The Regulatory Schism: Defining "Control" Under SAST Regulations and Competition Law

[Taha is a student at Symbiosis Law School, Pune.]

The concept of “control” in Indian mergers, acquisitions, and corporate restructuring extends beyond board seats to major transactions, regulatory disputes, and investor strategy. This article examines how “control” is defined and interpreted under the Substantial Acquisition of Shares and Takeover Regulations 2011 (SAST Regulations / Takeover Code) and the Competition Act 2002. It traces judicial precedents and regulatory contrasts, highlighting the need for harmonization to bring clarity and consistency to India’s evolving corporate landscape.

The Takeover Regulations’ Complex Standard

Regulation 5 of SEBI’s SAST Regulations broadly defines control as the right to appoint a majority of directors or to influence management or policy decisions, directly or indirectly, through shareholding, agreements, or other means. This aims to safeguard minority shareholders by requiring any acquisition of control – not just shares – to be made through an open offer, thereby providing shareholders with a window of opportunity to sell. But the meaning of “control” under this regime has been far from static.

Judicial interpretation has reshaped the boundaries of control. In Rhodia SA v. SEBI, the Securities Appellate Tribunal (SAT) emphasized substance over form, looking beyond complex transaction structures to determine actual influence. Options, vetoes, or management approvals may constitute control, as they allow a party to decide how the firm will run. 

In Subhkam Ventures v. SEBI, SAT distinguished between positive control – the power to make management decisions – from negative control, which is the power to prevent certain events from occurring. Only positive control, where an investor can actively determine outcomes, qualifies as “control” under the SAST Regulations. Veto rights, which only protect minority shareholders’ interests, do not amount to control.

The Supreme Court affirmed the “positive control” test in Arcelormittal India Private Limited v. Satish Kumar Gupta and Others, ruling that having sufficient votes to block special resolutions does not constitute control under Section 29A(c) of the Insolvency and Bankruptcy Code 2016. The ruling, which reaffirms control as positive control, is also persuasive in securities law.

In the Vishvapradhan Commercial Private Limited and Others v. SEBI case, concerns arose that complex loans, options, and agreements could covertly transfer control. However, SAT held that such rights were negative, not positive. Unless such agreements give the acquirer actual, pragmatic authority over managerial choices, they do not amount to “control”.

Now, short of further guidance from the Supreme Court, the prevailing position under the SAST Regulations is that affirmative capability to influence management or policy decisions constitutes control, rather than rights established only to protect investors. Integrated transactions, such as those in Rhodia, remain amenable to examination. However, typical protective rights, like vetoes and information rights, are generally insufficient to bring an acquirer within open-offer obligations.

A Different Approach under Competition Act

The Competition Act 2002 is more interventionist and has a broader view. Section 5 of the Competition Act provides for control through less direct, but material, influence over the target, even without actual legal control. In these cases, even a small investor or partner can, in practice, play the role of a dictator in strategic decisions. 

Landmark cases, such as Etihad Airways PSJC and Jet Airways (India) Limited, have held that a significant, but not a majority, stake, accompanied by board representation and some veto power, can amount to control. Unlike securities law, in this case, formal rights are not the primary focus; instead, the emphasis is on material influence. 

The Competition (Criteria for Exemption of Combinations) Rules 2024 outline this general approach. Under Rule 2, to be exempt from notifying the Competition Commission of India (CCI) of the merger beforehand, minority investments must: (1) have no right or ability to occupy a board seat or to be an observer; (2) have no special access to sensitive information; and (3) avoid market overlap. Even appointing a non-voting observer, or granting information rights to minority shareholders can require CCI notification before proceeding with the acquisition.

The Goldman Sachs (GS) order followed this model: GS purchased only 3.8% equity through convertible debentures, but its right to company information and board minutes led the CCI to require notification and impose a penalty for non-compliance. 

The Issue of Dissenting Regimes

The distinction between SEBI’s and CCI’s treatment of control is becoming more pronounced. Regulatory rights that do not constitute actual decision-making under SEBI’s doctrine of positive control are typically not considered to be control under the SAST Regulations. However, under CCIs’ competition regime, such rights, even without accompanying, operational power, can trigger CCI scrutiny. 

