A question often vexing private equity players in the Indian market is whether their investments are subject to clearance from the antitrust regulator, the Competition Commission of India (CCI).
One particularly tricky area is with respect to the exemption for purchases of minority stakes characterized as “solely for investment” under item 1 of schedule I of the CCI (Procedure in regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (regulations).
Regulation 4 of the regulations states that certain categories of transactions listed in schedule I are “ordinarily not likely to cause an appreciable adverse effect on competition (AAEC)” and hence notifications for these transactions “need not normally be filed”.
Item 1 to schedule I lists out a category of transactions falling under regulation 4 – the acquisition of shares or voting rights solely as an investment, i.e. less than 25% of the total shares or voting rights of the target, as long as it does not result in the acquisition of control in the target.
The question that arises next is what constitutes an acquisition made solely as an investment? By an amendment to the regulations introduced in 2016, the CCI added an explanation to item 1, which stated that an acquisition of less than 10% of the total shares or voting rights of an enterprise shall be treated solely as an investment provided the acquirer exercises the same rights as an ordinary shareholder, and the acquirer should neither be on the board of directors of the target, nor have the right to or intention to nominate a member of the board.
It may seem that if these conditions are met there is no requirement of issuing a notice to the CCI. However, things are not so simple. To begin with, regulation 4 is ambiguously worded. By “ordinarily” not likely to cause an AAEC, it implies that there could be circumstances under schedule I that cause AAEC.
The decisional practice of the CCI has also served to increase the uncertainty about whether there is a requirement to notify even where the investment is below the 10% limit under the explanation. In the MFCL-Zuari merger, a pre-amendment case, the CCI held that the schedule would not apply to acquisitions that are “strategic” in nature, between competing entities or entities active in vertical markets. The phrase “solely as investment” was held to connote a “passive investment” i.e. one where there was no intention to participate in the “formulation, determination or direction of the basic business decisions of the target”.
In New Moon BV (Abbot-Mylan merger), the CCI emphasized on the need for competition assessment in cases falling under item 1 if the acquirer and target are competitors, or present at different levels of production in the supply chain of the same product or service.
In the case of Shriram Capital Limited and Piramal Enterprise Limited, acquisition of a less than 10% stake was held not covered. This was in view of other investments made by the Piramal group in Shriram group, and the acquisition was held to be strategic in nature.
Another aspect the CCI has looked at is the timing of the acquisitions. Reliance was placed on the EU Commission’s Consolidated Jurisdictional Notice under the EU Merger Control Regulations to hold that if there were two or more transactions within a two-year period, in respect of the same respective groups of enterprises (not necessarily the same companies, but acquisitions by one group in companies of the other group) would make the transactions interrelated, necessitating notification under the regulations.
It is evident that a great deal of caution is being exercised when it comes to items falling under item 1 to schedule 1. In the recent case of ANI Technologies and Lazarus Holdings, the acquisition of a 7% stake was notified to the CCI. The CCI considered all the previous investments by the acquirers and their parent companies in related businesses before clearing the acquisition.
While the purpose of the introduction of the explanation to item 1 was to have a more permissive regime for acquisitions of less than 10% stake, the reality is that the CCI does not treat schedule I, or for that matter the explanation as an “exemption” in the same way that we usually use the term.
The real test appears to be of the intent or motive behind the transaction, which from an objective standpoint may be quite difficult to gather. This, coupled with the fact that there are strict penalties for failure to notify, leads acquirers to err on the side of caution rather than go by a common-sense reading of the law.
Arjun Krishnan is a partner and Kavita Jitani is a senior associate at Samvad Partners.
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