Minority Investments under the Indian Competition Regime: An Escalated Burden
The Competition Commission of India (CCI) is responsible for the regulation of the M&A transactions which fall under the ambit of the Competition Act, 2002. The CCI envisages an ex-ante assessment of all M&A transactions after meeting certain financial thresholds to assess any anti-competitive concern. The CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”) provide certain exemptions for minority investments where the deal value exceeds the financial thresholds.
Minority Investment Exemption
Regulation 4 of the Combination Regulations read with Schedule 1 states that any person acquiring less than 25% of an enterprise’s shares or voting rights need not make a notification before the CCI if they are made ‘solely as an investment’ or in the ‘ordinary course of business’ which do not lead to the acquisition of ‘control’ of the target company. For applicability of the minority investment exemption, all the three prerequisites must be met. These prerequisites as mentioned above have been interpreted by the CCI in several of its orders. The CCI has interpreted ‘solely as an investment’ means ‘passive investment’ which is done with a strategic intent whereas the term ‘ordinary course of business’ according to CCI means ‘frequent, routine and usual’ and that “the activities for which business is established would be the activities in the ordinary course”
However, such exemptions are not blanket exemptions as these transactions may have to be notified before the CCI. In the past, transactions involving acquisitions of less than 25% have been notified to the CCI. While the author believes that the CCI has been a pro-market regulator since its inception, however, for minority investments, the CCI has been skeptical for its lack of clarity and escalating regulatory compliance.
Subsequent Amendments – “Investment only” transactions
By way of an amendment in 2016, the CCI added an explanation to Item 1 under Schedule 1 of the Combination Regulations which stated that acquisitions of less than 10% of the total shares or voting rights of a target enterprise shall be treated solely as an investment provided
the acquirer can exercise only such rights that are exercisable by the ordinary shareholders of the enterprise whose shares or voting rights are being acquired to the extent of their respective shareholding; and
the acquirer is not a member of the board of directors of the enterprise whose shares or voting rights are being acquired and does not have a right or intention to nominate a director on the board of directors of the enterprise whose shares or voting rights are being acquired and does not intend to participate in the affairs or management of the enterprise whose shares or voting rights are being acquired.
The CCI views such transactions as merely “investment-only” not done with the aim to acquire any form of control. Total 31 acquisitions of less than 10% stake have been notified to the CCI since the introduction of the 10% exemption. In 2018, the CCI proposed to amend the Schedule I (explanation) to limit the scope of the exemption for the acquirers which are directly or indirectly, engaged in identical or similar trade or which are at different stages in the production chain. However, no such amendment was brought into force in the final draft of Combination Regulations.
A Patchy Road for Investors
Though the exemption may, at first seem extravagant to investors, various CCI orders have considerably limited the scope.
In Claymore/IndiaIdeas, the acquisition of a 0.12% stake by Claymore in IndiaIdeas was notified to the CCI. Claymore previously held an 8.75% stake in IndiaIdea along with a right to appoint a director. Interestingly, the combination had to be notified even though Claymore did not get any incremental rights. Another constricting interpretation that the CCI has adopted is when the portfolio companies of an acquirer and the target company are engaged in a competing business or where their business is vertically or complementary related.
In Lazarus Holdings/ANI Technologies, the acquisition of a 7% stake by Lazarus in ANI Technologies was notified to the CCI. In its assessment, the CCI considered all the previous investments of Lazarus Holdings and its parent companies in overlapping businesses before clearing the acquisition.
In Amazon.com NV Investment Holdings LLC/Quess Corp, the acquisition of approximately 0.51% stake by Amazon in Quess Corp was notified. This was after CCI identified an overlap between Amazon’s portfolio companies and Quess Corp in the business of providing facilities management services in India. As per the submission, the combined market share of the parties was in the range of 0-5%.
With the introduction of the 10% exemption followed with non-enforcement of the proposed amendment in the final draft of the Combination Regulations, it was thought that cases such as Claymore/IndiaIdeas, ANI Technologies/Lazarus Holdings and Amazon.com NV Investment Holdings LLC/Quess Corp would be exempted under the Combination Regulations.
Not so Green Route for Investors
In August last year, the CCI had introduced the Green Channel mechanism for automatic approval of M&A transactions. Such conduct is part of the CCI’s ongoing effort to make merger control quicker and more efficient. This route can be availed by filing a Form 1 before the CCI where they are deemed to be approved on the date of receipt of the acknowledgment if the parties have no horizontal, vertical or complementary overlaps. However, it is common for institutional investors to invest in multiple enterprises in the same sector. Even a slight overlap would make them ineligible under the Green Channel if their proposed investment is a repeat investment in the sector.
Further, on 27 March 2020, the CCI revised the Notes to Form 1. The guidance adds the “right to appoint an observer” as a condition that will amount to overlap under Form I. The Companies Act, 2013 has brought a strong director liability regime for ensuring corporate governance. As a result, investors may prefer to put observers on the board of the company to exercise investor oversight over its portfolio companies to protect their investments without having actual participatory rights. Such observers can be appointed in the capacity of a non-voting and speaking observer without having any right to influence the decision of the board. Many investors will not be able to get the exemption for acquiring a stake in the target if they have an observer on the board of an enterprise that deals in a similar or complementary business.
The purpose of the amendment in 2016 was to introduce a more laissez-faire regime for acquisitions that are less than 10% stake. However, the CCI precedents have reduced the application of the exemption for investors. This practice of the CCI appears to have blurred the line between participatory rights and pure investor protection rights. There is an old saying that if it isn’t broken then don’t fix it. The CCI should reconsider its revised Notes to Form 1 as investors would appreciate having an option of investor oversight over their investments without incurring any regulatory burden. The qualifying criteria under the Green Channel route also pose a significant problem for the investors. The CCI should introduce a threshold under the Green Channel for minority investments as even a minuscule cross-shareholding makes the investor ineligible to apply under the route. On a practical note, CCI’s regulations provide inadequate guidance on minority investments. While the competition regime in India imposes strict penalties for failure to notify, investors will exercise caution even if the transaction appears to be eligible for the exemption.
[i] Karan Shelke is a recent law graduate from Maharashtra National Law University, Mumbai, who is currently working as a research intern with Mr. Chanakya Basa. His interests lie in Competition Law, International Relations, Animal Rights, and Football. For any discussion related to the article, he can be contacted via mail email@example.com.
Preferred Citation – Karan Shelke, “Minority Investments under the Indian Competition Regime: An Escalated Burden ”, Arbitration & Corporate Law Review, Published on 13th September 2020.