The
meeting
of SEBI’s board held today has resulted in some crucial decisions. An
important one relates to SEBI’s new approach towards reconsidering the
definition of “control” under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011. This is because an acquirer who acquires control without
obtaining the minimum number of shares (i.e. 25% voting rights) could be
required to make a mandatory general offer to acquire the shares of the other
shareholders. The existing subjective definition has received substantial
attention and criticism on the ground that it leaves parties with tremendous
amount of uncertainty and the regulator with considerable discretion. Moreover,
India is one of the few countries that has a subjective (qualitative)
definition of control as most other jurisdictions have opted for a quantitative
definition of control based on a prescribed percentage shareholding threshold,
such as 25%, 30% or the like. In the past, SEBI had remained steadfast in its
application of the subjective definition.
meeting
of SEBI’s board held today has resulted in some crucial decisions. An
important one relates to SEBI’s new approach towards reconsidering the
definition of “control” under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011. This is because an acquirer who acquires control without
obtaining the minimum number of shares (i.e. 25% voting rights) could be
required to make a mandatory general offer to acquire the shares of the other
shareholders. The existing subjective definition has received substantial
attention and criticism on the ground that it leaves parties with tremendous
amount of uncertainty and the regulator with considerable discretion. Moreover,
India is one of the few countries that has a subjective (qualitative)
definition of control as most other jurisdictions have opted for a quantitative
definition of control based on a prescribed percentage shareholding threshold,
such as 25%, 30% or the like. In the past, SEBI had remained steadfast in its
application of the subjective definition.
In
today’s decision, SEBI has expressed its willingness to reconsider this issue
and has decided to propose two possible approaches towards a bright-line test
for control. One involves listing out protective rights (for example in
shareholders’ agreements) that would not amount to control, so long as such
rights have been approved by a majority of the public shareholders. This
approach is somewhat similar to that adopted by the Securities Appellate
Tribunal (SAT) in the Subhkam
case. The other approach involves a transition to a numerical threshold of
shareholding (voting rights) or the ability of the shareholder to appoint a
majority of the non-independent directors of the company.
today’s decision, SEBI has expressed its willingness to reconsider this issue
and has decided to propose two possible approaches towards a bright-line test
for control. One involves listing out protective rights (for example in
shareholders’ agreements) that would not amount to control, so long as such
rights have been approved by a majority of the public shareholders. This
approach is somewhat similar to that adopted by the Securities Appellate
Tribunal (SAT) in the Subhkam
case. The other approach involves a transition to a numerical threshold of
shareholding (voting rights) or the ability of the shareholder to appoint a
majority of the non-independent directors of the company.
As
I have argued in this paper, the
current qualitative approach leaves much to be desired, and needs
reconsideration by moving towards a more clear and certain approach. To that
extent, the present proposal by SEBI is welcome, although substantially
overdue. More details are expected in a discussion paper to be issued by SEBI,
and we hope to discuss the specific proposal in detail thereafter.
I have argued in this paper, the
current qualitative approach leaves much to be desired, and needs
reconsideration by moving towards a more clear and certain approach. To that
extent, the present proposal by SEBI is welcome, although substantially
overdue. More details are expected in a discussion paper to be issued by SEBI,
and we hope to discuss the specific proposal in detail thereafter.
In
addition to the issue of control, SEBI has also approved proposals to deal with
wilful defaulters, as declared in accordance with the relevant guidelines
issued by the Reserve Bank of India (RBI). Under these proposals, a company
whose promoter or director is a wilful defaulter will not be able to issue
shares or acquire control over a company. Moreover, the criteria for
determining a “fit and proper person” will incorporate aspects relating to
wilful defaulters. With this, defaulters in the debt markets would be prevented
from accessing the equity markets.
addition to the issue of control, SEBI has also approved proposals to deal with
wilful defaulters, as declared in accordance with the relevant guidelines
issued by the Reserve Bank of India (RBI). Under these proposals, a company
whose promoter or director is a wilful defaulter will not be able to issue
shares or acquire control over a company. Moreover, the criteria for
determining a “fit and proper person” will incorporate aspects relating to
wilful defaulters. With this, defaulters in the debt markets would be prevented
from accessing the equity markets.
Finally,
SEBI has also included greater transparency in financial statements by
requiring disclosure of qualifications in those, along with a statement on the
impact of such qualifications. This will be applicable for the financial year
ending March 2016.
SEBI has also included greater transparency in financial statements by
requiring disclosure of qualifications in those, along with a statement on the
impact of such qualifications. This will be applicable for the financial year
ending March 2016.
In relation to proposed framework for protective rights, it appears that the illustrative list of protective list will be a negative list (protective rights which shall not amount to control) and any other protective rights may amount to control and require public shareholders approval, since it will be difficult for SEBI to give positive list of protective rights which may amount to control.