MC EXCLUSIVE SEBI likely to hold plan to expand takeover rules to cash-settled derivatives

SEBI’s plan to include Cash-settled derivatives in Takeover Trigger, have to wait as panel rejects the proposal for now

• SEBI panel rejects adding cash-settled derivatives to 'shares' definition
• Panel deems the move premature and possibly disruptive to takeover rules
• Regulations tie control to share ownership and voting rights, not derivatives.

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India’s market regulator is likely to defer a proposal to broaden the definition of shares under its takeover rules to include single-stock, cash-settled derivatives, after a review panel flagged concerns over its timing and potential impact.

The Securities and Exchange Board of India’s Takeover Panel has indicated it is not inclined to support the proposal, describing it as premature and potentially disruptive to the existing takeover framework, according to people familiar with the matter.

SEBI had proposed expanding the definition of “shares” to include derivatives “derived from the shares of the target company carrying voting rights, including a risk instrument or a contract for differences.” The regulator argued that the current definition does not cover single-stock, cash-settled derivatives, which could be used by acquirers to facilitate takeover activity without triggering disclosure requirements.

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The proposal was prompted by experiences in markets such as the US and parts of Europe, where acquirers have used cash-settled derivatives to build economic exposure while masking control over target companies. India’s takeover rules require disclosure once shareholding crosses 5%, but the applicability of these norms to purely cash-settled derivative positions remains a grey area.

A prominent example cited by regulators globally is the Porsche–Volkswagen episode in Europe, where Porsche secretly accumulated a significant economic stake in Volkswagen through cash-settled call options that were not subject to disclosure under German law at the time. The legal framework was later amended, largely in response to that case.

In the US, while derivatives are widely used, their role in takeover strategies is limited by stringent disclosure rules. Securities and Exchange Commission regulations mandate disclosure of shareholdings, including derivative-based economic exposure, once specified thresholds are crossed, reducing the scope for stealth acquisitions.

SEBI argued that the proposal was forward-looking, even though single-stock derivatives remain limited in India due to regulatory constraints. The regulator said the change would help prepare the market in case such instruments gain wider acceptance in the future. Some jurisdictions, including the UK, have addressed similar risks by expanding takeover rules to cover “interests in securities.”

The Takeover Panel, however, did not recommend adopting the proposal at this stage. It said the change could create complications across the takeover regulations and described it as “pre-emptive” in nature.

According to the panel, the proposal seeks to address “an eventuality where such instruments may become prominent.” If required in the future, the definition of shares could be modified or expanded with targeted provisions tailored to the nature of new instruments. For now, the panel said, such concerns remain speculative.

Under India’s takeover regulations, control is traditionally linked to share ownership and voting rights. The growing use of derivatives has raised concerns globally that economic control can be accumulated without voting rights, potentially allowing acquirers to avoid takeover obligations.

An email seeking comment from SEBI on the proposal did not receive a response.

The prominent case of a corporate control battle using financial derivatives was of Porsche-Volkswagen (VW) saga in Europe, where derivatives were used to secretly build a significant stake in VW. Porsche had built its position through cash-settled call options, which were not subject to disclosure requirements under German law at the time. The legal framework was subsequently amended, largely in response to the Porsche–Volkswagen episode.

In the United States, although derivatives are widely used in financial markets, their role in takeover strategies is constrained by strict disclosure requirements. Securities Exchange Commission (SEC) regulations mandate disclosure of shareholdings, including derivative-based economic exposure, once prescribed thresholds are crossed, hence limiting the scope for stealth acquisitions through derivatives.

SEBI had a forward-looking approach and hence proposed the change. Even though single-stock futures are currently limited in India due to regulatory restrictions, SEBI felt it was better to be prepared in case such instruments become widely used in the future. To deal with the issue some jurisdictions have gradually sought to plug the loophole by expanding the definition to include "interests in securities". United Kingdom’s Takeover Code has such provisions.

However, the SEBI Panel on Takeover Code, didn’t recommend the acceptance of this proposal at this stage. Committee was of the view that it would cause difficulties throughout the takeover Regulations. Panel called the proposal “pre-emptive” in nature.

Panel said, it is to provide "for an eventuality where such instruments may become prominent." If and where it becomes necessary, the definition of shares can be modified or expanded or made wider and it would be possible to provide appropriate and effective provisions to deal specifically with the nature of instruments that are introduced. Panel was of the view that, at present it may be speculative.

Under the SEBI Takeover Regulations, control is traditionally linked to share ownership and voting rights. However, the growing use of derivatives allows economic exposure without voting rights, raising concerns that de facto control may be acquired without triggering takeover obligations.

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