Rethinking Investor Rights (Control, Veto Rights And 'Negative Control') After Recent Indian Case Law

1. Introduction

"Control" has become one of the most contested concepts in Indian corporate and securities law. It determines whether an acquirer must make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), whether foreign investment counts as "Indian owned and controlled" for FDI purposes, and how the Competition Commission of India (CCI) assesses combinations and "material influence." At the same time, modern deal‑making especially private equity and venture capital investment routinely seeks robust contractual protections and veto rights that, if drafted too aggressively, can be characterised as de facto control rather than mere investor protection.

Over the last decade, Indian regulators and courts have grappled with where to draw this line. Early decisions such as the Securities Appellate Tribunal's ruling in Subhkam Ventures v. SEBI distinguished between proactive control and reactive, protective rights. Subsequent guidance from SEBI and the CCI has refined the debate, and the CCI's recent FAQs on merger control now codify a "material influence" standard that sits alongside the Takeover Regulations' broad definition of control. This evolving landscape forces financial and strategic investors, founders and in‑house teams to revisit how they design veto rights, board representation and governance bundles in shareholders' agreements and articles of association.

This article unpacks the legal framework on control, examines how negative control and veto rights are currently viewed, and offers practical guidance for structuring investor rights without inadvertently triggering "control" consequences.

2. The Legal Framework On 'Control' In India

2.1. SEBI's Takeover Regulations

Regulation 2(1)(e) of the Takeover Regulations defines "control" to include:

1. the right to appoint the majority of directors; or
2. the right to control the management or policy decisions, directly or indirectly, exercisable by a person or persons acting in concert, including by virtue of shareholding, management rights, shareholders' agreements, voting agreements or otherwise.

The definition is intentionally broad and inclusive, capturing not just formal shareholding or board majorities but also contractual and other arrangements that may allow an investor to steer policy decisions. An acquirer crossing 25% shareholding or acquiring control is normally required to make an open offer to public shareholders, with certain exemptions.

2.2. Competition Law: Material Influence

The CCI historically assessed "control" by reference to de facto ability to materially influence management or policy, going beyond simple majority holdings. The Competition (Amendment) Act, 2023 has since codified material influence as the threshold for control, and the CCI's 2024 revised FAQs provide an indicative list of rights that are generally viewed as conferring such influence. These include veto rights over business plans, budgets, appointment/removal of senior management and expansion into new lines of business.

2.3. FDI and Sectoral Regulators

Under India's FDI policy, tests of "ownership and control" determine whether a company is considered Indian‑controlled and therefore eligible to downstream foreign investment under certain routes. Sector regulators (for example in insurance, banking and telecom) often overlay their own control tests, although they broadly echo SEBI and FDI principles. The practical message across regimes is consistent: rights that allow an investor to dictate or block key business and policy decisions can be treated as control even without shareholding majorities.

3. Negative Control, Protective Rights And Case Law Trends

"Negative control" typically refers to contractual rights that allow an investor to veto certain actions often through affirmative voting rights on "reserved matters" without giving that investor the ability to unilaterally implement decisions. The controversy is whether, and when, extensive veto bundles amount to "control" within SEBI's definition.

3.1. Subhkam Ventures: Proactive vs Reactive Control

In Subhkam Ventures v. SEBI, the Securities Appellate Tribunal (SAT) held that veto rights that merely allow an investor to protect its investment, by blocking certain actions proposed by the company, do not necessarily amount to control. SAT emphasised that control is proactive, not purely reactive: the ability to prevent the company from undertaking certain actions is not the same as the ability to direct its management or policies.

SEBI later withdrew its appeal against SAT's decision, but its subsequent consultation papers signalled discomfort with a purely narrow reading and floated "bright line" tests that would treat extensive veto rights as indicative of control. Although those proposals were not fully codified, they sharpened industry awareness that veto rights can tip into control territory.

