Expansion of ‘control’ poses challenges: Mukesh Butani ON M&A

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Source: Business Standard
December 30, 2013

2013 saw an alignment of the term ‘control’ under foreign direct investigation (FDI) and Securities and Exchange Board of India (Sebi) regulations. From an FDI standpoint, the regulator was forced to expand its 2009 definition to pave way for the Jet-Etihad deal. What lay at the core of the deal were clauses in the agreement giving Etihad certain affirmative powers of management.

The Foreign Investment Promotion Board, extending the definition of ‘power to appoint majority directors’ to include ‘power to control the management, voting, or policy decisions’, took a strict view before granting approval. This was logically followed by the Cabinet Committee’s decision to align the ‘control’ definition. The change, prima facie, seemed to augur well but poses challenges.

One, FDI regulations have sectoral caps in select sectors. Further, rules embrace definition of ‘foreign owned or controlled Indian companies’ which are not reckoned for threshold purposes.

With expansion of ‘control’, will mere veto power or affirmative rights in favour of the foreign investor lead to JV’s as foreign-controlled? This poses difficulty if structures were put in place prior to alignment. Two, t0he debate if affirmative rights include negative control is open. The Sebi appellate tribunal judgment of 2010 in Subhkam’s case ruling that negative rights are not covered came as a relief to private equity players. This was subsequently settled by Sebi on the basis that the decision (of the SC) has no precedence value. Investors will have to be prepared for a coordinated approach by the regulators. Sebi is likely to set precedence as Indian jurisprudence in this area shall evolve over time. In the meantime, parties to the agreement shall have to watch for the clauses.

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