Substantial ownership & effective control- meaning
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
22 March 2011
Exact meaning of substantial ownership and effective control of a company?
22 March 2011
Substantial ownership and effective control means the person holding such powers have majority shareholding of the company and is having full decision making powers with him.
Message likes :
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Querist : Anonymous
Querist :
Anonymous
(Querist)
22 March 2011
Can you provide me the details where substantial ownership is exactly defined. From where can i get the same?
26 July 2025
You're asking about the terms **“substantial ownership”** and **“effective control”**, which are widely used in **corporate law**, **taxation**, and **foreign investment regulations** (especially in aviation, telecom, and FDI policy in India). However, their **exact definitions depend on context** — they are **not uniformly defined** across all laws.
---
## ✅ **1. General Meaning**
### 🔹 **Substantial Ownership**
Generally refers to:
* **Majority beneficial ownership** (i.e., holding more than 50% of equity shares **or** voting power).
* Sometimes **even 25% or more** shareholding is considered "substantial" (depending on the law or regulation).
### 🔹 **Effective Control**
Means the **right or ability to direct key management decisions**, regardless of whether the person holds a majority of shares.
Includes:
* Power to appoint majority of directors.
* Control over policy decisions.
* Control via **shareholder agreements**, **voting arrangements**, or **board rights**.
---
## 🧾 **2. Where Are These Terms Used and Defined?**
### ✅ **A. FDI Policy (DPIIT) – India**
* In the context of **foreign investment**, especially **airlines, defence**, and **media sectors**, FDI policy uses the phrase:
> "**Substantial ownership and effective control** must remain with Indian nationals / resident Indian entities."
#### ➤ Defined as:
* **Substantial Ownership**: **At least 51% beneficial ownership** held by Indian citizens/entities.
* **Effective Control**: Indian parties must have **the right to control management**, board decisions, and policy-making.
Source: Consolidated **FDI Policy** (Press Notes and DPIIT Circulars).
---
### ✅ **B. Civil Aviation Sector (Example: DGCA Regulations)**
* Indian airlines must be:
* **Substantially owned and effectively controlled by Indian nationals**.
* Even if foreign entities invest (up to 49%), the **majority ownership and control must be Indian**.
---
### ✅ **C. Income Tax Act – Transfer Pricing & GAAR**
* The phrase is also used in **Section 92A** (Associated Enterprise definition) and **GAAR (Section 96 onwards)**.
* **No precise numeric threshold**, but **effective control** implies **management or decision-making power**.
* E.g., **control through board decisions, voting power, or contractual arrangements**.
---
### ✅ **D. Company Law (Companies Act, 2013)**
* While **“control”** is defined in Section 2(27) of the Companies Act:
> *“Control” includes the right to appoint majority of directors or to control the management or policy decisions, by virtue of shareholding, management rights, shareholders agreements, or voting agreements.*
* The Act does **not define “substantial ownership”** explicitly.
---
## 📌 **3. Where to Find These Definitions?**
| Context | Source Document |
| ---------------- | -------------------------------------- |
| FDI / FEMA | Consolidated FDI Policy by DPIIT |
| Aviation | DGCA Rules, Aircraft Act, FDI Circular |
| Income Tax | Income Tax Act, CBDT Circulars |
| Corporate Law | Companies Act, 2013 (Section 2(27)) |
| SEBI Regulations | SEBI Takeover Code (for “control”) |
---
## ✅ **Summary Table**
| Term | General Meaning | Where Used | Typical Threshold |
| --------------------- | ------------------------------------------------------------ | ------------------- | ----------------------- |
| Substantial Ownership | Beneficial ownership ≥ 51% (or sometimes 25%) | FDI, Aviation, FEMA | ≥ 51% (usually) |
| Effective Control | Right to influence/decide key management or policy decisions | FDI, SEBI, IT Act | Not always quantifiable |
---
If you're working on a case in a **specific sector** (e.g., FDI in aviation, or tax restructuring), let me know — I can give you the **exact clause/law** applicable to that context.
---
## ✅ **1. General Meaning**
### 🔹 **Substantial Ownership**
Generally refers to:
* **Majority beneficial ownership** (i.e., holding more than 50% of equity shares **or** voting power).
* Sometimes **even 25% or more** shareholding is considered "substantial" (depending on the law or regulation).
### 🔹 **Effective Control**
Means the **right or ability to direct key management decisions**, regardless of whether the person holds a majority of shares.
Includes:
* Power to appoint majority of directors.
* Control over policy decisions.
* Control via **shareholder agreements**, **voting arrangements**, or **board rights**.
---
## 🧾 **2. Where Are These Terms Used and Defined?**
### ✅ **A. FDI Policy (DPIIT) – India**
* In the context of **foreign investment**, especially **airlines, defence**, and **media sectors**, FDI policy uses the phrase:
> "**Substantial ownership and effective control** must remain with Indian nationals / resident Indian entities."
#### ➤ Defined as:
* **Substantial Ownership**: **At least 51% beneficial ownership** held by Indian citizens/entities.
* **Effective Control**: Indian parties must have **the right to control management**, board decisions, and policy-making.
Source: Consolidated **FDI Policy** (Press Notes and DPIIT Circulars).
---
### ✅ **B. Civil Aviation Sector (Example: DGCA Regulations)**
* Indian airlines must be:
* **Substantially owned and effectively controlled by Indian nationals**.
* Even if foreign entities invest (up to 49%), the **majority ownership and control must be Indian**.
---
### ✅ **C. Income Tax Act – Transfer Pricing & GAAR**
* The phrase is also used in **Section 92A** (Associated Enterprise definition) and **GAAR (Section 96 onwards)**.
* **No precise numeric threshold**, but **effective control** implies **management or decision-making power**.
* E.g., **control through board decisions, voting power, or contractual arrangements**.
---
### ✅ **D. Company Law (Companies Act, 2013)**
* While **“control”** is defined in Section 2(27) of the Companies Act:
> *“Control” includes the right to appoint majority of directors or to control the management or policy decisions, by virtue of shareholding, management rights, shareholders agreements, or voting agreements.*
* The Act does **not define “substantial ownership”** explicitly.
---
## 📌 **3. Where to Find These Definitions?**
| Context | Source Document |
| ---------------- | -------------------------------------- |
| FDI / FEMA | Consolidated FDI Policy by DPIIT |
| Aviation | DGCA Rules, Aircraft Act, FDI Circular |
| Income Tax | Income Tax Act, CBDT Circulars |
| Corporate Law | Companies Act, 2013 (Section 2(27)) |
| SEBI Regulations | SEBI Takeover Code (for “control”) |
---
## ✅ **Summary Table**
| Term | General Meaning | Where Used | Typical Threshold |
| --------------------- | ------------------------------------------------------------ | ------------------- | ----------------------- |
| Substantial Ownership | Beneficial ownership ≥ 51% (or sometimes 25%) | FDI, Aviation, FEMA | ≥ 51% (usually) |
| Effective Control | Right to influence/decide key management or policy decisions | FDI, SEBI, IT Act | Not always quantifiable |
---
If you're working on a case in a **specific sector** (e.g., FDI in aviation, or tax restructuring), let me know — I can give you the **exact clause/law** applicable to that context.
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