Delineating “control” vis-à-vis the power to veto

An Introduction to the Issue

“Control” is a relative term. In layman sense, the word indicates the power or authority to do and/or abstain from doing and/or to require/make someone do and/or restrict/inhibit someone from doing something. The Latin meaning of “veto” is “I forbid”.[1]

By that sense, the power to veto, which essentially means forbidding someone from doing something, is a way of exercising ‘control’.

However, ‘control’ has a much greater significance in the commercial sense and hence, has been defined at various places. The most pertinent of those definitions is laid in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SASTReg”). But the definition is an inclusive one and thus does not delineate ‘control’ exhaustively. Such a definition has resulted in uncertainty as to whether the existence of a power to veto would amount to having ‘control’ or not.

The question is fairly old but is not so widely litigated upon and thus, face uncertainty. The deliberations have more often been on defining ‘control’ in general and/or largely limited to determining the existence of control in the specific set of facts and circumstances but has rarely delved into the ambit of determining the impact of right to veto on the existence of control.

While the Securities and Exchange Board of India (“SEBI”) has answered this question in affirmative[2], it has also stated that the same is not a hard rule and can vary as per the situation. The judiciary has affirmed the contrary and is seen to be more inclined towards observing that mere acquisition or even exercising of veto powers cannot amount to ‘control’.

The following is an attempt to understand the various scenarios and interpretations and thereby to draw a conclusive answer to the question posed.

The Premise – A Conceptual Study

‘Control’ has been defined in SASTReg as –

“control” includes the right to appoint a 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.

Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.[3]

The definition of control is similar in most other laws and statutes also. For instance, as per the Companies Act, 2013 (“CA’13”), “control” shall include the right to appoint a 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.[4]

In case of Indian insurance companies, the expression “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.[5]

Again, a similar definition of control can be found in Cl. 2.1.7 of the Consolidated FDI Policy[6] as it provides that ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.[7]

The International Financial Reporting Standard (“IFRS”), as the name suggests, lays down the international standards for reporting in ‘consolidated financial statements’ (“CFS”). A CFS is a financial statement presenting assets, liabilities, cash flow, income, expenses, equity and debts of a parent company along with all its subsidiaries as if it is a single entity.[8]

IFRS 10 defines ‘control’ and undertakes consolidation on the basis of ‘control’.[9]

Thereunder exist three principles of ‘control’ –

  1. power over the investee
  2. exposure, or rights, to variable returns from involvement with the investee; and
  3. the ability to use power over the investee to affect the amount of those returns.[10]

The Indian Accounting Standard (“Ind AS”) lays the Indian standards. Ind AS 110 is the Indian counterpart of IFRS 10 and lays the same three principles in paragraph 7.[11] The ‘Educational Material on Ind AS 110, Consolidated Financial Statements’[12] by the Institute of Chartered Accountants of India (ICAI), as well as the Appendix B of Ind AS 110 lays certain factors which can assist in the determination of control. One such factor mentioned therein is ‘whether the rights of the investor give it the current ability to direct the relevant activities[13] which directs attention towards paragraph B15 which reads as –

Examples of rights that, either individually or in combination, can give an investor power include but are not limited to:

(d) rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor;[14]

If we consider the Companies (Significant Beneficial Owners) Rules, 2018, as amended in 2019 (“SBO Rules”), “control” is to mean the same as that in CA’13[15] while “significant influence” means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies[16] and even though ‘participate’ has not been defined therein, we can understand from a plain reading that it includes ‘having certain affirmative veto rights on financial and operating policy decisions of a company’[17] Thus, the implication is that even though having certain affirmative veto rights amounts to ‘significant influence’, it cannot be termed as ‘control’.

Au contraire, the Organisation for Economic Co-operation and Development (“OECD”) toolkit on implementation of beneficial ownership suggests that control can be exercised in many ways and may also be evident from ‘influence over or a veto of’ decisions that are made by an entity either through agreements amongst members/shareholders or through family links or other connections etc.[18]

The Competition Act, 2002 also provides an inclusive definition of ‘control’, which squarely falls in line with the definition in SASTReg and it is stated therein that “control” includes controlling the affairs or management…[19]

The Analysis – The Contrasting Outlooks

The primary objective is to understand what is veto essentially and how does it come into the picture. In the commercial/corporate sense, a veto is not much different a power and still means power to object to a decision or to restrict a person or group of persons from doing something. It most prominent use is in mergers and acquisition transactions.

Secondly, we need to analyse whether veto power leads to control. Considering the definition of ‘control’ in SASTReg, even if we ignore ‘right to … control the management’, then also the words ‘including … management rights or shareholders agreements or voting agreements’ indicates that a right to or power of veto would fit squarely within its scope and ambit and thus, the inclusive definition is encompassing veto power.

