In a far-reaching decision, the Securities and Exchange Board of India has ruled in an adjudication order that members of the board of directors of a listed company (“Target Company”) would be persons having control of the Target Company. Consequently, directors of the Target Company ought to make disclosures of their holdings under the disclosure requirements set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”).
Adjudication proceedings had been initiated against members of the board of directors of Matra Realty Limited, the Target Company, for failure to comply with disclosure requirements under Regulation 6(3) in 1997 and Regulation 8(2) of the Takeover Regulations. The noticees took a stance that the Target Company did not have promoters and it was a board-driven company. Moreover, the members of the board of directors did not have a controlling stake in the Target Company, and therefore, they were not in control over the Target Company. Therefore, it was argued that there was no obligation to disclose any promoter shareholding in terms of Regulation 6(3) and Regulation 8(2) of the Takeover Regulations.
Regulation 6(3) of the Takeover Regulations reads as under: -
“A promoter or any person having control over a company
shall within two months of notification of these Regulations disclose the number
and percentage of shares or voting rights held by him and by person(s) acting in
concert with him in that company, to the company.”
Regulation 8(2) of the Takeover Regulations reads as under: -
“A promoter or every person having control over a company shall, within 21(Emphasis Supplied)
days from the financial year ending March31, as well as the record date of the
company for the purposes of declaration of dividend, disclose the number and
percentage of shares or voting rights held by him and by persons acting in
concert with him, in that company to the company.”
It will be seen that two phrases are used in these provisions – “promoter” and “persons having control over a company”. The term “promoter” is itself defined in Regulation 2(1)(h) of the Takeover Regulations as a any person who is control over the company and any person named in a securities offer document or in a filing with stock exchanges as a “promoter” of the Target Company.
In the order, SEBI has ruled that since the Target Company was a board-managed company, the directors alone could have exercised control over the Target Company. Therefore, their own shareholding ought to have been disclosed since they were “persons having control over a company”.
SEBI took note of the definition of the term “control in Regulation 2(1)(c) of the Takeover Regulations, which is as under:-
“control” shall include the right to appoint majority of the directors
or to control the management or policy 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 matter.
SEBI has also cited the definition of “control” in the Black’s Law Dictionary, 8th Edition, which is as follows: -
“the direct or indirect power to direct the management and policies of a
person or entity, whether through ownership of voting securities, by contract,
or otherwise; the power or authority to manage, direct or oversee”.
The SEBI order notes that “any person who controls the management of a company either individually or collectively with other persons or controls or influences the policy decisions by virtue of his position, can be said to be in ‘control’ over the affairs of the company. In the present case, the Noticee was a part of the Board of Directors which controlled the affairs…..A director is one of the controllers of the company’s affairs. The Board of Directors is the brain and the company is the body. The company can and does act only through the Board. When the brain, i.e., the Board, functions, the company, i.e. the body, is said to function. Thus, the functioning of the company is totally controlled and directed by the Board.”
SEBI noted that the Target Company was a board-managed company, the board had only three directors at the relevant time, and these directors along with persons acting in concert indeed held shares at the relevant time. SEBI has ruled that being “persons having control over” the Target Company, the three directors ought to have made their disclosures under Regulation 6(3) and Regulation 8(2) of the Takeover Regulations. For failure to make such disclosure, monetary penalty has been imposed.
The decision has implications not only for board-managed companies that do not have promoters (for example, ICICI Ltd. and Larsen & Toubro), but also for every listed company in which directors have any shareholding. One is not sure if these companies even aggregate the shareholding of all directors and disclose their shareholding under Regulation 8(2) of the Takeover Regulations.
Now that SEBI has given this ruling, every listed company would have to report the shareholding of its directors under the head “persons having control” – quite distinct from the holding of the “promoters.