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Suggestion for New provision
Title: Control
Suggestion: The term “Negative Control” as used by the SEBI in its various judgement, Exemptions orders needs to be specifically defined under the regulations.
The term negative control should be divided in two parts:
i. On the basis of Shareholding in the Target Company:
On the acquisition of more than 25% shares in the company and getting the right to control the special resolution.
ii. In terms of the covenant contained in the shareholders agreement
Generally, whenever a Private Equity investor makes investment, it enters into the agreement with the company where it reserves some rights in his favour. In other words, it contains stipulation in the agreement that the company cannot take these actions as mention in the agreement without its approval. Thus, it may be possible that the shares acquired by it may be less than 25% requires to restrict the special resolution, however, due to the condition mentioned in the shareholders agreement; it acquires the negative control over the company.
Rationale: The term Control has been defined in the regulations. However, the term negative control has not been defined whereas it has been variably used by the SEBI in its judgement.