The meeting of SEBI’s board held today has resulted in some crucial decisions. An important one relates to SEBI’s new approach towards reconsidering the definition of “control” under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This is because an acquirer who acquires control without obtaining the minimum number of shares (i.e. 25% voting rights) could be required to make a mandatory general offer to acquire the shares of the other shareholders. The existing subjective definition has received substantial attention and criticism on the ground that it leaves parties with tremendous amount of uncertainty and the regulator with considerable discretion. Moreover, India is one of the few countries that has a subjective (qualitative) definition of control as most other jurisdictions have opted for a quantitative definition of control based on a prescribed percentage shareholding threshold, such as 25%, 30% or the like. In the past, SEBI had remained steadfast in its application of the subjective definition.
In today’s decision, SEBI has expressed its willingness to reconsider this issue and has decided to propose two possible approaches towards a bright-line test for control. One involves listing out protective rights (for example in shareholders’ agreements) that would not amount to control, so long as such rights have been approved by a majority of the public shareholders. This approach is somewhat similar to that adopted by the Securities Appellate Tribunal (SAT) in the Subhkam case. The other approach involves a transition to a numerical threshold of shareholding (voting rights) or the ability of the shareholder to appoint a majority of the non-independent directors of the company.
As I have argued in this paper, the current qualitative approach leaves much to be desired, and needs reconsideration by moving towards a more clear and certain approach. To that extent, the present proposal by SEBI is welcome, although substantially overdue. More details are expected in a discussion paper to be issued by SEBI, and we hope to discuss the specific proposal in detail thereafter.
In addition to the issue of control, SEBI has also approved proposals to deal with wilful defaulters, as declared in accordance with the relevant guidelines issued by the Reserve Bank of India (RBI). Under these proposals, a company whose promoter or director is a wilful defaulter will not be able to issue shares or acquire control over a company. Moreover, the criteria for determining a “fit and proper person” will incorporate aspects relating to wilful defaulters. With this, defaulters in the debt markets would be prevented from accessing the equity markets.
Finally, SEBI has also included greater transparency in financial statements by requiring disclosure of qualifications in those, along with a statement on the impact of such qualifications. This will be applicable for the financial year ending March 2016.