Somasekhar Sundareshan, J. Sagar & Associates' Mumbai Partner, argued for private equity firm Subhkam Ventures before the Securities Appellate Tribunal (SAT) to define the word, 'control'.

According to Regulation 10 of the Securities and Exchange Board of India (SEBI) Takeover Regulations, whenever an acquirer exceeds the threshold level of 15 percent in the company, they are mandated to make an open offer to acquire a further 20 percent from the public shareholders.

Subhkam Ventures, a Private Equity (PE) Fund had increased its stake in MSK Projects, an infrastructure company, from 8.8 percent to 24.6 percent. Since Subhkam's stake increased above 15 percent, it was mandated to make an open offer, in accordance with the regulations. The primary objective of the regulation is to inform the existing shareholders of the fact that the company has a new substantial shareholder and if the other shareholders wished to exit the company, they could sell out in the open offer that follows.

SEBI was of the view that the PE investor's shareholding had crossed more than the shareholding of the existing promoters, the rights amounted to 'control', and consequently the PE Fund ought to be considered as a promoter in the infrastructure company and hence make an open offer under Regulation 12 as well. Therefore the SEBI's directive was challenged by the PE Fund which was represented by J. Sagar with SAT specialist Somasekhar Sundareshan taking the lead along with Associate, Ravichandra Hegde. SEBI's long time standing counsel in the SAT, Kumar Desai assisted by Daya Gupta appeared for them.

The SAT, in its order held that 'control' under the Takeover Regulations is a positive power and not a negative power. "Power by which an Acquirer can only prevent a company from doing what the latter wants to do is by itself not control," held the Bench comprising Justice N.K. Sodhi and Samar Ray. Consequently, the Shubkam Venture's rights in MSK Projects were considered to be of an affirmative nature, not amounting to 'control'.

"Although making an open offer as a promoter has no significant financial implication, it has several other effects a PE Fund may not be ready for," explains Ravichandra Hegde. "A promoter has to lock-in his equity for 3 years, and also has to divulge shareholding and investments in other companies, which the PE Funds may not want to. This judgment therefore provides clarity for the PE investors investing in companies and who have to make an open offer to increase their stake in the Company".

Somashekar Sundareshan, told Bar & Bench, "Although the regulations were clear about this issue, what this judgment brings about is that merely if somebody has influence on governance, it doesn't mean he has control over the affairs of the company. This judgment will act as a precedent for what is not control," he said.

Manu Punnoose, Managing Director, Subhkam Ventures speaking to financial daily, Mint, had said "Any investor would like to stick to its core competence which is picking the right company and staying invested in it with the objective of getting maximum capital gain. Our core competence is not running businesses".

A copy of the judgment is available here.