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Nov 22, 2011, 10.53 AM IST | Source: CNBC-TV18

SC ruling on Subhkam Ventures unclear on negative control

The Supreme Court's much awaited order in the case of Subhkam Ventures is finally out, but it doesn't answer the elusive question of what kind of negative rights in a company would constitute 'control', reports CNBC-TV18's Payaswini Upadhyay.

The Supreme Court's much awaited order in the case of Subhkam Ventures is finally out, but it doesn't answer the elusive question of what kind of negative rights in a company would constitute 'control', reports CNBC-TV18’s Payaswini Upadhyay.

The case dates back to 2007 when private equity firm Subhkam Ventures acquired a 17.9% equity stake in listed company MSK Projects. The shareholder agreement gave Subhkam several rights often referred to as negative rights or affirmative rights such as a veto on company policies. But a SEBI order passed in 2008 ruled that these negative rights would constitute control.

Subhkam appealed that in the securities appellate tribunal (SAT) and won the case in 2009. The tribunal said that these rights are not control but instead protective provisions.

However, SEBI appealed the SAT decision in the Supreme Court and so for the last two years the private equity industry has been keenly awaiting the decision on whether the SC thought that affirmative rights such as veto would constitute control, because almost all PE agreements contain such rights and the judgment will have a bearing on them.

But last week, the Supreme Court disposed off the appeal in the Subhkam case and SEBI decided not to pursue the case any further. The reason for that was that Subhkam never appointed its Director on the board and has now exited most of its investment. But because of this, no clarity on what affirmative rights would constitute control has come and that question of law is still open.

The only thing we have right now is the SEBI and SAT order. Guidance on this front may come if a similar case reaches the apex court. Also, the impact would be mostly on private equity players looking at investments in the listed companies’ space.

Also watch the accompanying video for more details..

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