BY AMIT KUMAR, FOURTH-YEAR STUDENT AT CHANAKAYA NATIONAL LAW UNIVERSITY, PATNA
INTRODUCTION
On its face, Mitsubishi UFJ Financial Group (“MUFG”)-Shriram Finance Limited (the “Company”) arrangement is a headline grabbing largest foreign direct investment of 2025 in financial service sector, a 20% equity subscription that promises capital and governance support. Underneath that neutral form, however, the deal bundles governance covenants, board nomination rights and large promoter payout that when analysed together mirror a transfer of economic and managerial control. This article argues that Securities Exchange Board of India’s (“SEBI”) takeover and listing rules were strained to their formal limits by a deal that preserved technical compliance while raising serious questions about the protection of minority shareholders and the integrity of open offer regime.
DEAL BACKGROUND
The deal, between MUFG and the Company, signed and approved by the board of directors of the Company in December 2025, received the greenlight of the shareholders of the Company in the extraordinary general meeting held on 14th January, 2026. After receiving all the regulatory approvals including that of the Competition Commission of India, the Board of the Company approved the preferential allotment to MUFG on 8th April, 2026. Under the deal, MUFG would get the 20% stake in Shriram finance for approx. ₹39,618 crore (around $4.4 billion) by way of preferential allotment. In return, MUFG got the right to nominate two non-independent directors to Shriram Finance’s board. It also got the right to second up to six representatives in the management of the Company which implies that MUFG retains the authority to influence the management, the right which is not available for other shareholders. Along with it, MUFG got the anti-dilution right and reserved matters protections, implying that certain key decisions cannot be taken without the concurrence of MUFG. The deal makes MUFG a strategic investor in the Company and positions MUFG differently in comparison to the other shareholders of the Company and keeps its position above the other shareholders.
DEAL BACKGROUND
What makes the deal more noticeable is the separate unusual non-compete fee of $200 million to the Shriram Group’s promoter entity Shriram Ownership Trust (the “SOT”), which is a private discretionary trust established in 2006. The said fee makes about 5% of the deal. This payout brings forth the two critical challenges. Firstly, the payout would go to over 40 beneficiaries of the SOT, rewarding the very management that will continue to be part of the Company. Secondly, Shriram Capital, through which the SOT is holding the shares of the Company, will continue as an investor of the Company. However, the promoters’ stake would come down to 20.3% from 25.39% post the deal. Additionally, the nature of the SOT blurs the distribution of the said fee among over 40 beneficiaries. All these facts imply that it is inconsistent with the traditional purpose of a non-compete clause. Traditionally, a non-compete fee is intended to compensate outgoing promoters for agreeing to refrain from engaging in competing businesses, thereby protecting the acquirer’s investment, goodwill, and market position. Therefore, it necessitates a discussion on such strategic investments, which tick boxes the regulatory requirements but outsmarts the regulatory requirements in substance.
As per Regulation 8(7) of The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the ‘Takeover Code’), the meaning of price adopts a substance over form approach, under which the price paid for shares of the target company is not confined to the consideration reflected in the share purchase agreement. Instead, it encompasses all payments made or agreed to be made for shares, voting rights, or effective control, whether routed through incidental, contemporaneous, or collateral agreement, and regardless of whether such payments are described as control premium, non-compete fees, or any other contractual label. But the current non-compete fee would have fallen under this regulation, had the Takeover Code been triggered based on extant definition of control discussed below.
Moreover, Regulation 26(6) of the SEBI Listing Obligations and Disclosure Requirements Regulation, 2015 bars side dealings of such nature without the prior approval of the board and the shareholders of a listed entity, which has been complied with and the deal has received the approval of the both in the current deal. Despite formal approval, the non-compete fee effectively operates as a side dealing since it provides an additional, transaction-linked benefit exclusively to the promoters, rather than being part of the main consideration available to all shareholders.
