“Control” Untouched in the Takeover Regulations: A Case of Regulatory Inertia

Let’s just say, it is not at all surprising. After carrying out an extensive consultation that lasted more than a year with a view to defining the concept of “control” under the SEBI (Substantial Acquisition and Takeovers) Regulations, 2011 (the “Takeover Regulations”), the Securities and Exchange Board of India (“SEBI”) has come around a whole circle. It has, by retaining the current definition of “control”, decided to leave matters where they are and to not disturb the status quo.

Early last year, SEBI had released a consultation paper in which it sought views on adopting a brightline test for defining “control”. The current definition created a lot of confusion in the takeover markets because it was qualitative (and subjective) in nature and gave significant discretion to SEBI to interpret the term, thereby creating a lot of uncertainty to acquirers on whether (or not) they will attract the mandatory open offer obligations under the Takeover Regulations (as I have discussed in detail in an earlier paper). Views may differ on whether a brightline test is preferable or the current status quo, but the ultimate verdict emanating from SEBI seems grounded in some practical and operational aspects of the matter rather than on the merits.

First, while several attempts have been made to reform the definition of control, all have failed to take the bold step of actually altering the definition. The origins of the current definition can be attributable to the Bhagwati Committee Report, which was then reflected in the 1997 version of the Takeover Regulations. The ambiguity and practical issues began cropping up since then. However, for one reason or another, the ball kept getting passed from one court to another. The judiciary had the opportunity to provide clarification when the Subhkam Case went before the Supreme Court, but the settlement arrived at between the parties eliminated the possibility of the Court providing a judicial exposition on the issue. Interestingly, the Takeover Regulations Advisory Committee (“TRAC”) that conducted a comprehensive review of the Takeover Regulations largely skirted issue as well because, at the time, the issue was pending before the Supreme Court in the Subhkam Case. After being juggled around, it was finally SEBI that held on to the hot potato, but it too seems to have finally given up making any reforms at all.

Second, the SEBI’s rationale for leaving the definition of “control” unaffected displays another curious turn of events. Since the Takeover Regulations were the first piece of legislation to have adopted a definition of “control”, they became the basis for defining control under various other legislation such as the Companies Act, 2013, the foreign direct investment law (i.e., the Consolidated FDI Circular) and competition law. However, the definition in other legislation are not verbatim from the Takeover Regulations and contain appropriate divergences to suit the purpose of the individual legislation. Oddly enough, the diffusion of the “control” definition from the Takeover Regulations to other legislation has come in the way of its alteration in the source legislation (i.e., the Takeover Regulations). In that sense, the debate is less about whether that definition is useful and appropriate, but that any reforms brought about to it with affect may other legislation (all of which presumably also need to be reconsidered) thereby leaving the regulatory regimes in considerable disarray. One can only draw from this episode the regulatory attitude to avoid reforming an unsatisfactory legislation because the problems arising therefrom have also infected other legislation, all of which need to be sanitized.

The “control” saga continues with no signs of abatement.