Such a gap is not merely theoretical; it also figures in real transactions. In private equity and venture capital transactions, investors often dual-track their deal structures, seeking to stay within competition law safe harbour while simultaneously avoiding a finding of control under SEBI’s takeover regime. 

This balancing act is fraught with risk. A passive structure passive for competition law may strip investors of customary governance protections, such as veto rights, board access, or information rights, thereby weakening oversight and increasing commercial exposure. 

Conversely, retaining such protections for operational visibility may trigger competition scrutiny, as seen in cases such as Goldman Sachs, resulting in delayed approvals, penalties for gun-jumping, or even a renegotiation of the deal. Regulatory arbitrage (structuring transactions to exploit perceived gaps between the two regimes) can be equally perilous. A deal compliant under the SAST Regulations, relying on the doctrine of “positive control”, may still be re-characterised by the CCI as conferring material influence, exposing parties to ex post enforcement and financial sanctions. In cross-border or time-sensitive transactions, these uncertainties can escalate costs, derail deal timelines, and erode the very efficiencies that sophisticated structuring seeks to achieve.

The Missed Opportunity for Harmonisation

SEBI’s 2016 consultation paper attempted to resolve this issue. It suggested either a precise bright-line standard (such as 25% voting rights or a board majority) or safe harbours for routine investor rights. The paper explicitly labelled board observer appointments as negative control, not as “control.” Most developed economies follow fixed thresholds or pair principle-based rules with detailed, stable guidance. Countries such as Australia, Germany, Singapore, Hong Kong, the UK, and Russia do not consider de facto control as a defining criterion. For instance, under Rule 9.1 of the UK Takeover Code, open offer obligations are triggered only when the acquirer acquires a stake of 30% or more in the target company. 

Further, under English law,  the Enterprise Act 2002, which governs competition reviews, operates alongside this framework. The Takeover Code expressly permits bids only after obtaining regulatory clearances, allowing the takeover and merger control process to proceed in parallel with a high degree of predictability. Moreover, dealmakers need not worry about open offer concerns as long as the acquired stake is below 30%, and they are then solely required to assess competition concerns. 

Similarly, the Singapore Code on Takeovers and Mergers governs takeovers in Singapore, and under Rule 14.1, an open offer is triggered only after the 30% acquisition threshold is breached. Merger control is governed by the Competition Act 2004 and enforced by the Competition and Consumer Commission of Singapore. Just like the UK, Singaporean law allows a general offer to be subject to competition approval only (See Appendix 3).

However, in India, the 2016 harmonisation effort failed due to fragmented responses from stakeholders within Indian regulators. The outcome is the continued existence of an arbitrary, occasionally unpredictable climate. Furthermore, the Competition (Criteria for Exemption of Combinations) Rules 2024 now include rights that SEBI's framework excludes, such as affirmative rights not part of the ordinary course of business, including information rights and board observer appointments. The same provisions, specifically board observer rights, may be harmless under securities law but essential under competition law, thereby reinforcing strategic ambiguity. It is also unclear whether information rights that constitute “control” under the new combination regulations would have the same effect under the Takeover Code. 

Charting a Future Path

In line with India’s ambitions to be a global destination for cross-border capital, there should be legal assurance regarding control issues. The prevailing trend in developed markets is clear: bright-line tests, encouraged by guidance that provides safe harbours for customary investment shields and separates material and structural influences. 

SEBI must revert to establishing a framework in which control is exercised only through transparent, quantitative measures, and a prescribed set of minority entitlements, including board observership and regular access to information. The CCI can provide final guidance on the quality and quantity of information and engagement sufficient to exempt, allowing minority investors to use a single compliance manual.

Until then, investors and dealmakers must check for both regimes' requirements. They must restrain themselves to each regime’s safe harbour, employ ring-fencing protocols for information flows, record the intent and impact of minority rights, and structure for flexibility where necessary.

Conclusion

Ultimately, India's dual standards for “control” stem from two distinct policy objectives: minority protection and market dominance. However, their failure to accommodate one another now impedes the smooth operation of both. As emblematic cases such as the NDTV case and the Goldman Sachs order illustrate, the imperative for harmonised, transparent, and commercially sensible definitions is greater than ever before. Only then can India's regulatory framework support its fast-expanding capital markets and the interests of companies, investors, and the economy as a whole.