India: Interpretation Of ‘Control': An Uncontrolled Increase In Ambiguity?

  • SEBI issues self-contradictory order in relation to 'control' under the takeover regulations
  • Obiter dictum suggests that obtaining affirmative rights are not to be viewed as acquisition of 'control'
  • Whole-time member shies away from directly deciding on aspect of 'control' on grounds of irrelevance, while simultaneously indirectly ratifying that there was an acquisition of 'control'.

The interpretation of 'control' under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Code 2011") and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Code 1997") has thus far stood on watery ground; in particular, 'affirmative voting rights' and 'control' have shared a tempestuous relationship, with no clear stance having been taken by the apex court till date, even though debates have done the rounds among various stakeholders for over two decades. Though the determination came up before the Supreme Court in Subhkam Ventures1, the Supreme Court did not conclusively decide the interpretation of 'control', due to subsequent developments in the matter. Consequently, the question of whether having affirmative rights in a company amounts to an acquisition of 'control' in the company or not remained open.

With speculation abound in the investor community, the Securities and Exchange Board of India ("SEBI"), in 2015, issued a discussion paper on the 'Brightline Tests for Acquisition of 'Control' under the SEBI Takeover Regulations' for public comments; however, the same is still pending finalization.

On March 31, 2017, 'control' received a fresh chance, having come up before the Whole Time Member ("WTM") of SEBI for adjudication, in the matter of Kamat Hotels (India) Limited2. In this matter, the WTM had to decide, inter alia, whether there had been an acquisition of control by the Noticees (defined below) by the signing of an agreement under which they obtained certain rights (as described below), which would mandate the making of an open offer under the Takeover Code 1997.The WTM ruled that the determination of 'control' due to the presence of affirmative voting rights, in light of the facts of the case, was irrelevant. However, there are certain parts of the order of the WTM which are contradictory leading to an unclear conclusion.

Background and Facts

In 2007, Clearwater Capital Partners (Cyprus) Limited, along with Clearwater Capital Partners Singapore Fund III Private Limited (together the "Noticees") subscribed to foreign currency convertible bonds ("FCCB") issued by Kamat Hotels (India) Limited ("KHIL"), and subsequently entered into an agreement with certain shareholders of KHIL in 2010 ("Agreement"). In 2012, the Noticees were obligated to make a mandatory open offer under the Takeover Code 2011, pursuant to the conversion of the FCCBs into equity shares resulting in the acquisition of voting rights in KHIL in excess of the limits set out in Regulation 3(1) of the Takeover Code 20113. Upon filing the draft letter of offer with SEBI, the latter observed, vide letter dated November 30, 2012 ("Observations") that the Noticees should have, in fact, made an open offer under Regulation 12 of the Takeover Code 19974, even prior to the conversion, due to rights obtained by them under the Agreement which were in the nature of 'control'. These rights included the right to nominate a director on the board of KHIL, restrictions on KHIL and its promoters from acting against the interest of the Noticees, and affirmative voting rights granted to the Noticees. Since this open offer had not been made in 2010, SEBI observed that the Takeover Code 1997 had been violated. The Observations consequently required the Noticees to do the following: (i) recalculate and revise the offer price to factor in for the price calculated on account of triggering the open offer requirement by entering into the Agreement in 2010, which included the 10% interest per annum for the delay in making the open offer (the delay period began from 2010 till 2012) ("2010 Price"); (ii) make the open offer pursuant to Regulation 12 of the Takeover Code 19975 since the rights acquired by the Noticees were in the nature of 'control'; and (iii) disclose that SEBI may initiate appropriate penal action against the Noticees for the alleged violations mentioned in (i) and (ii) herein above in terms of the provisions of the Takeover Code 1997 and the SEBI Act, 1992. The Noticees consequently amended the letter of offer and included for the revised calculation of the offer price. The Noticees however did not follow SEBI's Observations that the open offer was to be made pursuant to Regulation 12 of the Takeover Code 1997 as they intended to appeal against the same before the Securities Appellate Tribunal ("SAT").

