Introduction
The definition of ‘control’ has been understood in different ways under Indian corporate and commercial laws. Section 2 (27) of the Companies Act, 2013 defines ‘control’ as the “right to appoint the 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.” This standard definition is followed in multiple acts and regulations of the Securities Exchange Board of India as well as the Institute of Companies Secretaries. Despite this clearly laid-down definition, the recent ‘subjective’ interpretation of control by regulatory bodies such as the Registrar of Companies and the Securities Appellate Tribunal has brought forward a newer perspective. Hence, we need to evaluate these emerging trends and determine whether this novel approach adopting subjective interpretation is beneficial for the long-term goals of the Indian market. This article critically analyses how the Indian courts have historically delved into the interpretation of control and evaluates whether the current approach needs a reconsideration.
The Established Understanding
Under the corporate law regime, the definition of control, laid down under Section 2 (27) of the Companies Act, 2013 gives room for a both subjective and objective definition. Traditionally, the objective application of control is easier to ascertain for the courts. An example can be seen throughthe landmark case of Vodafone International Holdings B.V. v. Union of India (UOI) and Ors. In this case, the court said that control should be understood as a mixed question of law and fact. Furthermore, it was highlighted that a controlling interest in certain situations is often assumed through ownership of shares which gives that character of a controlling interest in the management of the company. Such a controlling interest is a byproduct of owning stock in a firm; it is something that arises from having stock. Therefore, a controlling interest is not a unique or identifiable capital item that is held in addition to shares. It was further said that shares reflect a shareholder’s interest, which is composed of a variety of rights outlined in the contract included in the Articles of Association. A company’s control is derived from the voting power of its shareholders. When a shareholder’s level of ownership gives them the ability to direct management, their right may take on the characteristics of a controlling interest. It is impossible to separate shares from the rights that come from them. Thus, a controlling interest develops as a result of holding stock in a company; it is a consequence of stock ownership.
The Novel Interpretation(s)
The first instance where the court interpreted a differential understanding of control as positive control was said in the case of Subhkam Ventures (I) Private Limited v. SEBI. Here,the Tribunal specifically said that the expression ‘control’ in the context of the Takeover Code, 1997 only denotes positive control which includes de facto control of management and policy-making decisions. The court actively rejected negative control in this case, highlighting that reactive powers or negative control cannot be understood within the ambit of control. More importantly, the court said, “Control, according to the definition, is a proactive and not a reactive power…In a board managed company, it is the board of directors that is in control. If an acquirer were to have power to appoint majority of directors, it is obvious that he would be in control of the company but that is not the only way to be in control.” Even though the Supreme Court said that this case was not to be used as a precedent in future cases, it has been cited in multiple cases such as ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors, Vishvapradhan Commercial Pvt. Ltd v. SEBI. In Arcelor Mittal, the Supreme Court adopted the definition laid down by Subhkam Ventures for the purpose of interpreting what a corporate debtor would entail under Section 29 A (c) of the Insolvency and Bankruptcy Code. Thus, the interpretation of control herein strictly included only ‘positive control’, or a (proactive) control—not just blocking or veto powers. The court differentiated how control is interpreted under Section 2(27) of the Companies Act, 2013. It highlighted that under the Companies Act, the definition of control is divided into two parts- de jure control and de facto control. The first part of the definition which includes the right to appoint a majority of directors in the company is ‘de jure control’, while the power of exercising policy-making or management decisions which falls within the latter part of the definition is ‘de facto’ control. Additionally, it was highlighted that the said definition is an inclusive one which includes both positive and negative control. The interpretation of what control entails is to be determined on the basis of the immediate facts and circumstances surrounding the case and what the court considers a reasonable/prudent man would adopt to arrive at the conclusion.
