed to the Supreme Court.
The SEBIs decision of bringing negative control within the purview of control under the
Erstwhile Takeover Code raised serious concerns among the private equity fund and venture
capitalists community as these rights are commonly granted to investors under investment
agreements entered into by them with target companies. Furthermore, most investors consider
these rights critical in order to have some level of supervision over the target companys
1 (2010) 99 SCL 159

operation and management. The entire investment community therefore looked to the Supreme
Court to settle the question of control for once and for all and to clarify the point of law on the
issue.
Subsequently, both SEBI and Subhkam Ventures have reached an out of court settlement in the
matter and hence in November 2011 the Supreme Court passed an order disposing off the appeal.
The order of the Supreme Court also specifically stated that the order of the SAT would not be
treated as a precedent in the matter of law. This added further ambiguity as to the position of law
on whether the grant of certain rights in investment agreement would tantamount to the
acquisition of control for the purposes of the takeover regulations. As stated above, since under
the New Takeover Regulations definition of control remains unchanged, the ambiguity
regarding negative control continues.

MECHANISMS OF CONTROL
Effective corporate governance is essential if a business wants to set and meet its strategic goals.
A corporate governance structure combines controls, policies and guidelines that drive the
organization toward its objectives while also satisfying stakeholders' needs. A corporate
governance structure is often a combination of various mechanisms.

Internal Mechanism
The foremost sets of controls for a corporation come from its internal mechanisms. These
controls monitor the progress and activities of the organization and take corrective actions when
the business goes off track. Maintaining the corporation's larger internal control fabric, they serve
the internal objectives of the corporation and its internal stakeholders, including employees,
managers and owners. These objectives include smooth operations, clearly defined reporting
lines and performance measurement systems. Internal mechanisms include oversight of
management, independent internal audits, structure of the board of directors into levels of
responsibility, segregation of control and policy development.
Monitoring by board of directors is viewed as an important internal control mechanism which
helps mitigate agency conflicts and check managerial opportunism by aligning interests of
shareholders and managers. The monitoring function of boards has drawn the attention of
corporate governance researchers as it refers to the responsibility of directors to monitor
managers on behalf of shareholders.

External Mechanism
External control mechanisms are controlled by those outside an organization and serve the
objectiv es of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External mechanisms
are often imposed on organizations by external stakeholders in the forms of union contracts or
regulatory guidelines. External organizations, such as industry associations, may suggest
guidelines for best practices, and businesses can choose to follow these guidelines or ignore
them. Typically, companies report the status and compliance of external corporate governance
mechanisms to external stakeholders

CONTROL UNDER OTHER ENACTMENTS

Non-Uniformity of Meaning under Indian Laws and Regulations
The term control, with respect to companies, may be defined in various ways, including, with
reference to shareholding, voting rights, right to appoint directors on the board, management
rights, veto rights etc. A laymans understanding of the term would be the ability to control the
management and policy of a company, whether by holding a majority of shares or by having
majority representation on the board of directors of the company or by any other means.?
In light of the vast number and variety of legislations required to effectively regulate companies,
and the multifarious subjects that they cover, the term control has been given various meanings
depending on the domain of the concerned legislation. The multiplicity of definitions of the term
has at times created uncertainty and ambiguity in the corporate world and among the investor
community. In India, the term control finds its place in a number of legislations and regulations,
which may be broadly categorised as follows:

The Companies Act , 1956

No definition of control; broadly control is used interchangeably with ownership, and
ability to appoint majority member on the board of directors.
The 1956 Act is the basic law governing the formation, operation and liquidation of companies in
India. The 1956 Act uses the term control in various contexts. Section 4 of the 1956 Act defines
holding and subsidiary companies where one criterion is that a holding company should be
able to control the composition of the board of directors of the subsidiary (s4(1)(a)) and it also
explains when the composition of the board of directors of a company will be deemed to be
controlled by another company (s4(2)). Such a control over the composition of a companys
board is exercised by another company if the latter company, by exercise of some power at its
discretion without the consent or concurrence of any other person, can appoint or remove the
holders of all or the majority of the directorships (s4(2)). Section 239 empowers an inspector to
carry out an investigation into affairs of related companies whose directorships are held by the

employees or nominees of those having the control and management of the first-mentioned
company. Section 247 of the 1956 Act states that investigation of the ownership of a company
can be done for the purpose of determining the true persons who are or have been able to control
or materially to influence the policy of the company. Control also appears in the context of S.398
whereby an application can be made to the Company Law Board (CLB) by a member
complaining that a material change has taken place in the management or control of the
company.
On a perusal of above sections, it is apparent that the term control is used in the 1956 Act in a
variety of contexts and hence a uniform definition of the term would not suffice for this statute.
Rather, the term may need to be interpreted differently for each provision or section of the 1956
Act in which it appears, to ensure that the motive and rationale behind the concerned provision is
given effect to.