This non-compliance with the directions of the Observations prompted SEBI to issue a show-cause notice to them. The order of the WTM was passed after hearing the Noticees pursuant to the above show-cause notice. In their averments before the WTM, the Noticees expressed their apprehension in being classified as 'promoters' should they accept, in the final letter of offer, that they acquired 'control' in KHIL as per the terms of the Agreement. Being classified as promoters would subject them to various onerous promoter-related obligations, and adversely impact their operations as financial investors.

Issues discussed before the WTM

The WTM was required to determine three questions in this case:

  • Whether the Noticees failed to disclose that the open offer was to be made pursuant to Regulation 12 of the Takeover Code 1997?

    As discussed above, the Noticees failed to make the open offer under Regulation 12 of the Takeover Code 1997, and made the offer only under Regulation 3(1) of the Takeover Code 2011. However, the Noticees clearly set out details of the Observations in the final letter of offer, specifically stating that (i) SEBI had required the offer to be made under the Takeover Code 1997, (ii) that SEBI may initiate penal action against the Noticees for alleged violations of the Takeover Code 1997, and (iii) that they intended to appeal against the Observations. Consequently, the WTM observed that the Noticees had made adequate disclosures about the Observations in their letter of offer which enabled the shareholders to make an informed decision, and hence decided the first question in the negative.

  • Whether the Noticees acquired 'control' in KHIL under the Agreement?

    While examining the second question, the WTM, with regard to the rights available to the Noticees under the Agreement (mentioned above), made an obiter dictum in its order: "It is apparent that the scope of the covenants in general is to enable the Noticees 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".

    However, the WTM observed that the Agreement got extinguished in July 31, 2014, and the clauses that purportedly conferred 'control' on the Noticees under the Agreement were no longer binding on the promoters of KHIL; consequently the WTM decided that the determination of 'control' was no longer relevant.

    Although the obiter dictum seems to suggest that the WTM is of the view that affirmative voting rights and customary investor protection rights should not amount to acquisition of 'control' in a company, the conclusion drawn by the WTM that the determination of control was no longer relevant leaves the reader a little confused on the actual intent and purpose of the obiter dictum. The matter in question was whether at the time that these rights were in force, the Noticees acquired control. Therefore one could argue that since the matter related back to a time in 2010, whether or not the Agreement was in force in 2014 was not relevant to the matter.

  • Whether the offer price would be different if it was calculated taking into consideration the 2010 Price along with 10% interest per annum since 2010?

    The above decision by the WTM on control is also in conflict with his determination of the third question in the negative; the WTM observes that the price of the open offer has correctly been arrived at after considering the 2010 Price which includes the 10% interest per annum calculated since entering into the Agreement in 2010. In other words, the same has been calculated as if there had been an acquisition of 'control' under the Agreement, leading to a non-compliance of the Takeover Code 1997 and consequent penalty being levied since 2010. While this may have been a result of the Noticees erring on the side of caution and complying with the Observations, the WTM's acknowledgement of the correctness of such calculation implies that there had, in fact, been an acquisition of 'control' under the Agreement in 2010, which necessitated that the 2010 Price including the interest of 10% to be factored in.

Although the WTM issued an order favourable to the Noticees in the present case, the matter of what really constitutes control continues to be ambiguous. Perhaps the decision read along with the WTM's obiter dictum as a whole suggests that the authorities are in fact warming up to the fact that 'negative control' and protective rights in the Indian context is not control as envisaged under the Takeover Code. If only the WTM had taken a different stand on the computation of the 2010 Price, there would have been a meaningful conclusion to this confusion. In light of this mayhem, one's only ray of hope may be the finalization by SEBI of the Brightline Tests for Acquisition of 'Control' to attain some sense of clarity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Amudavalli Kannan
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions