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As per SAST Regulations- Acquisition of Control
Transcript of As per SAST Regulations- Acquisition of Control
If an Indian company is concluded to be “foreign owned” or “foreign controlled” for the purposes of the FDI Policy, any downstream investment by that Indian company in another Indian company is required to be in compliance with the relevant sectoral conditions on entry route, conditions and caps with regard to the sectors in which the latter Indian company is operating
TREATMENT OF EXISTING INVESTMENTS
The amended definition of “control” will apply prospectively. This effectively means that, while the existing foreign investments in Indian companies with sectoral caps and having downstream investments in other Indian companies, which are engaged in restricted / prohibited sectors, will be “grandfathered”, any further rounds of investment by the foreign investor into such Indian company or any new downstream investments by such Indian company, is likely to require a fresh examination of the rights of the foreign investor in such Indian company in order to determine if the same is in compliance with the FDI Policy by virtue of the new definition of “control”.
IMPLICATIONS IN FDI
CONTROL- THE UNRULY HORSE
In terms of Category (1) of Schedule I, read with Regulation 4 of the Combinations Regulations, ‘any acquisition of shares or voting rights by the acquirer, directly or indirectly or in accordance with the execution of any document including a shareholder’s agreement or articles of association made
solely as an investment or in the ordinary course of business
not allowing the acquirer to hold twenty five percent or more of the total shares or voting rights of the acquired enterprise, which also do not led to the acquisition of control’, notice under Section 6(2) of the Act, need not mandatorily be given.
The term ‘investment’ has not been defined under the Competition Act, 2002, however, under the US Antitrust Law, the Hard-Scott-Rodino Antitrust Improvements Act, 1976 provides that an investment made ‘solely for an investment purpose’ is when the acquirer has
no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer.
Necessary corollary of indifference towards intention in matters of computation of shareholding.
Shriram Transport Finance Co. Lmt.
Scrupulous care to remove earmarks of intention to exert control.
CAN MERE INTENTION NOT TO EXERCISE CONTROL, OBVIATE THE REQUIREMENT OF MAKING AN OPEN OFFER
Sandip Save v. Chairman of SEBI
- IDBI did not have the intention to acquire control but merely ensure that the loan was not diverted for purposes other than what it was intended to be for.
IN 2013 the FDI definition was aligned to the SAST Defintion:
control” includes 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 manner.
NOW SUBJECT TO SUBJECTIVITY
A company is considered as “Controlled” by resident Indian citizens, if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company
FDI WAS SUBJECT TO OBJECTIVITY
THE CONCEPT OF CONTROL ARISES IN:
AN APPRAISAL OF THE IMPLICATIONS OF THE DEFINITION FOR ACQUISITIONS, FDI, AND COMPETITION
CONTROL-A FUNCTION OF OWNERSHIP
Control, if confined to ‘positive control’ means, by implication necessitate that it is being as a ‘function of ownership’
Is the pre-requisite of acquisition of control - someone dispensing with control?
The Regulation reads, that an open offer shall be required when there is
‘acquisition of control
acquisition of control to the exclusion of others’.
- Many can hold control at the same time
Modern Corporate and Private Property – Adolf Berle and Gardiner Means.
NOT A FUNCTION OF OWNERSHIP
DOES THE FACT THAT A RIGHT IS NEGATIVE, NEGATE ITS CHARACTERIZATION AS A CONTROL RIGHT?
ARGUMENTS AGAINST THE SUBHKAM PRINCIPLE
SUBHKAM VENTURES- SEBI; SAT; SC
SAT rules in favour of the investor community clarifying that they may rely on these ubiquitous instruments in contractual documentation without it qualifying as control
The order of the Honourable Supreme Court disturbed this equilibrium:
Keeping in view the above changed circumstances, it is in the interest of justice to dispose of the present appeal by keeping the question of law open and it is also clarified that the impugned order passed by the SAT will not be treated as a precedent"
KAMAT HOTELS- CLEAR WATER CAPITAL DEAL- SEBI
JET AIRWAYS (INDIA) LIMITED-ETIHAD AIRWAYS PJSC INR 2,058 crore DEAL- FIPB; CCI
MULTI SCREEN MEDIA PRIVATE LIMITED- CCI
CENTURY TOKYO LEASING CORPORATION OVER THE LEASING DIVISION OF TATA CAPITAL FINANCIAL SERVICES LIMITED- CCI
1st SCHOOL OF THOUGHT–
Implied authorization stemming from awareness of necessary occurrence
2nd SCHOOL OF THOUGHT –
Can the same rule not be applied to PE’s and VC’s?
