A controlling stake refers to owning a significant portion of a company’s shares or voting rights that gives an individual or entity the power to influence or control important decisions, including appointing directors, setting policies, and making strategic moves like mergers, acquisitions, or dividend declarations.
How is a Controlling Stake Achieved?
A controlling stake is generally achieved when a shareholder owns more than 50% of the voting shares in a company. However, even holding less than 50% can be considered a controlling stake if the shareholder holds enough power to influence key decisions through alliances or board appointments.
Types of Controlling Stakes:
| Stake Percentage | Level of Control | Explanation |
|---|---|---|
| 50% + 1 share | Absolute control | The shareholder can pass any resolution without opposition. |
| 30%-50% | Significant control | The shareholder can block special resolutions. |
| 20%-30% | Influential minority | The shareholder can influence decisions through alliances. |
| <20% | Minor control | Can still exert control if other shareholders are dispersed. |
Why is a Controlling Stake Important?
Influence Corporate Governance:
They can appoint or remove directors and make decisions about the company’s future.Approve Key Decisions:
Major corporate decisions like mergers, acquisitions, or issuing new shares require shareholder approval.Dividends and Profits:
The controlling shareholder can influence the company’s dividend policy.Hostile Takeover Protection:
A controlling stake can protect the company from hostile takeovers by external parties.
How Can a Controlling Stake Be Acquired?
Buying Shares in the Open Market
The shareholder purchases shares from the stock market to reach a majority stake.Private Purchase from Existing Shareholders
They can negotiate with existing shareholders to buy their shares.Merger or Acquisition
A company can acquire another company by purchasing its controlling stake.Convertible Instruments
Acquiring control through convertible bonds or preference shares that can be converted into equity.
What Rights Do Controlling Shareholders Have?
| Right | Description |
|---|
| Voting Rights | They can vote on key corporate matters. |
| Board Representation | They can appoint members to the board of directors. |
| Decision-Making Power | They have a say in mergers, acquisitions, and policies. |
| Dividend Control | They can influence dividend payments. |
Controlling Stake in Indian Law
In India, the Companies Act, 2013 governs the rights and responsibilities of shareholders. Additionally, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 regulates acquisitions in listed companies.
Key Points from SEBI Regulations:
Mandatory Open Offer:
If an acquirer crosses 25% stake in a listed company, they must make an open offer to other shareholders to acquire at least an additional 26% stake.Disclosure Requirements:
Acquirers must disclose their shareholding to SEBI and the stock exchanges when they acquire 5% or more shares.
Real-World Examples of Controlling Stakes in India
Reliance Industries Limited:
Mukesh Ambani, through various entities, holds a controlling stake in Reliance Industries, allowing him to control the company’s decisions.Tata Sons:
Tata Sons, as the holding company of the Tata Group, owns controlling stakes in several Tata companies like TCS, Tata Motors, etc.Flipkart Acquisition by Walmart:
In 2018, Walmart acquired a 77% controlling stake in Flipkart, giving it decision-making power over the company.- In a landmark episode of Shark Tank India Season 4, Peyush Bansal, Co-founder and CEO of Lenskart, made the show’s largest investment to date by acquiring a 51% controlling stake in NOOE, a premium lifestyle and accessories brand, for ₹5 crore
FAQs
How much ownership is considered a Controlling Stake?
A controlling stake generally refers to owning more than 50% of the total shares of a company. However, in some cases, even owning less than 50% might give a shareholder controlling power if the remaining shares are widely distributed and do not pose a challenge.
Can a Controlling Stake be acquired?
Yes, a controlling stake can be acquired through various means such as:
- Purchase of shares from the open market or through private transactions.
- Mergers and acquisitions: Buying a majority stake from another company or entity.
- Investment from venture capitalists or private equity firms who buy a significant portion of the shares.
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