Further, it may be contended that the non-compete fee payable under the transaction was fully disclosed and approved by shareholders. However, regulatory compliance is not exhausted by disclosure and consent alone. The decisive issue is whether such consideration, notwithstanding its disclosure, constitutes part of the price, paid for acquisition of control. If a non-compete payment, viewed in conjunction with governance rights and strategic covenants, operates as consideration for ceding influence or conferring decisive control, shareholder approval cannot obviate the mandatory obligations under the Takeover code, which are triggered by substance rather than form. Moreover, while a non-compete fee is not illegal per se and is a commonly accepted practice globally, its legitimacy lies in compensating an exiting promoter or investor for relinquishing control and agreeing not to compete with the business. However, this fundamental rationale appears to be absent in the present case, as the promoters are neither exiting the company nor disengaging from its management, and will continue to remain significant shareholders with ongoing involvement in the business. As reported, the payment effectively accrues to a promoter group that continues to run and control the company, thereby blurring the distinction between a genuine non-compete consideration and an additional transaction-linked benefit.
THE CONTROL QUESTION: REGULATION 4 OF SEBI TAKEOVER CODEe
The Regulation 3 of the Takeover Code requires an acquirer to make an open offer if it crosses the shareholding threshold limit of 25% or more, or the existing shareholder holding more than 25% makes creeping acquisition of 5% or more in a financial year. Further Regulation 4 gets triggered, if there is acquisition of control in the target company. In the current deal of MUFG-Shriram Finance, the subscription of shares of 20% of the Company is well below the threshold limit. Moreover, the deal provides for the preferential issue of new shares, which falls under the general exception of the Regulation 10(2B) of the Takeover Code, thereby MUFG is not required to make any open offer. The preferential allotment connotes that MUFG is not acquiring, rather it is infusing fresh capital in the Company.
However, Regulation 4 of the Takeover Code prohibits the acquisition of control over the target company, irrespective of acquisition or holding of shares or voting rights in the target company without an open offer. This regulation is triggered solely on the acquisition of control, irrespective of other quantitative considerations of limits provided under the Takeover Code. Unlike other quantitative criteria under the Takeover Code, this regulation is a qualitative criterion and discretion of invocation is vested with the SEBI to gauge the requirement of open offer by the acquirer in a given facts and circumstances. Accordingly, it is necessary to analyse the scope of ‘control’ under Regulation 2(1)(e) of the Takeover Code, which broadly includes the right to appoint a majority of directors and to exercise control over management and policy decisions.. These rights can be exercised directly or indirectly by one person or more than one person who are person acting in concert. Further, such rights can accrue to a person by way of shareholding, management rights, shareholders agreements, voting agreements and in any other manner. The definition of control under the Takeover Code has been reviewed many a times and it has been left as it is to be decided by SEBI on the basis of each case. Firstly, the Bhagwati Committee, constituted in 1995 to review the old SEBI Takeover Code of 1994, recommended the broad definition and opined that it should be left to SEBI to decide basis each case. Further, the Takeover Regulations Advisory Committee (“TRAC”), in its report dated July 19, 2010, reiterated the same views, and currently, the same definition is there in the Takeover Code.
Later, to determine the Brightline test for acquisition of control the SEBI floated a discussion paper on March 14, 2016 to seek comments of the public, pursuant to representations made by the market participants to provide guidance in respect of protective rights which would not amount to acquisition of control. Protective rights are negative in nature and aim to safeguard an investor’s interests, such as veto rights over fundamental matters like changes to charter documents, capital structure, or related party transactions. As they do not permit involvement in day-to-day management or policy decisions, they are generally not treated as ‘control’. However, rights enabling influence over management, appointment of key personnel, or business strategy may amount to acquisition of control. After receiving a number of comments from various stakeholders, the SEBI, in its press release dated September 08, 2017, decided to continue with the existing extant definition of acquisition of control in the Takeover Code, while observing that “any change or dilution in the definition of acquisition of control would be having far-reaching consequences since similar definition of control exists under the Companies Act, 2013 and other laws”.
PROTECTIVE RIGHTS OR PARTICIPATORY CONTROL?
