The CCI has proven its mettle and shown to the world at large that is here to expedite the approval process and conform with the overall objective of facilitating ease of doing business in India. However, certain industry concerns are long standing and remain to be addressed. These include concerns raises by the private equity (PE) industry that has been awaiting clarity on certain key merger control issues for a long time.

The significance of the PE industry for the Indian economy cannot be overstated. PE investments bolster the economy and encourage overall technical and entrepreneurial advancement. In 2022, PE investments in Indian companies stood at USD 46 billion.^[2] Given the nature of PE investments (with crunched deal timelines and timely exit requirements), regulatory certainty is key for PE investors. The Indian government has been taking steady steps to improve the ease of doing business ranking of India. This includes taking steps towards cutting red tape and improving the regulator-user interface. To this end, the CCI has been keen on studying and analysing the PE sector and addressings it concerns. In December 2020, the CCI commissioned a market study on PE investors and the competitive impact of common ownership (PE Market Study).^[3] However, the PE Market Study is yet to be published.

Given this background, some of the recent merger control developments that are likely to have a bearing on PE and some common CCI-related issues faced by PE players are discussed below.

Brief Overview of the Indian Merger Control Regime

The Indian merger control regime is mandatory and suspensory in nature. Combinations that are notifiable in advance to the CCI can be filed in three types of forms.

Types of Notifications

Depending on the nature of the transaction and its impact of market structure, a notifying party can either file a combination under Form I (short form) or Form II (long form). A Form I (short form) may be filed if the post-combination combined market share of the parties is less than: (a) 15% in horizontally overlapping markets; and (b) 25% in any vertically related markets. If these market share thresholds are exceeded, a Form II (long form) is recommended.

In August 2019, the CCI introduced a fast-track approval process for certain combinations, known as the ‘Green Channel’ route. Under this route, combinations where there are no horizontal overlaps, vertical relationships or complementary activities between the parties (including their group entities and affiliates)^[4] are ‘deemed approved’ on filing a shorter version of the Form I (short form) with the CCI.

In April 2022, the CCI revised the details required for a Form II filing. In doing so, the CCI did away with several information / data requests that were not very relevant for its review of market dynamics in relation to a transaction. At the same time, it increased the duration of market-facing data required from 3 to 5 years and increased the scope of information required to include detailed analysis of vertical and complementary activities and the presence of the parties in such integrated markets.

Exemptions from a CCI Notification

Three types of exemptions are available under the Indian merger control regime: (a) the de minimis exemption (available based on the assets and turnover of the target);^[5] (b) exemptions for certain types of transactions that are not expected to adversely affect competition and therefore need not normally be notified (as set out in Schedule 1 to the Competition Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations 2011 (Combination Regulations)); and (c) certain specified types of transactions (such as transactions relating to banking companies,^[6] and nationalized banks).^[7]

Of these, the exemption for minority acquisitions is most pertinent from a PE perspective. This is contained in Item 1 of Schedule I of the Combination Regulations that exempts transactions involving non-strategic acquisitions of shareholding of less than 25% (Item 1 Exemption). Parties may avail of the Item 1 Exemption if the acquisition: (a) does not entitle the acquirer / its group to hold 25% or more of the total shares / voting rights of the target; and (b) is made either solely as an investment (SIP) or in the ordinary course of business (OCB); and (c) does not lead to an acquisition of control. Over time (as discussed below), the CCI has interpreted key concepts like ‘control’, ‘ordinary course of business’, and ‘solely as an investment’ in a manner that effectively renders the Item 1 Exemption mostly redundant. Much to the discontent of the financial investors, such diluted and skewed interpretations of the Item 1 Exemption makes it elusive at best and a mirage at worst.

The Indian Merger Control Regime and PE Deals – Some Key Concerns

There are a number of key questions that have been preoccupying the PE industry vis-à-vis the Indian merger control regime. For example, should the PE investor be deemed to be in control of the portfolio company even if it is acquiring less than a 10% shareholding and qualified voting rights in the target? What is the perimeter of rights and investment thresholds within which PE deals are safe from the CCI’s radar?

Some important recent developments in the merger control regime that may have a bearing on the assessment and approval of PE deals are discussed below.

Control – Diluting Standards

In September 2022, the CCI published a revised version of the ‘Frequently Asked Questions’ (FAQs) on its website. While the FAQs do not have the force of law, they are indicative of the CCI’s thought process and the likely approach it will take. Prior to the introduction of the FAQs, there was uncertainty regarding the definition of ‘control’. The Competition Act defines ‘control’ rather circuitously, as “controlling the affairs or management by one or more enterprises, either jointly or singly, over another enterprise or group; or one or more groups, either jointly or singly, over another group or enterprise”. Before the revisions, the CCI’s interpretation of control oscillated between the ‘material influence’ standard^[8] and the ‘decisive influence’ standard.^[9] In the FAQs, the CCI has unequivocally adopted the ‘material influence’ standard (the lowest threshold of control) as being indicative of ‘control’. The FAQ note that control exists regardless of the degree thereof. The FAQs further clarify that ‘material influence’:

• implies the presence of factors that give an enterprise / person the ability to influence the affairs and management of the other enterprise, including factors such as shareholding, special rights, status and expertise of an enterprise or person, board representation, structural / financial arrangements;
• includes within its scope de facto control (i.e., control over half of the votes actually cast at a meeting regardless of actual shareholding held) and de jure control (i.e., shareholding conferring more than 50% of the voting rights of the target); and
• may be classified as negative control, positive control, sole control or joint control.

