As per the market regulator Securities and Exchange Board of India’s (SEBI) order dated March 31, 2017, in the Kamat Hotels (India) Limited (Kamat Hotels) case, Clearwater Capital (Clearwater) had subscribed to the foreign currency convertible bonds (FCCBs) of Kamat Hotels. Pursuant to a change in the applicable regulation relating to the conversion price for FCCBs, Kamat Hotels passed necessary resolutions approving the revision in price for conversion of FCCBs. Clearwater entered into an inter-se agreement (Agreement) with Kamat Hotels and its promoters on August 13, 2010. The Agreement expired on July 31, 2014. The Agreement had certain affirmative voting rights as are typical for the private equity (PE) investors to have for protection of their interests. Clearwater decided to convert the FCCBs into equity shares on January 11, 2012. The conversion resulted in increase in the shareholding of Clearwater from 24.50% to 32.23% requiring Clearwater to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).

The open offer was made only under Regulation 3(1) which relates to acquisition of equity shares/voting rights and not under Regulation 4 (relating to acquisition of control). SEBI issued an observation letter on the draft letter of the offer filed for the open offer. SEBI’s letter stated that Clearwater acquired control under the Agreement in the year 2010 itself as certain affirmative voting rights/ protective covenants gave control to Clearwater and therefore, the open offer should have been made under Regulation 12 (relating to acquisition of control) of the 1997 Takeover Regulations. The protective covenants mandated approval of Clearwater before altering the share capital of Kamat Hotels, creating new subsidiaries, entering joint ventures, disposing or acquiring any material assets, lending or borrowing money beyond certain limits, winding up, etc.

Issue of Acquisition of Control

While dealing with the issue of ‘acquisition of control’ as a result of these protective covenants, the Whole Time Member (WTM) of SEBI observed that it is apparent that the scope of covenants in general is to enable Clearwater to exercise certain checks and controls on the existing management for the purpose of protecting their interest as investors rather than formulating policies to run the Target Company. WTM also said that since the Agreement extinguished on July 31, 2014, the clauses in the agreement that allegedly give control have ceased to be binding and are hence not relevant for consideration at present. WTM’s order also clarifies that the question of ‘control’ in this case is not material at this point of time.

This, to a certain extent, shows a positive shift in the thinking of the WTM of SEBI as compared to the blatantly negative stand taken by SEBI in a previous order in the Subhkam Ventures case relating to existence of affirmative voting rights and is good news for the financial investor community.[i] However, the order is not a determination of the issue of control from a strict legal perspective. Even if this order had a detailed determination of this issue, most people would have taken a view that since it is not an order of the Supreme Court of India, one must be conservative in approach and refrain from taking a view that suggests that affirmative voting rights do not amount to acquisition of control from SEBI’s prespective. To date there is no prescribed safe list of affirmative vote items that a pure financial investor can have and some financial investors are known to take a risk call on the list of affirmative vote items that they have in their shareholder agreements.

One must also keep in mind that although the observation of the WTM in the Kamat Hotels case shows a positive shift in thinking for now, a change in the WTM of SEBI may lead to a change in thinking because orders on interpretation of this issue will be specific to the thinking of the person writing the order and any unfavourable order or observation in future will again open up a can of worms.

Better Way Forward

PE investors have been waiting to see if the Discussion Paper on Control issued in March 2016 by SEBI (Discussion Paper) results in a meaningful amendment to the Takeover Regulations so that it closes the issue once and for all (indeed dependent on the actual text of the amendment). Given the observation in the Kamat Hotel’s case, if SEBI is now really in favour of affirmative voting rights and is clear that such rights do not amount to “control of a listed company” by a pure financial investor, then it is time that SEBI’s Discussion Paper is moved forward and SEBI Takeover Regulations are amended to state in unambiguous terms that affirmative voting rights of pure financial investors are not considered as acquisition of control of a listed company.

If the amendment leaves open any room for adverse interpretation, the effort of introducing the change would be a futile one. This will take away the anxiety relating to the triggering of an open offer and being categorised as a promoter of listed companies under applicable regulations, and make life easy for pure financial investors who have these rights merely to protect the funds that they have put in.

Therefore, the better outcome from SEBI that the PE investor community would like to see is an amendment to SEBI Takeover Regulations keeping in mind the practical way pure financial investors function. This would be better than waiting for favourable orders from SEBI and then praying that such an order is either not changed by another WTM or overturned by the Supreme Court.


[i] Although SEBI”s order in the Subhkam Ventures case was overturned by Securities Appellate Tribunal (SAT) on January 15, 2010 in Subhkam Ventures (I) Private Limited v. SEBI, this order of SAT is still not law as the matter went of appeal to the Supreme Court of India but was disposed off keeping the issue of law open. This is because essentially the key dispute was settled out of court.