3.2. Evolving Regulator and Market View

Later enforcement and informal guidance suggest a more nuanced position:

1. Veto rights limited to fundamental, existential matters (such as changes to charter documents, liquidation, merger, major asset sale or change of business) are more likely to be viewed as legitimate investor protection.
2. Vetoes that extend to day‑to‑day operations or core policy decisions. Approval of annual budgets in detail, expansion into or exit from product lines, appointment and removal of key management, routine borrowings and capital expenditure, raise a higher risk of being construed as control.

Academic and practitioner commentary now broadly converges on this principle. The greater the investor's ability to shape the company's strategic and operational choices, the stronger the argument that it exercises control, even if nominal shareholding remains below traditional thresholds.

4. Common Investor Rights And Their Control Risk

To operationalise these concepts, it is useful to map typical shareholder and investor rights against their relative control risk.

4.1. Board Representation And Information Rights

Board seats for investors, whether as nominees or independent directors, combined with standard information rights (financial statements, management reports, inspection rights), are generally not treated as conferring control by themselves. However, where board representation is coupled with contractual requirements that management act only in accordance with investor‑approved plans or policies, the analysis changes.

4.2. Veto Over Fundamental Matters

Many investment deals include veto rights over classic "fundamental" matters:

1. Alteration of the memorandum and articles of association.
2. Change in share capital (new issues, buy‑backs, reduction).
3. Sale of all or substantially all assets or business.
4. Liquidation, winding‑up or change in business objects.
5. Related‑party transactions with promoters beyond thresholds.

These are typically viewed as protective rights designed to prevent value‑destructive structural changes, and, if limited and carefully drafted, are less likely to be treated as conferring control.

4.3. Operational And Business‑Plan Vetoes

1. Vetoes over operational and strategic matters carry higher risk:
2. Approval of annual budgets and business plans at a granular level.
3. Approval for entry into or exit from product lines or geographies.
4. Hiring, firing and remuneration of key managerial personnel.
5. Ordinary course borrowings, guarantees or capital expenditure above relatively low thresholds.

Where an investor can systematically block these decisions, regulators may view it as exercising policy control, especially if management cannot act without investor consent.

4.4. Financing And Related‑Party Transaction Rights

Rights that allow investors to block third‑party financing or insist that future funding be raised only from them, or give them effective veto over routine related‑party dealings, can also drift into control territory if they amount to steering the company's financial strategy rather than protecting against dilution or abuse.

A simple way to visualise this is as follows:

* This is not a legal safe‑harbour, but a practical tool for dealmakers and in‑house counsel.

5. Implications For PE/VC Investors, Strategic Investors And Founders

5.1. Financial Investors

PE and VC investors typically target minority or non‑controlling positions but seek robust protections. The control debate directly affects:

1. Takeover obligations: If rights are treated as conferring control in a listed company, an open‑offer obligation can arise even below 25% shareholding.
2. Disclosure and regulatory approvals: Certain sectoral and FDI regimes treat control‑acquisitions differently from minority investments, affecting approval timelines and conditions.
3. Exit dynamics: A "controlling" investor's exit may trigger regulatory approvals or restrictions that a pure financial investor could avoid.

Financial investors must therefore calibrate their rights especially operational vetoes and involvement in management appointments to achieve governance comfort without crossing into de facto control unless that is a deliberate choice.

5.2. Strategic Investors

Strategic investors, including multinational corporates, are often more comfortable with being recognised as controllers, since integration and alignment of group policies is part of the commercial thesis. For them, the issue is less about avoiding the label and more about planning for its consequences; takeover offers, public float, sectoral approvals and CCI merger control filings.

However, even strategic investors may sometimes wish to stay below control thresholds (for example, in joint ventures where local partners must retain Indian control for regulatory reasons). In such cases, careful rationing of veto rights and management control becomes equally critical.

5.3. Founders and Promoters

Founders frequently negotiate veto bundles with investors without fully appreciating that they may be ceding effective control even at relatively modest dilution levels. Understanding how vetoes and super‑majority requirements interact with board composition and shareholding is essential. In regulated sectors, mis‑characterisation of control can also lead to compliance slippage and later enforcement risk.