The same shall stand true for the definitions of control under the CA’13 as well as the Insurance Act, 1938. The definition under the Competition Act, 2002 is on similar lines although, it can be seen that meaning of ‘affairs and management’ is much wider than that of ‘management or policy decisions’ under SASTReg.[20]

Similar is the implication under the IFRS framework for the preparation of CFS. In fact, its domestic counterpart i.e. Ind AS 110 further expressly includes ‘veto’ rights as an indication of power and having such power is one of the factors determining the ability to direct the relevant activities and such an ability to use power symbolises ‘control’. It is like ‘veto’ is a subset of ‘power’ which further is a subset of ‘control’.

Notably, looking at the SBO Rules in isolation leads to an interpretation that veto would fall within ‘significant influence’ but not in ‘control’ as both are distinct. However, the SBO Rules are bylaws made under CA’13 and hence, should not be interpreted in a manner, which would stand in contradiction to the meaning directly reflected under CA’13. Furthermore, the OECD’s Beneficial Ownership Implementation Toolkit also indicates that the power to veto decisions is also a way of exercising control.

However, the judiciary is seen to be tilted towards the contrary interpretation. In Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors.[21] the Hon’ble Supreme Court of India (“SC”) also delved into the interpretation of ‘control’ inter alia. It observed that ‘control’ has been defined in CA’13 in two parts, the first being de jure control “which includes the right to appoint a majority of the directors of a company[22] and the second being de facto control which means that “so long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control””[23]

As the matter was pertaining to the Insolvency and Bankruptcy Code, 2016 (“IBC”), the SC was more concerned about determining the meaning of control as in §29A(c) of IBC and therefore observed, “mere power to block special resolutions of a company cannot amount to control[24] thereby ruling that control under the said provision only denotes positive control (irrespective of de jure or de facto) and ‘veto’ power or power of negation would not amount to control.

In the same matter, SC also placed reliance on M/s. Subhkam Ventures (I) Pvt. Ltd. v. The SEBI[25] as decided by the Securities Appellate Tribunal (“SAT”). In this matter, SAT had ruled that ‘control’, as defined under SASTReg “is a proactive and not a reactive power[26] Thus, simpliciter, SAT observed that control means actively controlling a situation by taking necessary measures and a mere power to prevent someone from doing what the latter wants to do is not control in itself. It further explained that the test of assessing control is whether the person acquiring the right is in the driving seat. The SAT concluded as follows –

It must be remembered that every fetter of any nature in the hands of any person over a listed company cannot result in “control” of that person over that company.[27]

Subsequently, when the matter went into appeal before SC, it disposed of the appeal by considering specific facts of the case, noted that the question of law is kept open, and also ripped the SAT ruling of its binding / precedential value.[28] However, as observed hereinbefore, the SC had again placed reliance on the SAT ruling in its recent judicial pronouncement in the Arcelor Mittal Case indicative of the fact that it found the SAT observations befitting and appropriate.

Notably, in Vodafone International Holdings B.V. v. Union of India (UOI) & Ors.[29] also, albeit being minuscule, there was an observation in paragraphs 222 and 232 that the concerned entity/persons had veto power to promote their interest but the same was vested by way of special agreements and would not amount to ‘control’.

Basing reliance on SAT ruling in Subhkam Case, SEBI suggests that an enquiry must be made with regards to the purpose of the right. The basic principle as laid down by SEBI is that rights, which are protective rather than participative in nature do not amount to acquisition of control, provided, the investor does not otherwise have power to exercise control, neither on day-to-day operations nor on policy matters.[30]

SEBI came up with a similar bright-line test for the acquisition of ‘control’ under the SASTReg vide its discussion paper. What is thus ensued is to understand the demarcation and distinction between a protective right and a participatory right. SEBI had provided an illustrative list of protective rights, which do not amount to acquisition of control. This list includes ‘veto’ or ‘affirmative rights’.[31] It states that “Veto rights in matters that are not part of the ordinary course of business or involve governance issues would be considered as protective in nature and would not amount to exercise of control over the target company …”[32] This was further supplied with certain express illustrations of such veto powers.

However, SEBI also clarified that this is just an indicative list and any other right would still be examined on the facts and circumstances of the case and if deemed participative then it would amount to acquisition of control.[33] Furthermore, SEBI declared not to adopt or incorporate any such test in SASTReg definition and to continue ascertaining the acquisition of ‘control’ as per the extant definition.[34]

A Conclusion

It all began in utter chaos but as they say, if something is certain, it is uncertainty. Same was the case with the meaning and connotation of control, specially vis-à-vis veto rights. The definition of ‘control’ was in fact, initially avoided in the SASTReg and was only subsequently added. This definition was also an inclusive one, thus, leading to wider purports. The definitions of ‘control’ as supplied by SASTReg as well as various other sources including CA’13, Ind AS 110, and international frameworks such as OECD Toolkit on beneficial ownership and IFRS indicates towards inclusion of veto rights within its scope.