Later, in Vishvapradhan Commercial Pvt. Ltd. v. Securities and Exchange Board of India, the order by the Securities Appellate Tribunal further showed that “control”, as defined in Regulation 2(1)(c) of the SAST Regulations, 1997 can be understood in broad terms, as the Tribunal recognized that the Noticee was circumventing the formal procedure of the takeover exercise, and instead gained ‘control’ of the target company by conveniently granting a loan to the borrowers, repayment. Thus, this indicates that the courts have been given the power to decide on the factual circumstances of each case to conclude what constitutes control.
In another wave of recent cases, there is a newer emerging dimension of control. For example, the order passed by the Registrar of Companies against LinkedIn Technology Information Private Limited dated 22 May, 2024 showed the adoption of an unprecedented ‘subjective’ test of control by the ROC. Here, by employing this new interpretation, the ROC extended the ambit of control to Satya Nadella and Ryan Roslansky, the CEO of Microsoft and LinkedIn Corp., with the reasoning that control of the CEO in question is linked to having a ‘general charge and supervision’ over the affairs of the company that can be exercised without holding a significant number of shares. This metric has never been employed in ascertaining the ambit of control. Additionally, ‘control’ as referred to in the Companies (Significant Beneficial Owners) Rules, 2018, is the same as defined under Section 2(27) of the Companies Act. Similarly, the ROC passed another order against Samsung, implicating Mr. Lee Kun Hee along with his family members, for non-disclosure of SBO details. Interestingly, the court employed both objective and subjective tests here to ascertain the meaning of control. The objective test entailed looking at the stake owned within these companies whereas under the subjective test, the court simply said that there was a “legally remote mechanism” through which he exercised unfettered power. Significant Beneficial Ownership Rules, 2018 aim to determine individuals who ultimately own or control a reporting company, for ensuring transparency, disclosure and combatting financial crimes. The rules require any Significant Beneficial Owner to declare their interest and follow compliance, failure of which attracts consequences. The unclear threshold of ‘control’ in determining such individuals who exercise significant beneficial ownership in a reporting company has created a conundrum in its legal framework from a regulatory standpoint.
Problems with the Novel Approach(es)
This display of judicial discretion granted to interpret the word ‘control’ has given uncertainty to determine its meaning for various purposes. It has also led to several regulatory bodies employing their own interpretation of control such as the subjective test (as seen in the LinkedIn and Samsung orders), something which has never been done by the courts. In a number of instances, the remarkable shift in the application of control has contributed to a plethora of interpretations that are detrimental and lead to several uncertainties for market players. This also leads to an unnecessary leeway afforded to the regulatory bodies to determine who may qualify anyone as a ‘significant beneficial owner’. Additionally, it also leads to the adverse consequence for any multinational corporation of an ‘incorrect declaration’ because any significant owner will then have to disclose their confidential information such as passport number, addresses amongst other requirements which causes a deterrence to foreign players operating in Indian market. Hence, this demands a clarity in the definition of ‘control’ and setting a clearly established standard.
Conclusion
Under Indian Company Law, the meaning of “control” is constantly changing, marking a substantial departure from standard objective measurements in favor of more complex and situation-specific evaluations. Because of its inherent ambiguity, the novel approach carries dangers even though it may be helpful in tackling complicated control structures and contemporary corporate governance challenges. While it is prudent for the courts to differently apply the understanding of courts in different contexts, such as IBC, as differentiated from the Companies Act, 2013, the courts and other regulatory bodies should refrain from engaging in such judicial adventurism that equates ‘control’ with a layman understanding- thus, failing in any legal application of the established principles. As evidenced by recent incidents involving the Registrar of Companies, the subjective assessments used by regulatory organizations can produce unexpected results and raise the bar on regulatory scrutiny. It is critical to strike a balance between the need for a clear, objective set of criteria that offer legal certainty and the need for a flexible, inclusive definition of control for the long-term health of the Indian market. To reduce the risks associated with changing interpretation, regulatory bodies should establish clearer standards and make sure they are applied consistently.
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