SEBI Regulations
The Securities and Exchange Board of India Act 1992 (the 1992 Act) established the SEBI to
protect the interests of investors and to promote and regulate the securities market in India.
While the 1992 Act itself does not have a separate definition for the term control, various
regulations and guidelines made under the 1992 Act have defined the term control.
While some SEBI regulations have their own tailor-made definition of control depending upon
the specific needs of those regulations, the definition as appearing in the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations 1997 as amended from time to time (the 1997
Code) has been adopted or referred to in several other regulations of the SEBI.
Under the SEBI (Merchant Bankers) Regulations 1992, the SEBI (Portfolio Managers)
Regulations 1993 and the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations
1993, control is defined in a narrow sense whereby controlling interest is an interest, whether
direct or indirect, to the extent of at least 51% of voting rights in the body corporate. This
specific definition of control has been adopted in light of the fact that these regulations set up a
regulatory regime for market intermediaries and their operations have a potential effect upon the
investors in specific and the market in general.

However, as already pointed out, a number of SEBI regulations have adopted the definition of
control as it appears in the 1997 Code. The SEBI (Buyback of Securities) Regulations 1998, the
SEBI (Issue of Sweat Equity) Regulations 2002, the SEBI (Issue of Capital and Disclosure
Requirements) Regulations 2009 (SEBI ICDR 2009) and the SEBI (Delisting of Equity Shares)
Regulations 2009 all incorporate the definition of control as it appears in the 1997 Code. 2
Under the SEBI (Delisting of Equity Shares) Regulations 2009, a company seeking delisting of
securities has to disclose the persons who are in control of the company by means of a public
announcement.3 In the SEBI (Credit Rating Agencies) Regulations 1995, the SEBI ICDR and the
SEBI (Issue of Sweat Equity) Regulations, control is used to define terms like associate, group,
persons acting in concert and promoters and imposes restrictions on the dealings of these players.
In light of the large number of SEBI regulations that have adopted the definition of control as
provided in the 1997 Code and the critical importance of the takeover regulations in protecting
interests of the minority/public shareholders, it is imperative to examine the definition of
control from the 1997 Code and relevant judicial pronouncements on the same.
Regulation 2(1)(c) of the 1997 Code defines control to include the right to appoint the majority
of the directors or to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or in any
other manner.4 Regulation 12 states that, irrespective of whether there has been acquisition of
shares or voting rights, no acquirer shall acquire control over a company without making public
announcement to acquire shares.5 Acquisition in the context of Regulation 12 includes direct or

21 Regulation 2(1)(d) of SEBI (Buy Back of Securities) Regulations 1998; Regulation 2(1)(d) of SEBI
(Issue of Sweat Equity) Regulations 2002; Regulation 2(2) of SEBI (Delisting of Equity Shares)
Regulations 2009; Regulation 2(1)(i) of SEBI ICDR 2009.
3Schedule I under Regulation 10(2) of the SEBI (Delisting of Equity Shares) Regulations 2009.
4 Regulation 2(1)(c) of the 1997 Code.
5 Regulation 12 of the 1997 Code.

indirect acquisition of control over companies whether listed or unlisted and whether in India or
abroad.
Regulation 2(1)(c) defines control only in terms of a right. As per the 1997 Code, the term
control has been identified with:
1.the right to appoint majority directors; or
2.

the right to exercise control over the management or policy decisions of the company.

How can such control be exercised The regulation does not provide a clear answer to this. It
gives only certain illustrative instances like by virtue of:
1.

shareholding; or

2.

management rights; or

3.

shareholders agreements; or

4.

voting agreements; or

5.

in any other manner.

Due to the open-ended nature of this definition, the term control has been a bone of contention
and subject to interpretation in various decisions of the Securities Appellate Tribunal (SAT) and
the SEBI as briefly narrated below.

In Rhodia SA v Securities and Exchange Board of India,6 the SAT held the acquirer to be in
control on the basis that the acquirer had veto right over certain matters that had been described
by the parties as major decisions on structural and strategic changes. Hence, as per this
decision, a say over major decisions on structural and strategic changes by veto rights would
amount to control.

