The challenge in interpreting ‘control’ under the SEBI takeover regime is hardly a new one. The current definition of ‘control’ under the Takeover Regulations, 2011, similar to the one under the Takeover Code, 1997, consists of two parts. Firstly, the right to appoint a majority of the directors on the board of a company, which is fairly straightforward to determine; and secondly, the right to control the management and policy decisions of a company, which is where things tend to become slightly murky specially in the context of a minority shareholder exercising veto or affirmative vote rights.
While there were other cases over the years which dealt with the construct of control, the definitive ruling on this aspect was considered to be the SAT ruling in Subhkam Ventures (I) Private Limited v. SEBI(Subhkam Case). However, things became muddled again when it went into appeal and the Supreme Court neither upheld, nor rejected the interpretation in Subhkam Case but ordered that it was not to be considered as a precedent.
Now, with the recent SAT ruling in the NDTV Case, the precedent value of Subhkam Case for the purposes of takeover regime seems to have been revived.
In the Subhkam Case, an extensive list of veto rights were granted to the appellant in relation to inter alia, (a) amendment of the charter documents; (b) alteration of share capital; (c) approval of the annual business plan and any deviation, revisions therefrom; (c) sale/ disposal of assets outside the ordinary course of business in excess of specified threshold; (d) incurrence of indebtedness and capital expenditure over specified limits; (d) appointment of key officials, their remuneration and powers; and (e) incorporation of subsidiaries, the acquisition of interests in any company or business or to acquire or sell shares, debentures, bonds or other securities/instruments in any company.
While allowing the appeal, SAT held that the term ‘control’ under the takeover regime was intended to include only proactive control and not reactive powers or negative control. The Tribunal found that the affirmative voting rights granted to the acquirer/ appellant were only meant to protect the interest of the acquirer and the investment made by it. Further as per the Tribunal, these rights ensured good corporate governance and protected the interests of the shareholders from the whims and fancies of the promoters.
The Subhkam Case was considered to be a landmark judgment since it expressly held that ‘control’ under the takeover regime must be interpreted as only proactive or positive control and not negative control. However, when this went into appeal before the Supreme Court and before the Supreme Court could make a final determination, the appellant had divested its investment. While disposing the appeal, the Supreme Court stated that the order passed by SAT in the Subhkam Case was not to be treated as a precedent.
Signs of Revival
The interpretation of control as positive control construct as decided in Subhkam Case, received a revival of sorts in ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors. (ArcelorMittal) The Supreme Court was inter alia interpreting the term ‘control’ under Section 29A(c) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and referred to the definition of ‘control’ as provided under inter alia the Takeover Regulations, 2011. The Supreme Court interpreted ‘control’ under Section 29A(c) of the IBC to denote only positive control, meaning that a mere power to block special resolutions of a company cannot amount to control. The Supreme Court referred to the Subhkam Case favourably and held that the observations of SAT in the Subhkam Case, can be applied to interpret ‘control’ under Section 29A(c) of the IBC.
Although in ArcelorMittal, the Supreme Court did not directly rule on the interpretation of ‘control’ for the purposes of the takeover regime, its reliance on SAT’s reasoning in the Subhkam Case. did pave the way for Subhkam’s positive control construct to make a come back.
While this may not be the complete NDTV and VCPL story, for the current purposes, it is sufficient to know that SEBI looked at a loan agreement with warrants as security and a call option agreement and found that VCPL had acquired control of NDTV and inter alia directed VCPL to make an open offer to the public shareholders of NDTV. In appeal, SAT found that a combined reading of the aforesaid agreements does not in any way lead to a conclusion of VCPL acquiring control over NDTV.
More importantly, in the process, the Tribunal also reaffirmed and revived the precedent value of Subhkam Case. SAT noted that in ArcelorMittal, the Supreme Court has approved the interpretation of ‘control’ under the Subhkam Case and has concluded that the expression ‘control’ means effective control. SAT brushed aside the objection that Subhkam Case cannot be considered as a precedent stating that since it has been approved by the Supreme Court in ArcelorMittal, it can be considered as a precedent for subsequent cases.
The SAT noted that the affirmative/ veto rights of VCPL are meant to ensure standards of good governance are not in the nature of day-to-day operational control or management or policy decisions. Since VCPL only has negative control and does not have the right to have any particular course of action to be adopted, VCPL cannot be construed to be in control of NDTV.
The rights that were noted favourably by the Tribunal as not amounting to control included, affirmative consents for amendments to charter documents, issuance of securities, buyback of securities, reduction or alteration of share capital, encumbrance on shares, raising loans and establishing subsidiaries.
Another Sequel in the Making?
SAT ruling in NDTV Case is certainly a welcome one since it provides further support to the view that negative control does not amount to control for the purposes of Takeover Regulations. This judgment should lay to rest, some of the usual caveats that have accompanied financial investors seeking affirmative/ veto rights in listed companies. However, given the past record, SEBI taking this to the Supreme Court cannot be ruled out and there may yet be another twist in the tale.
 Subhkam Ventures (I) Private Limited v. SEBI, Appeal No. 8 of 2009
 Securities and Exchange Board of India v. Subhkam Ventures (I) Private Limited, Civil Appeal No. 3371 of 2010.
 AIR 2018 SC 5646. Also see, Re: Kamat Hotels (India) Limited, WTM/GM/EFD/DRAIII/20/MAR/2017
In view of the Supreme Court keeping the question of law open while disposing the appeal against SAT order in Subhkam Case.