Therefore, the CCI has significantly diluted the threshold of what may constitute control. This is critical from a PE perspective as it significantly narrows the scope of what may now constitute non-controlling transactions (that typically qualify for an Item 1 Exemption).

From Broad Based Assessment to Narrow Assessment

Until recently, the CCI considered the range of rights being acquired in a transaction on an aggregated basis to assess if control was being acquired and consequently whether the Item 1 Exemption was available. In its previous decisional practice, the CCI had for a long time considered the acquisition of a board seat together with a bouquet of certain types of rights attached to a minority shareholding (such as rights to approving, adopting, amending, or modifying annual budget and business plans^[10] / changes to the dividend policy^[11] / charter documents of the target)^[12] as being indicative of control and hence disqualifying such combinations from the ambit of the Item 1 Exemption. However, in recent cases – Trian / Unilever PLC,^[13] Trian Fund / Invesco Limited¹⁶ (together, the Trian Cases) and the PI Opportunities Fund / Future Retail Limited (PI Opportunities Case),^[14] the CCI has taken a view that the acquisition of a board seat alone (without concomitant special rights) gives the acquirer the ability to participate in the affairs of the target entity and, as such, cannot avail of the Item 1 Exemption. This inevitably opens the door for more CCI notifications being made by PE firms in the future given that most PE deals see a nominee director being appointed on the board of investee companies to protect the investment.

Common Directorships

Given that PE firms often have sector-based specialisations, they are likely to hold investments in competing entities. The CCI in the PI Opportunities Case^[15] has taken a very stringent view of the ability of a board director to access the competitively sensitive information of the target and viewed this as a significant competition concern. In several earlier cases as well, the CCI alluded to its reservations about issues arising from common directorships^[16] and has viewed common directorships amongst competitors (and the potential flow of confidential information of the companies through the common directors) unfavourably. To this end, PE players will have to be careful in their selection of nominee directors and managing information flows within their hierarchies.

Extinguishing the OCB Limb of the Item I Exemption

According to the earlier decisional practice of the CCI, a transaction was deemed to be in the OCB if it was “frequent, routine and usual” and if the activities were in the nature of revenue transactions.^[17] The CCI also held that whether a transaction was revenue or capital in nature needed to be determined by looking at the nature of the business activities of the enterprise in question. In the context of securities, the CCI has observed¹⁵ that “transactions in ordinary course of sale and purchase of securities are done solely with the intent to get benefited from short term price movement of securities” which emphasises the underlying aspects of frequency, duration of holding, intent, etc. In the Trian Cases and the PI Opportunities Case,¹⁷ the CCI has effectively annihilated the possibility of a PE transaction ever availing of the OCB route. In the PI Opportunities Case, the CCI narrowly interpreted PE investments as being definitionally in the nature of ‘investments’ that will rarely fall in the SIP bucket and will certainly not be considered in the OCB bucket.

Effectively extinguishing the availability of the OCB route to PE deals, coupled with the diluted definition of ‘control’ (courtesy of the FAQs) and the interpretation that the acquisition of even a single board director leads to material influence, is concerning from the perspective of any financial investor. Any PE deal that entails the acquisition of any special right (not available to an ordinary shareholder of the target) or a board seat or access to information of the target would deprive the transaction of the Item 1 Exemption, regardless of the shareholding / voting rights being acquired. For instance, in Caladium Investment Pte. Limited / Bandhan Bank Limited, the acquisition of only a 4.99% shareholding together with certain affirmative voting rights with respect to certain reserved matters was notified to the CCI.^[18]

Given the nature of minority protection rights that typically get woven into most PE transactions (such as information rights, board seats and veto rights), most PE transactions that meet the jurisdictional thresholds and entail overlaps, are headed toward a mandatory visit to the CCI.

Potential Impact of the Competition Amendment Bill (Bill)

The Bill, introduced in the Indian Parliament in August 2022 and likely to take effect this year, proposes some key changes in the Indian merger control regime. In particular, the Bill moots a deal value threshold of INR 2000 crore together with an India nexus element as an alternative basis for notification to the CCI. If this proposal bears fruit, many PE deals that do not currently meet asset / turnover-based thresholds may require approval by the CCI.