Now looking at the MUFG-Shriram deal, the deal involves three key aspects: the right to second six personnel to the Company, an anti-dilution clause, and certain reserved matter protections. These elements need to be examined in light of the existing definition of ‘control’ as consistently interpreted by committees and SEBI over the past two decades.. As per proxy advisory firm Stakeholder Empowerment Services (‘SES’), right to second six appointments would amount to management influence in substance. SES’s report notes that these secondees’ role is unknown and are going to operate inside the management, such strategic presence goes beyond arm’s length oversight. SES further notes that with anti-dilution rights and reserved matters protections, MUFG wields strategic influence over key decisions where its concurrence would be required, thereby elevating its position from a passive investor to that of gatekeeper of strategic decisions. Thus, question arises as to whether such strategic investors would be considered to have gained only protective rights or participatory rights making the case for open offer under the Takeover Code?
In SEBI v. Subhkam Ventures Private Ltd., (“Subhkam Ventures”) the Supreme Court (the ‘SC’) intervened to define the definition of control but failed to give any decisive guidance and left the question of law open, while clarifying that Securities Appellate Tribunal’s (the ‘SAT’) order would not be treated as precedent. In this case, the SAT met with a situation wherein the acquirer sought to acquire 19.91% stake of the target company. It held that right to nominate one director from a group and along with veto rights would not constitute control. Para 8 of the SAT order is worth mentioning, wherein it held that “list of protective matters provided from clause 9(a) to 9(o) are not in nature of day-to-day operational control over the business of the target company. So also, they are not in the nature of control over either the management or policy decisions of the target company”. Further in the para, the SAT held that requirement of affirmative vote in appointment of key officials of company like CS, CEO, CFO, COO etc., would not amount to control as it cannot get its candidate appointed.
Applying the reasoning of para 8 of the SAT’s order in Subhkam Ventures, the present deal raises an important issue, whether the right to nominate or second six representatives to the Company’s management amounts to ‘control’. In Subhkam Ventures, the acquirer only had affirmative voting rights, which did not ensure actual appointment. In contrast, MUFG appears to have a direct right to place its representatives within the management, giving it a more active role.
In my view, this difference matters. Having multiple representatives inside management can allow MUFG to influence business decisions and the day-to-day functioning of the Company. This goes beyond mere protective rights and moves closer to participatory control. Therefore, these rights may not fit within the limited scope of protective rights recognised in Subhkam Ventures and instead point towards a degree of de facto control.
CONCLUSION
Apparently, the deal ticks all the regulatory boxes. The investment remains below the 25% threshold, it may claim exemption under Regulation 10(2B), got the shareholders’ approval, and disclosures have been carefully made. On paper, there is little to object to. But transactions do not operate on paper alone. When the arrangement is examined as a whole, including board nomination rights, extensive managerial secondments, veto driven reserved matters, and substantial side deal of $200 million to the promoters in the guise of non-compete fee, a more complicated picture of the deal. Such engineered arrangement’s influence that may not cross the numerical definition of control, yet significantly reshapes who holds real power within the Company.
India’s takeover framework was never intended to function as a mere checklist. Regulation 4, read together with the deliberately broad definition, reflects conscious regulatory choice. SEBI was empowered to look beyond formal shareholding percentages and examine where influence is acquired in substance. The central inquiry was always meant to be who effectively directs the affairs of the company. The MUFG-Shriram deal sits in an uncomfortable space. It may not amount to a classical transfer of control, but it also places MUFG far beyond the position of an ordinary financial or even conventional strategic investor. At the same time, the promoters receive economic benefits, particularly through the non-compete consideration, that dilute the parity principle embedded in the open offer regime. This principle is meant to ensure that all shareholders receive an equal opportunity when control or near control shifts.
For minority shareholders, this creates a structural vulnerability. Their protection exists in law, but their effectiveness becomes uncertain in complex and heavily engineered transactions. Therefore, the real question is not whether the MUFG-Shriram deal complies with the letter of law. The deeper and more troubling question is whether the law, as it is currently interpreted and enforced, remains capable of capturing control in its modern and increasingly nuanced forms. The lack of a clear regulatory response to this question is what should concern regulators and market participants alike.
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