Sunday, 28 December 2014

Multiple investments in companies carrying on same business activities by Strategic Investors would require CCI approval

The Competition Commission of India (CCI) has recently opined[1] that “an acquisition of shares or voting rights, even if it is of less than 25 per cent, may raise competition concerns if the acquirer and the target are either engaged in business of substitutable products/services or are engaged in activities at different stages or levels of the production chain. Such acquisitions need not necessarily be termed as an acquisition made solely as an investment or in the ordinary course of business, and thus would require competition assessment, on a case to case basis, under the relevant provisions of the Act”.

Though the aforesaid order appears to have the effect of limiting the exemptions granted in Schedule I of the CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (“Combination Regulations”), in fact it has only provided clarity to the provisions of point 1 of Schedule I of the Combination Regulations.

Point 1 of Schedule I of the Combination Regulations exempts from the requirements of merger control filing (which otherwise would qualify the threshold limits prescribed under the Act)  an acquisition of shares or voting rights, solely as an investment or in the ordinary course of business in so far as the total shares or voting rights held by the acquirer directly or indirectly, does not entitle the acquirer to hold 25% or more of the total shares or voting rights of the investee company or in accordance with execution of any document including a shareholders’ agreement or articles of association, not leading to acquisition of control of investee company.
Thus, even as the provisions stand today or prior to the aforesaid order, an acquisition of “control”, whether by way of shareholding of more than 25% of the paid up capital of the investee company or by exercising any rights under an agreement would tantamount to exercise of control over the affairs of the investee company would not be exempt from the requirement of a merger control filing. The term “control” is not defined in the Competition Act, 2002 (the “Act”) or the Combination Regulations. However, it appears that the definition of the term “control” as adopted by various other regulators such as SEBI, DIPP/FIPB and MCA would be relevant here. Accordingly, “control” would include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of a shareholders agreements or voting agreements or in any other manner.

Furthermore, it appears from the Order that the CCI has further clarified that the assessment of acquisition of “control” would become more relevant if the acquirer and the target are either engaged in business of substitutable products/services or are engaged in activities at different stages or levels of the production chain. Thus, if the acquisition of “control” by the acquirer over the target is within the same or similar industry/business sector, the likely hood of an appreciable adverse effect on competition in the relevant industry/ business sector is higher and accordingly the same would require an assessment by the CCI.

The principle outlined in the aforesaid Order would, amongst others, largely regulate strategic investments by private equity firms focusing investment in a particular industry/business sector, as also mentioned in certain press statements made by the Chairman of CCI. As per recent news articles[2], “According to the Competition Commission of India (CCI), chairman, Ashok Chawla now the firms will need CCI approval while making multiple investments in a sector, even if the transactions don't breach the prescribed thresholds.”

The aforesaid appears to be a concerted effort by the CCI to restrict growth of monopolistic environment in a particular industry/business sector, which could be an outcome of acquisition of “control” by a single investor in multiple companies operating within the target sector.

Authored by:
Nidhi Arora
  



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