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Discussion Paper on “Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations”

News and Press Release - Dated:- 15-3-2016 - Objective 1. This discussion paper seeks comments of the public for certain proposals related to Brightline Tests for Acquisition of Control under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as the Takeover Regulations ). Background 2. The Takeover Regulations prescribe that an acquirer acquiring substantial shares or voting rights i.e., 25% or more, has to make an open offer to the public shar .....

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ctly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position. 4. From the definition of control as defined under the Takeover Regulations, 2011, it is observed that regulation 2(1)(e) defines control as inclusive of The right to appoint a ma .....

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ee which was constituted to review the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, recommended a broad definition of control and opined that it should be left to SEBI to decide whether there has been an acquisition of control on the basis of facts of each case. The Takeover Regulations Advisory Committee (TRAC), in its report dated July 19, 2010 also reiterated the above views of the Bhagwati Committee. Need for Bright Lines on Control 7. The term control which is d .....

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x and requires consideration of facts and circumstances of the case. Therefore, the nature of definition of control is based on certain defined principles rather than rule-based. It is only while applying these principles on a set of facts, that there is a rise of multitude of opinions and has led to litigations. 9. It has been represented by market participants to SEBI to provide a list of protective rights which would not amount to acquisition of control. However, other such participants were .....

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cy 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. 11. The Insurance Laws (Amendment) Act, 2015 defines control as: control shall include 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 shareho .....

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tive. The definition of 'control' under the Competition Act, 2002 is provided by way of an Explanation to section 5 of the said Act as under- Explanation - For the purposes of this section,- (a) control includes controlling the affairs or management by- (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise; 14. It is seen that the above definition of 'control' in .....

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ith regard to control by way of (a) right to appoint majority of the directors or (b) controlling 'the management or policy decisions', the definition under section 5 is only specific with regard to controlling the affairs and management‟. It is further noted that while under the Takeover Regulations controlling the management or policy decisions is relevant factor, under the Explanation to section 5 of the Competition Act controlling the affairs and management is relevant factor. .....

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nal. International Financial Reporting Standard (IFRS) also defines the principle of control and establishes control as the basis of determining which entities are consolidated in the consolidated financial statements. Under IFRS, the principle of control sets out the following three elements of control: (a) power over the investee; (b) exposure, or rights, to variable returns from involvement with the investee; and (c) the ability to use power over the investee to affect the amount of the inves .....

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l Scenario 18. Regarding the aspect of control, it is observed that in countries such as Australia, Germany, New Zealand, Russia, Hong Kong, Singapore, South Africa and UK, the change of control is considered to be the same as acquisition of voting rights above the specified thresholds irrespective of whether such holdings confer de facto control. 19. Further, in countries such as Japan, Malaysia, Switzerland and USA, control has not been defined for the purpose of takeovers. 20. Further, in cou .....

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not only through voting rights and appointment of board members, but also through the ability to exercise influence over the company s policies or its shareholder meetings, even if the entity holds voting rights below the specified thresholds. 22. From the above, it is seen that in most of the countries, control has been defined in terms of the specified voting rights irrespective of de facto control. Some of the countries have also included the ability to control the composition of board member .....

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n its judgment dated January 15, 2010, rejected SEBI's view stating that none of the clauses of the agreements, individually or collectively, demonstrated control in the hands of the acquirer. Hon ble SAT had observed that: …Control, according to the definition, is a proactive and not a reactive power. It is a power by which an acquirer can command the target company to do what he wants it to do. Control really means creating or controlling a situation by taking the initiative. Power .....

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for protecting its investment….Such fetters fall far short of the existence of control over the target company. It must be remembered that every fetter of any nature in the hands of any person over a listed company cannot result in control of that person over that company… 25. However, Hon'ble Supreme Court, in its judgment dated November 16, 2011, stated that keeping in view the above changed circumstances, it is in the interest of justice to dispose of the present appeal by .....

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have the power to exercise control over the day-to-day running of the business nor the policy making process. 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. 27. In terms of the aforesaid principles, an illustrative list of rights have been categorized below as protective in nature. These rights would be provided as a guidance to the market within the existing defini .....

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who does not have any voting or participation rights. c) Covenants specified by Lenders provided these rights are customary to the lending business and the lender has granted the loan strictly on commercial basis. Further, such lender should be in the business of lending such as banks, NBFCs, etc. d) Commercial Agreements - The rights conferred on parties to a Commercial Agreement would not amount to control provided that i) The mutual commercial benefit should flow from both the sides i.e. the .....

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ance issues would be considered as protective in nature and would not amount to exercise of control over the target company:- i) amendments to memorandum and articles of association of the target company which adversely impact the investor s rights; ii) any alteration to the capital structure of the company. These may include issue of capital or convertible securities, buyback, reduction of capital, merger, demerger, arrangement or compromise with its creditors or shareholders or effecting any s .....

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or providing any loans or issuing any guarantees or creating any security in excess of the thresholds permissible without special shareholder approval under the Companies Act, 2013. viii) winding up of the company or making a general assignment for the benefit of the creditors of the company and/or the subsidiaries or admitting in writing the inability of the company to repay its debts when they become due. ix) write-off of any of the receivables, loans and advances, investment or investments o .....

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ameters that will be material or outside the ordinary course of business for clauses 24(e)(i), 24(e)(iv), 24(e)(v), 24(e)(vi) and 24(e)(ix) which shall be disclosed to the shareholders. Grant of the protective rights mentioned under para 24 above, to an investor shall be subject to obtaining the public shareholder's approval (majority of minority) in this regard. Such rights shall also be incorporated in Articles of Association of the company after obtaining shareholders approval. c) In case .....

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appoint certain number of directors of a company. 30. In India, the Companies Act recognizes any holding in excess of 25% as the threshold at which special resolutions can be blocked. Further, the threshold for substantial acquisition under the Takeover Regulations is 25%. It would, thus, be appropriate that 25% may also be specified as the threshold level for trigger of control in Indian listed companies. 31. Further, with respect to the control being exercised through the right to appoint majo .....

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umber of listed companies in which at least half of the board members are independent and thereby, right to appoint majority of directors would not be applicable to such cases. Therefore, an entity having the right to appoint majority of non-independent directors may be considered to be in control of the company. 33. In view of the above, the definition of control under the Takeover Regulations may be amended such that control is defined as: (a) the right or entitlement to exercise at least 25% .....

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