6 (2001) 33 SCL 570

But in Sandeep Save v Securities and Exchange Board of India, 7the SAT observed that there was
no change in control despite the presence of veto rights in favour of the foreign body corporate
as it had only two nominee directors on the board of directors of the target company and the
board composition did not suggest a change in control.
Further, in In Re NRB Bearings India Ltd(2003), the SEBI overlooked the foreign acquirers veto
rights over some matters, including amendments to the organisational documents, declaration of
dividends, alteration in share capital, entry into joint ventures, technology transfer etc and held
that since the foreign acquirer had only nominal representation on the target companys board,
there was no change in control of the target company.
This departure from the stand taken in Rhodia was reiterated in Subhkam Ventures (I) Private Ltd
v The Securities and Exchange Board8 of where the SAT observed that every fetter of any nature
in the hands of any person over a listed company cannot result in control over the company.
The SAT stated that what is contemplated for a change in control under the 1997 Code is a
proactive control and not a reactive control. A proactive control would mean a power by which
an acquirer can command the target company to do what they want it to do. Power by which an
acquirer can only prevent a company from doing what the latter wants to do is by itself not
control. Hence, the SAT opined that affirmative/veto rights given to the private equity investor
enabling it to block certain decisions in the management of the company would not amount to
control in the absence of a positive right to take such decisions.
However, the SEBI has appealed against the aforesaid judgment of the SAT in the Supreme
Court and the Supreme Courts decision is awaited. Till such time as a final decision is given by
the Supreme Court, the meaning and scope of the term control under the 1997 Code shall
remain a grey area.

FDI Policy issued by the Reserve Bank of India

7 2003 41 SCL 47 SAT
8 (2010) 99 SCL 159

Includes the right to appoint a majority of the directors or to control the management or
policy decisions including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements.
The FDI policy of India aims at achieving increased foreign investment and at the same time
maintaining a supervisory structure that would regulate the quantum and usage of the
investments that flow in. This is done with the objective of maintaining transparency, simplicity,
clarity and predictability. The FDI Policy provides the regulatory regime for investments by
foreign residents in any entity in India, where investment is usually understood as financial
contribution to the capital of an enterprise or purchase of shares in the enterprise.
The FDI Policy defines the term control. It provides that the foreign investment through an
investing company would not be considered for calculation of the indirect foreign investment in
case of Indian companies which are owned and controlled by resident Indian citizens and/or
Indian companies, which are owned and controlled by resident Indian citizens. A company is
considered as controlled by resident Indian citizens if the resident Indian citizens and Indian
companies, which are owned and controlled by resident Indian citizens, have the power to
appoint a majority of its directors in that company). An entity is considered as controlled by
non-resident entities, if the non-residents have the power to appoint a majority of its directors.
If an investing company is either owned or controlled by non-residents, the entire investment by
the investing company into the subject Indian company would be considered as indirect foreign
investment.The same meaning of control is used while laying down guidelines for transfer of
ownership or control of Indian companies in sectors with FDI caps from resident Indian citizens
to non-resident entities.
Thus, it appears that control is defined under FDI regulations with the purpose of ensuring that
the indirect foreign investment is taken into account for calculation of sectoral caps only when
majority of the board of the concerned investing company can be appointed by the non-resident
investor. The definition of control under the FDI regulations is thus narrower than that found
under SEBI regulations.

The Competition Act , 2002

The definition under the Competition Act deals with controlling the affairs and
management is much wider in scope than that under the Takeover Code, which includes
the right to appoint majority of the directors or controlling the management or policy
decisions.
The Competition Act 2002 (the 2002 Act), as amended from time to time, provides for a detailed
regulatory framework to assess the anticompetitive effects of any merger, acquisition,
amalgamation and any other form of combination.
For this purpose, control is defined to include controlling the affairs or management by:
1. one or more enterprises, either jointly or singly, over another enterprise or group;
2. one or more groups, either jointly or singly, over another group or enterprise.
The question arises as to whether the definition of control as provided in the 2002 Act would
suffice for an effective analysis of a combination that involves acquisition of control and
subsequently facilitate identification of the adverse anticompetitive effects of the proposed
combination. The 2002 Act is silent on what instances would amount to a control over the affairs
or management of a company and this is likely to create an ambiguity.

Control under the Companies Bill 2009

It is noteworthy that the Companies Bill 2009 (the 2009 Bill) had defined the term controlling
interest. Controlling interest meant the largest voting power a member may exercise in a
general meeting of a company, whether directly or indirectly, and either alone or in association
with their relatives, bodies corporate or firms controlled by such person or their relatives. Further
the term control was used in defining several concepts like promoter (S2(1)(zzq)) and
subsidiary company (S 2(1)(zzzi)).
It has been contended that the aforesaid definition of control is likely to ensure a uniform
interpretation and application of the term control under the SEBI laws and the to be enacted

companies law. However, it has to be understood that the proposed Bill would need to cover
diverse aspects including a companys incorporation, administration, internal management,
accounts, member protection and liquidation.

