‘Control’ May Be Defined In New Companies Bill

Move to bring it in sync with SEBI’s Takeover Code

The Ministry of Corporate Affairs (MCA) plans to come up with a definition of ‘control’ in respect of companies, that will be in alignment with what is contained in the SEBI’s Takeover Code, an MCA official told Business Line.

“We want to have a common definition that will establish a clear legal framework for what ‘control’ in a company entails,” the official added.

SEBI’s Takeover Code defines ‘control’ mainly in terms of a person or a group of persons exercising the right to appoint the majority of directors. The Companies Bill of 2009, while not defining ‘control’, referred to ‘controlling interest’. The latter, in turn, pertained to a member/group exercising the largest voting power in a general meeting of the company.

“We are planning to incorporate the definition of ‘control’ in the Companies (Amendment) Bill of 2011 and this definition will be based on what is contained in the SEBI’s Takeover Code,” the official explained.

The MCA is said to be keen to define ‘control’ with the objective of restricting indirect or proxy control. There are instances where the right to vote or appoint a director is misused. There may be a dummy director, who passes resolutions. In that case, the control is with the director or company only notionally. The real ‘control’ lies with the person or the Group exercising the right to appoint the majority of directors in a company.

To cut down legal scraps

“For the industry, SEBI’s definition is topical and contemporary. So, it makes sense for MCA to synchronise the definition of ‘control’ with it,” noted Mr Pavan Kumar Vijay, Managing Director of Corporate Professionals, a Delhi-based corporate consultancy firm.

Having an explicit definition of ‘control’ within the Companies Act is seen as a way to avoid legal tussles. This is especially so in companies where those in the helm of affairs do not have dominant ownership and are yet still able to influence director appointments and through such device influence decision-making process in that company.

In the absence of an explicit definition within the Companies Act, ‘control’ is currently being exercised through the articles or memoranda of associations of the companies concerned. “Once you have a legal framework that clearly defines control, the scope for disputes would come down,” said a corporate lawyer.

The Companies (Amendment) Bill 2011 is scheduled to be tabled in the monsoon session of Parliament.