6. Drafting And Negotiation Tips

6.1. Focus Vetoes On Fundamental, Not Routine, Decisions

A practical rule is to concentrate vetoes on events that change the nature or survival of the business, rather than on its day‑to‑day management. For example:

1. Retain vetoes on changes to constitutional documents, share capital, liquidation, major asset sales and related‑party transactions beyond robust thresholds.
2. Avoid blanket vetoes on detailed budgets, individual contracts, ordinary‑course hiring/firing and incremental business decisions, unless the investor is willing to accept being viewed as a controller.

6.2. Use Thresholds, Materiality Qualifiers And Sunset Provisions

The risk of control can be reduced by using quantitative thresholds and time‑bound rights, such as:

1. Veto rights that fall away once the investor's shareholding dips below a threshold.
2. Higher materiality thresholds for transactions requiring consent, rather than catching routine operations.
3. Step‑down of vetoes as the company matures or meets agreed milestones.

6.3. Ensure Consistency Across Documents And Filings

Whatever balance is struck in the shareholders' agreement must be reflected consistently in:

1. Articles of association and other constitutional documents.
2. Regulatory filings (SEBI, stock exchanges, CCI, FDI filings).
3. Public disclosures such as offer documents and annual reports.

Inconsistency between private contracts and public disclosures can invite regulatory scrutiny and undermine parties' litigation positions.

6.4. Coordinate Deal, Regulatory And Competition Counsel

Given the overlapping regimes (SEBI, FDI, sectoral regulators, CCI), it is rarely sufficient for deal teams to draft rights in isolation. Involving regulatory and competition counsel early enables:

1. Assessment of whether a proposed right bundle is likely to be seen as control.
2. Identification of necessary approvals or filings upfront.
3. Avoidance of surprises during subsequent transactions or exits.
4. Key Takeaways

First, "control" in India is not limited to shareholding majorities or formal appointment rights. Extensive veto bundles, particularly over budgets, business plans, senior management and routine financing decisions, can amount to de facto control even at minority stakes.

Second, not all veto rights are equal. Carefully framed protective rights over truly fundamental matters are more likely to be accepted as investor protection, while pervasive interference in operations and policy carries higher regulatory risk. Mapping rights by risk level helps structure deals appropriately.

Third, PE/VC and strategic investors, founders and in‑house teams must treat control as a cross‑regime concept. A comfortable outcome under the Takeover Regulations may still raise flags under FDI or competition law, and vice versa. Early, integrated advice from regulatory and competition specialists is therefore essential.

Finally, where investors do intend to exercise control, it is better to plan for and disclose this transparently, obtaining whatever approvals are needed, than to rely on aggressive drafting that tries to disguise control as mere protection. In an era of increasingly sophisticated regulators and activist shareholders, clarity and consistency can be as valuable as any veto right.

REFERENCES

1. SEBI, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 – definition of "control" and open‑offer triggers.
2. SEBI discussion/consultation materials on "bright‑line tests" for control and treatment of veto rights (archived concept papers and consultation notes).
3. Subhkam Ventures (I) Pvt. Ltd. v. SEBI, Securities Appellate Tribunal – decision analysing whether veto / affirmative rights constitute "control".
4. Subsequent SAT/High Court decisions interpreting control and negative control under the Takeover Regulations (as summarised in practitioner commentaries).
5. Competition Commission of India, Revised FAQs on Merger Control (2024/2025) – guidance on "control" and "material influence", including examples of rights that may amount to control.
6. CCI combination orders and advocacy materials discussing minority acquisitions and material influence (selected cases summarised in leading law‑firm updates).
7. Department for Promotion of Industry and Internal Trade (DPIIT), Consolidated FDI Policy – definitions of "ownership" and "control" for foreign investment purposes.
8. Sectoral regulations (for example, IRDAI and RBI circulars) that use "control" tests for insurance, banking and NBFCs, as referenced in takeover/FDI practice guides.
9. International Bar Association, India Takeover Guide (latest edition) – practical explanation of "control", open‑offer triggers and common deal structures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.