CONTROL Vs. SUBSIDIARY

The existing Companies Act, 1956 does not define the term control. It explains the meaning
of terms holding company and subsidiary as below. A company will be deemed to be a
subsidiary of another company if, but only if:
(a) The other company controls the composition of its board of directors, or
(b) The other company:
i.

Where the first-mentioned company is an existing company in respect of which the

holders of preference shares issued before the commencement of this Act have the same
voting rights in all respects as the holders of equity shares, exercises or controls more

ii.

than half of the total voting power of such company,

Where the first-mentioned company is any other company, holds more than half in
nominal value of its equity share capital, or

(c) The first-mentioned company is a subsidiary of any company, which is the others subsidiary.

Notified AS 219 i.e. Accounting Standards notified under the Companies (Accounting
Standards) Rules 2006 defines the terms control and subsidiary as below :
Control refers to
a) The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the
voting power of an enterprise, or
b) Control of the composition of the board of directors in the case of a company or of the
composition of the corresponding governing body in case of any other enterprise so as to
obtain economic benefits from its activities.
A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

The Companies Act, 2013 defines the terms subsidiary and control as below.
Subsidiary company or subsidiary, in relation to any other company (that is to say the
holding company), means a company in which the holding company:
i.
ii.

Controls the composition of the board of directors, or

Exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies. Control shall include the right
to appoint majority of the directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner.

The Companies Act, 2013 contains a definition of the term control, which is broader than the
definition given in notified AS 21. In accordance with definition in notified AS 21, only board
control and control over voting rights is considered. However, the definition given in the
Companies Act, 2013 suggests that a company may control other company through other
mechanism also, say, management rights or voting agreements. This may require many more
companies to be consolidated, though they are not subsidiaries under AS 21. Also, the definition
9 Consolidated Financial Statements

of the term control given in section (2)(27) of the Companies Act, 2013 is broader than the
notion of control envisaged in the definition of the term subsidiary given in the section 2(87)
of the Companies Act, 2013. To avoid differing interpretations and ensure consistency, it may be
appropriate for the ICAI and MCA to clarify that definitions/requirements in the Companies Act,
2013 are relevant for legal/regulatory purposes.

CASE STUDY
SEBI Order on Control Under Takeover Regulations

Background and Facts

Few years back SEBI passed its order in the Jet-Etihad case relating to whether the investment
by Etihad Airways in 24% shares of Jet Airways (India) Limited and the terms thereof amount to
Etihad obtaining control in Jet so as to require Etihad to make a mandatory open offer under
the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover
Regulations). After analyzing the investment terms, SEBI concluded that no such control
relationship was created, and hence no mandatory open offer is necessary.
The brief facts that gave rise to the order are that Etihad entered into a set of agreements with Jet
and its promoters by which it acquired 24% shares in Jet through a new issue of shares for USD
379 million. Apart from investment related matters, the agreements dealt with commercial
matters of cooperation between the two airline companies. When the investment was under

consideration by the Central Government, SEBI had expressed its opinion to the Central
Government that the investment did not create a relationship of control for the purposes of the
Takeover Regulations. Subsequently, the deal was cleared by the Central Government (Foreign
Investment Promotion Board (FIPB)) as well as the Competition Commission of India (CCI).
The CCI, while clearing the transactions, made some observations that indicated a possibility of
joint control between Etihad and Jets promoters, following which SEBI issued a show cause
notice alleging possible acquisition of joint control for the purposes of the Takeover Regulations.
In this context, SEBI heard the various parties and passed its order.

Findings and Reasoning

In arriving at its conclusion, SEBI was guided by the fact that the FIPB had already concluded
that effective control of Jet remained with the existing Indian promoters. This is particularly
important because the definition of control in the Guidelines for Foreign Direct Investment
(FDI) in the Civil Aviation Sector are in pari materia with the definition of control in
Regulation 2(1)(e) of the Takeover Regulations. However, SEBI refused to be guided by the
findings of the CCI on the ground that one regulatory agency may be guided by the findings of
other regulatory agency on a particular issue only if the two laws are pari materia in their
substance and are being applied on the same set of facts and circumstances. There are
significant differences in the definition of control under the Competition Act, 2002 and the
Takeover Regulations, and hence the latter needs to be independently examined to determine
whether the requirement for a mandatory open offer arises.
In so examining, SEBI considered two broad issues:
(i)

whether Etihad and the existing promoters and persons acting in concert (PACs) due to

(ii)

the possible joint control over Jet; and

whether the rights conferred upon Etihad under the transactions documents confer joint
control over Jet. SEBI answered both in the negative.

