The issue as to what would be construed as ‘Control’ in relation to Securities and Exchange Board Of India (Disclosure and Investor Protection) Guidelines, 2000 (‘DIP Guidelines’), where term ‘Control’ is not defined under the DIP Guidelines, propped up for consideration in the matter of DLF Ltd. v. SEBI.

In the absence of a specific definition of the term ‘Control’, the SEBI at the lower level while deciding on the issue as to whether DLF is in control of its subsidiaries which it has earlier divested, relied on the definitions of the term ‘Control’ under various legislations, primarily those under the Companies Act, 1956 (Companies Act), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SAST Regulations), and the Accounting Standards as issued by the Institute of Chartered Accountants of India.

The SAT as regards the definition of ‘Control’ under the SAST Regulations, observed:

These SAST Regulations are commonly called the 'Takeover Code' and mainly deal with the takeover of one company by another and the merger as well as de-merger of companies. The present matter is, undoubtedly, not a case of take-over or merger and hence the reliance placed by the “2nd WTM (Whole Time Member)” on the definition of control, occurring in the Takeover Code, 1997, appears to us to be misplaced.

The SAT on the definition of ‘Control’ under the Accounting Standards observed,

If there is any lacuna in the DIP Guidelines, the same cannot be replenished by introduction of the definition of “control” which currently sits in AS-18, AS-23 and AS-24 in a different context altogether.

At the risk of stating the obvious, “significant influence” does not amount to “control”. It is clear from the above discussion that AS-23 is applicable only when an Investor has “significant influence” and not “control”.”

Placing reliance on the definition of control under Sections4(1) and (2) of the Companies Act and various precedents on the issue, the SAT observed,

The composition of the Directors of a Company shall be deemed to be controlled by another company only if that other company exercises power at its sole discretion to appoint or remove the Directors of the other company. Therefore, the Appellant-Company, i.e., DLF, could be said to control the three companies, namely – Shalika, Sudipti and Felicite, only if it can be proved that DLF had exclusive power or sole discretion to appoint or remove the Directors of these three companies and not otherwise.

and held that,

the Appellant[DLF] did not control either the composition of the Board of Directors of these three companies or in any manner attempt to appoint or remove the earlier Directors which was the task of the share-holders of the three erstwhile subsidiaries post the total divestment of shares. A holding company, after it has sold its 100% shares in a subsidiary, practically becomes functus-officio qua the management and control of the erstwhile subsidiary.

In the present case, the directors of the subsidiaries continued to be on the board, despite the transfer of shareholding. But the Tribunal did not regard this as indicating “control” as it cannot create a presumption in law of a ‘continued relationship’ between DLF and its subsidiaries. Instead the SAT opined that it is up to the shareholders of the subsidiary companies to decide who would be appointed as the company’s directors. Control can be established only if it is proved that DLF had exclusive power or sole discretion to appoint or remove the directors of these three companies and not otherwise.


VA View

This order of SAT settles the issue as to what shall be construed as ‘Control’ for the purpose of DIP Guidelines. DIP Guidelines have now been replaced by Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, (‘ICDR Regulations’) which defined the term ‘Control’ under Regulation 2(1) (i). The term ‘Control’ under the ICDR Regulations has been defined as to “have the same meaning as assigned to it under clause (c) of sub-regulation (1) of regulation 2 of the SAST Regulations”.

Though the ambiguity of definition of term ‘Control’ in DIP Guidelines was resolved under the ICDR Regulations, the observation of the SAT that the definition of ‘Control’ under SAST Regulations could not have been relied on and reasoning given for the same seems to be ‘misplaced’, as ICDR regulations which is replacement of DIP Guidelines itself has relied on definition of the term ‘Control’ under SAST regulations.