Regulatory view of ‘control’ puts investors in catch-22

Historically, “control” in corporate parlance has been understood as positive control. As per a 2009 press note from the Department of Industrial Policy and Promotion, control means the power to appoint a majority of directors. However, codification of the term control in subsequent legislation has expanded its scope beyond majority ownership of shares and majority representation on the board. Accordingly, control now includes within its ambit the ability of a person to influence the company’s policy decisions, such as by virtue of management rights or shareholders’ agreements.

As control was given a new flavour, it was only a matter of time for the judiciary (and quasi-judicial bodies) to respond to the accruing of certain rights to investors out of various definitive agreements entered into among the company, promoters and investors.

An order by the Securities and Exchange Board of India (SEBI) in 2010, in the matter of Subhkam Ventures, sent shock waves among investors. The order stated that certain minority protection rights, including the right to nominate directors on the board, and affirmative voting rights constituted “control” for the purposes of the takeover regulations.