As to the PACs issue, it was found that there was no common objective or community of interest
to acquire control over the company. While there was some cooperation under the arrangements,

they were between Jet and Etihad and not with the promoters. Hence, the target company itself
cannot be considered a PAC.
As to the issue of control, it was found that Etihad has the right to nominate only 2 out of 12
directors. Moreover, the governance procedures indicate that material recommendations will be
subject to the approval of both parties with the powers and supremacy of the board of Jet being
unaffected. Crucially, Etihad does not have any affirmative or veto rights, quorum rights, casting
vote or pre-emptive and tag along rights (regarding the transfer of shares).
Based on all of these reasons, SEBI concluded that Etihad is not in control or joint control of
Jet for the purposes of the Takeover Regulations and hence is not obligated to make an open
offer to the shareholders of Jet.

Analysis
SEBIs decision and reasoning were largely based on the specific facts of the case, which did not
require it to delve deeply into the jurisprudence governing the issue of control under the
Takeover Regulations. The issue of control has been the subject matter of controversy ever
since the decision of the Securities Appellate Tribunal in the Subhkam case, although that
decision was subsequently set at naught by the Supreme Court where the matter was settled. That
uncertainty does not seem to have dissipated given that SEBI did not have to go deeply into that
question in the Jet case. Unlike in the Subhkam case where the question of whether affirmative
or veto rights amount to control was directly in consideration, the facts of the Jet case were
more straightforward given that Etihad had agreed to amend the terms of the arrangements to
reduce the management or control-type rights in order to steer clear of the controversy
surrounding control. In other words, the more direct facts of the Jet case made the decision
somewhat more straightforward.

The principal legal issue that received SEBI attention was the fact that where there are several
definitions of control in different legislation or regulations, they must be applied by other
regulators carefully. They can be given regard by other regulators only if the respective
definitions are in pari materia. If not, the purpose and objectives of the different regulations
must be considered when being adopted by other regulators. Hence, SEBI showed regard to the
definition of control under the FDI policy which was in pari materia with the Takeover
Regulations, but not the definition in the Competition Act which carried material differences.
Finally, this case also raises the broader question about whether it is possible for an acquirer to
stay below the shareholding threshold for mandatory open offers (e.g. 25%) and deprive the
minority shareholders of any exit through such offers. Under the scheme of the Takeover
Regulations, that depends upon the rights conferred upon such acquirer under contract. If those
rights elevate the position of the acquirer to one of control, an open offer becomes necessary,
but not otherwise. Hence, one of the lessons from this case is for acquirers in such circumstances
to structure their rights and position in the target carefully so as to steer clear of any involvement
in the management and policy decisions of the target. While that would be determined on a caseby-case basis, the avoidance of some of the rights such as affirmative rights (veto) and quorum
provisions may have helped resolved this case in a manner that is favourable to the acquirer.

CONCLUSION
The definition of control under the takeover regulations needs to be clarified to ensure that a
climate of certainty prevails over when an investor would be required to make an open offer to
shareholders. More specifically, it is standard practice for private equity investors to insist on
veto/affirmative rights in shareholder agreements in order to protect their investment and the
takeover laws need to clarify whether such veto rights would amount to a change in control or
not. In this respect, the decision in Shubkam was a step in the right direction, as it clearly
asserted that the mere ability to block/veto management decisions does not itself amount to
control and hence acquiring such veto rights would not trigger an open offer requirement under
the 1997 Code. However, the ambiguity remains. Meanwhile, the SEBI has decided to retain the
existing definition of control in the new takeover regulations, thereby losing out on an
opportunity to define the term control with greater clarity and precision.

A generic definition of control will not suffice for all the provisions where the term control
has been used in the Companies Act. It is the duty of the legislators to consider the context in
which the term control appears in the various provisions of the Act and limit the meaning of
control for each such provision depending upon the intent and rationale of that particular
provision. While this may necessitate a detailed reconsideration of each provision in the
Companies Act using the term control, it would go a long way in removing the ambiguity
associated with the usage of this term.

BIBLIOGRAPHY

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James P. Walsh and James K. Seward, On the Efficiency of Internal and External
Corporate Control Mechanisms, The Academy of Management Review Vol. 15, No. 3
(Jul., 1990), pp. 421-458 accessed at http://www.jstor.org

Inder Mohan Singh, Siladitya Chatterjee, Arya Tripathy, Control under Indian
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