ARE FINANCIAL INSTITUTIONS TO BE TREATED AS DIFFERENTLY FROM PE, VC FUNDS?
THE APPLICATION OF THE DEFINTION IN VARIOUS LAWS AND THE IMPLICATIONS THEREOF
‘INTENTION’ AS A DETERMINANT
90% OWNERSHIP + RIGHT TO APPOINT MAJORITY DIRECTORS
10% OWNERSHIP + MINORITY PROTECTION RIGHTS
ENTIRE SHAREHOLDING SHALL NOW BE TREATED AS INDIRECT FOREIGN INVESTMENT
INDIAN OWNED AND INDIAN BOARD CONTROLLED BUT POTENTIALITY FOR CONTROL
Whether the share subscription-cum-shareholders' agreement between Subhkam Holdings (that was taken over by Subhkam Ventures) and MSK Projects amounted to acquisition of control, by virtue of the 22 reverse veto rights granted therein.
"Control, according to the definition, is a proactive and not a reactive power. It is a power by which an acquirer can command the target company to do what he wants it to do. Control really means creating or controlling a situation by taking the initiative. Power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. In that event, the acquirer is only reacting rather than taking the initiative. It is a positive power and not a negative power.........The test really is whether the acquirer is in the driving seat. To extend the metaphor further, the question would be whether he controls the steering, accelerator, the gears and the brakes. If the answer to these questions is in the affirmative, then alone would he be in control of the company. In other words, the question to be asked in each case would be whether the acquirer is the driving force behind the company and whether he is the one providing motion to the organization. If yes, he is in control but not otherwise. In short control means effective control"
OPEN OFFER THRESHOLDS:
Control is defined as
"an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights..of a company, irrespective of whether such interest or interests give defacto control."
follows the same definition.
, the definition is, "
Unless the context otherwise requires, control shall be deemed to mean a holding, aggregate holdings, of 30% or more of the voting rights of a company, irrespective of whether the holding or holdings give de facto control."
South Africa, Spain
and other EU members,
, also rely on numeric measures
In the United States, the meaning of control is less linked to the acquisition of a certain amount of voting rights and is more subjective.
However both the FASB and the ETIF cite the following matters as illustrative of matters over which a veto would only be protective and would not amount to a participating right.
1. Amendments to articles of incorporation of the investee company
2. Pricing on related party transactions
3. Voluntary liquidation of the investee company or a decision to cause the investee to enter bankruptcy or other receivership
4. Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary course of business
5. Issuance or repurchase of equity interest.
CCI's approach however resonates global best practices.
M/s SUBHKAM VENTURES (I) Pvt Lmt v. SEBI
"the appellant is a financial investor in the target company and only wants to protect its investment through the various clauses in the agreement and has no intention to take over its control
"the appellant has made heavy investments in the target company and is interested in ensuring that the objects for which the company has been set up are not deviated from without its knowledge or consent
An investment by an enterprise which leads to the acquisition of ‘control’ over another enterprise may require notification to CCI (within 30 days) under Section 6 of the Act, provided the transaction meets the asset size or turnover value thresholds prescribed under Section 5 of the Act.
Moreover, if an enterprise is said to ‘control’ of another, the two will qualify as ‘group’ companies under the Act, exposing them to a different set of asset and turnover thresholds.
Explanation (a) to Section 5 of the Act defines the term ‘control’ to include, ‘controlling the affairs or management by (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise’.
Under Competition Law any acquisition, solely for investment purposes shall not require such complainces.
Therefore, the question which arises is:
when might the rights secured by an investor cease to be mere investment protection rights and become so extensive that CCI treats them as leading to ‘control’ over another enterprise?
IMPLICATION IN COMPETITION LAW
THE DICHOTOMY OF POSITIVE-NEGATIVE