However, SAT distinguished and instead of coming up with a blanket conclusion, it came up with an observation indicating towards a subjective test to determine whether the exercise of right is proactive or reactive in nature. The SC initially went against this approach but a few years later relied back on it.

SEBI thereafter, introduced its own test of determining whether the exercise of right is participatory or protective, which is similar to the SAT’s test. This is because exercise of veto is considered as a mere protective measure by SEBI (generally), and is only reactive in nature as per the SAT’s test laid in Subhkam Case. On the other hand, a participatory exercise of right is synonymous to proactivity.

However, till date, the definition of ‘control’ under SASTReg is wide enough to encompass even exercise of ‘veto’ rights and neither of the tests find place in SASTReg for delineating ‘control’ vis-à-vis power to veto, which, therefore, still remains a subjective enquiry.

And most importantly, the question still remains, i.e. if by virtue of a veto right, the investor (who otherwise do not have any participatory right or are not proactively involved in decision making) is blocking the decision of the shareholders, then who is having actual control (in essence).

Suggestion / Opinion

Albeit undergoing litigation for almost over a decade, the answer to our enquiry is ambiguous. In light of the readings and analysis of various provisions and case laws as discussed hereinbefore, I am of the opinion that rather than determining acquisition of control due to exercise of veto rights on a case to case basis, a firm rule should be made towards its inclusion i.e. exercise of veto rights should be considered as sufficient to indicate acquisition of control.

In other words, irrespective of the purpose of exercise of such a veto right, the fact remains that in the event of such an exercise, the veto-er is the person controlling the decision, and hence, whether the veto has been exercised as a protective right/ reactive measure or as a participatory right/ proactive measure should not make a difference.

[1] Black’s Law Dictionary, 1700 (Bryan A. Garner edn. 9th ed., 2009).

[2] Business Today, Why veto rights does not mean “control”,

[3] Reg. 2(1)(e), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

[4] §2(27), Companies Act, 2013.

[5] §3(iv), Insurance Laws (Amendment) Act, 2015; §2(7A), Insurance Act, 1938.

[6] Consolidated FDI Policy 2015,

[7] Cl. 2.1.7, Consolidated FDI Policy 2015.

[8]; §286(9)(f), Income Tax Act, 1961.

[9] Id.

[10] Giselle Cini, The control concept in IFRS 10,

[11] Ind AS 110, Indian Accounting Standard,

[12] At pg.5,

[13] ¶B3(c), Appendix B, Ind AS 110, Indian Accounting Standard,

[14] ¶B15(d), Appendix B, Ind AS 110, Indian Accounting Standard,

[15] Rule 2(1)(b), Companies (Significant Beneficial Owners) Rules, 2018.

[16] Rule 2(1)(i), Companies (Significant Beneficial Owners) Rules, 2018.

[17] Krishnava Dutt & Aastha, Argus Partners, MCA Introduces Amended Rules for Significant Beneficial Ownership, 28 May 2019,

[18] Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD and Inter-American Development Bank, A Beneficial Ownership Implementation Toolkit – March 2019,

[19] §5, Competition Act, 2002.

[20] SEBI Discussion paper on Brightline Tests for Acquisition of Control under SEBI Takeover Regulations,

[21] Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors., AIR 2018 SC 5646.

[22] Ibid. at ¶47.

[23] Id.

[24] Ibid. at ¶48.

[25] M/s. Subhkam Ventures (I) Pvt. Ltd. v. SEBI, MANU/SB/0007/2010,

[26] Ibid. at ¶6.

[27] Ibid. at ¶9.

[28] SEBI v. M/s. Subhkam Ventures (I) Pvt. Ltd., MANU/SC/1587/2011.

[29] Vodafone International Holdings B.V. v. Union of India (UOI) & Ors., (2012) 6 SCC 613.

[30] SEBI Discussion paper, supra n.19 at ¶26; Vaidhyanadhan Iyer & Farah Titina, AZB & Partners, Pulling The Veto Pen Out? : Veto Rights As A Threshold For Control Under The SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011, 28 October 2019

[31] SEBI Discussion paper, supra n.19 at ¶27(e).

[32] Id.

[33] Ibid. at ¶34.

[34] SEBI PR No. 56/2017, Acquisition of ‘control’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011,


Mudit Jain

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Mudit Jain is a student of B.A. LL.B. (Hons.) in his fourth-year at the National University of Advanced Legal Studies, Kochi.

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