SEBI Weighs Caution as Proposal to Expand Takeover Rules Faces Panel Pushback
India’s capital markets regulator may put on hold a key proposal to expand takeover regulations to cover cash-settled derivatives, after its internal review panel raised concerns over the timing and broader implications of such a move. The proposal, which sought to widen the definition of “shares” under takeover rules, has been described by the panel as premature and potentially disruptive to the existing regulatory framework.
According to people familiar with the matter, the Takeover Panel of the Securities and Exchange Board of India is not inclined to recommend the proposal at this stage. The panel believes that while the issue flagged by the regulator is theoretically valid, the current structure and usage of derivatives in India do not yet warrant such an expansive regulatory change.
Why SEBI Proposed Bringing Cash-Settled Derivatives Under Takeover Rules
SEBI’s proposal aimed to broaden the definition of “shares” to include derivatives derived from the shares of a target company, including cash-settled instruments and contracts for differences. The regulator argued that the current framework leaves a regulatory grey area, as acquirers could potentially build large economic exposure through derivatives without triggering disclosure thresholds under takeover regulations.
At present, Indian takeover rules mandate disclosures when an investor’s shareholding crosses 5%, followed by incremental disclosures thereafter. However, purely cash-settled derivative positions do not confer voting rights and therefore fall outside the traditional definition of ownership, even though they may provide substantial economic influence.
SEBI’s concern was rooted in global precedents where acquirers have used such instruments to mask effective control.
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Global Lessons Shape SEBI’s Forward-Looking Approach
The proposal was informed by international experiences, most notably the Porsche–Volkswagen episode in Europe. In that case, Porsche quietly accumulated a significant economic stake in Volkswagen using cash-settled call options that were not subject to disclosure under German law at the time. When the position eventually came to light, it caused market disruption and prompted regulators to tighten disclosure norms.
Similarly, in the United States, while derivatives are widely used, their role in takeover strategies is curtailed by strict disclosure requirements enforced by the U.S. Securities and Exchange Commission. Investors are required to disclose not only physical shareholdings but also derivative-based economic exposure once prescribed thresholds are crossed, limiting the scope for stealth acquisitions.
SEBI argued that adopting a forward-looking stance would help India avoid similar regulatory blind spots if single-stock cash-settled derivatives gain wider acceptance in the future.
Takeover Panel Flags Timing and Regulatory Complexity
Despite acknowledging the rationale behind the proposal, SEBI’s Takeover Panel has advised against implementing it now. The panel reportedly felt that the move was “pre-emptive” and could create unintended complexities across the takeover regulations.
According to the panel, the proposal attempts to address an eventuality that may or may not materialise. Single-stock derivatives remain limited in India due to regulatory constraints, and their role in takeover strategies is currently negligible. Introducing sweeping changes at this stage could complicate compliance and interpretation across multiple provisions of the takeover code.
The panel noted that if such instruments become prominent in the future, SEBI would still retain the flexibility to amend the definition of shares or introduce targeted provisions specific to new instruments.
Control, Ownership and the Derivatives Debate
Under India’s takeover regulations, the concept of control is traditionally tied to voting rights and share ownership. However, the growing sophistication of financial markets globally has highlighted how economic exposure can be built without direct ownership.
This divergence between economic interest and voting control has become a focal point for regulators worldwide. While derivatives can enhance market efficiency and risk management, they also raise concerns that de facto control could be accumulated without triggering mandatory takeover obligations.
The panel appears to have taken the view that India’s current market structure does not yet face this risk in a material way.
International Comparisons Highlight Different Regulatory Paths
Some jurisdictions have opted for broader definitions to address such concerns. The United Kingdom, for instance, has expanded its takeover framework to include “interests in securities,” capturing certain derivative positions that provide economic exposure.
However, regulators have also been careful to balance market innovation with regulatory clarity. The SEBI panel’s recommendation suggests a preference for incremental, instrument-specific regulation rather than a broad redefinition that could have far-reaching consequences.
Market Impact Likely Limited in the Near Term
For investors and market participants, the panel’s stance offers near-term regulatory certainty. Derivatives traders, institutional investors and listed companies are unlikely to see immediate changes to disclosure or takeover obligations linked to cash-settled instruments.
At the same time, the discussion signals SEBI’s growing focus on keeping India’s regulatory framework aligned with global best practices. Even if deferred, the issue is now firmly on the regulator’s radar.
An email seeking comments from SEBI on the panel’s recommendation did not elicit any response.
A Door Left Open for Future Reforms
While the proposal may be on hold, it is not off the table entirely. The panel itself acknowledged that if cash-settled derivatives become more prominent in India, the definition of shares could be revisited or expanded with carefully designed provisions.
For now, SEBI appears set to prioritise stability and proportionality over pre-emptive regulation, choosing to watch how market structures evolve before reshaping one of the most critical pillars of India’s takeover framework.