Overreach in Assessment of Overlaps

One of the pivotal aspects of merger control assessment is an assessment of overlaps between the acquirer side and the target side. The CCI requires that, for such an assessment, all the downstream affiliates of the target and all the downstream affiliates of the ultimate parent entity of the acquirer, are considered. The information mapping obligation on the acquirer is clearly more onerous given that its mapping begins from the ultimate parent entity of the acquirer group.

From a PE firm’s fund structure perspective, finding the ultimate parent entity and identifying its affiliates (especially given the widened scope of what constitutes ‘control’) is a challenging exercise. More often than not, a PE fund’s structure involves layers of entities with differing governance models and complex holding structures (which may involve several funds being housed within a fund) that makes determination of the ultimate parent entity a challenging task. Further, given that PE firms often invest in blind pool vehicles, it is challenging to ascertain the ultimate parent entity and the affiliates to undertake the overlaps assessment in accordance with the CCI’s requirements.

Given this, applying a simplistic approach to mapping overlaps from the ultimate parent entity of an acquirer fund (that typically rests atop a complex web of entities that may be operating separately with their own governance structures) is not only misplaced but also highly onerous (as overlap mapping may need to be undertaken vis-à-vis portfolio companies held by unrelated funds under the same parent entity). To ease the challenges highlighted above and attract more PE opportunities, it may be helpful if the CCI provides guidance to distinguish between: (a) the ‘group’ that is ultimately part of the transaction, from the other ‘group’ of funds that are not related to the transaction; and (b) funds established by different general partners / investment committee / advisory committee. The CCI should be careful of not casting the net of entities to be mapped too wide, given that, in most situations, a PE firm’s stake / interest in a portfolio company is unlikely to translate into anything that impacts the portfolio company’s competitive decisions.

Apart from this technical paternity test, there is the operational challenge of procuring correct and detailed information from the relevant portfolio companies (that have little / no incentive or legal obligation to share such information) to furnish information in relation to the merger filing (for which the legal liability ultimately vests with the notifying party, i.e., the acquirer in case of acquisitions). In light of the above, it would be prudent for deal makers to budget extra time for the merger filing process when chalking out deal timelines. Separately, a lot of this operational pain could be alleviated if the CCI allows the PE firms to submit information from portfolio companies on a best-efforts basis or asks for portfolio company related information only in problematic transactions.

The Road Ahead

Given the key developments in the Indian merger control regime that impact PE deals, as discussed above, and while one awaits the PE Market Study, deal makers have good reason to be wary. The CCI is taking the ‘substance over form’ approach rather strictly. This may render any innovative deal structuring to circumvent CCI approval requirement futile. Whether it is on-market operations or post facto offerings of directorships to the acquirer or manoeuvrings not captured in the transaction documents, the CCI is likely to adopt an effects-based approach to determine whether a notification of a transaction is required. Further, PE players need to be careful regarding internal documentation regarding transactions as the CCI may rely on this to infer whether there was an ‘intention’ to acquire ‘control’. Another note of caution relates to the directors being appointed to the board of portfolio companies. It may be useful to institute and observe strict protocols regarding who can access the commercially sensitive information of a portfolio company within the fund and to construct Chinese walls between information of competing portfolio companies. Additionally, care must be taken by the CCI during overlaps assessment and deal times adjusted to account for the extracting information from portfolio companies. While one might expect the CCI to address many of the industry concerns in the times to come, dealmakers are advised to tread softly, for they tread a regulatory minefield.

Footnote

^[1]      As on 3 March 2023.

^[2]      PE-VC investments in India fell by 29% in 2022, The Economic Times (2 January 2023).

^[3]      CCI To Conduct Market Study on Private Equity Investments: Chairperson, Bloomberg Quint (4 December 2023). The study has not yet been completed.

^[4]     Affiliates include companies in which the acquirer has a shareholding in excess of 10%, or the right to appoint a director, or any other special rights not available to ordinary shareholders.

^[5]      Investors investing in smaller companies (in terms of turnover and assets) can avail of the de minimis target based exemption (Target Exemption). The Target Exemption is available for investments in a target that has assets not exceeding INR 350 crores in India or turnover not exceeding INR 1000 crores. This exemption may not be available when making smaller investments in a larger target. In March 2022, the Government of India extended the Target Exemption until 28 March 2027.

^[6]     Notification regarding exemption of banking companies in respect to which Central Government has issued notification under Section 45 of the Banking Regulation Act, 1949, S.O. 1034(E) (11 March 2020).

^[7]      Notification regarding exemption of nationalized banks from Section 5 and 6 of the Competition Act, S.O. 2828 (E) (30 August 2017).

^[8]     UltraTech Cement Limited/ Jaiprakash Associates Limited, CCI, Ref. Ref. No. C-2015/02/246 (12 March 2018).

^[9]     Aditya Birla Chemicals Limited / Grasim Industries Limited, CCI, Ref. No. C-2015/03/256 (31 August 2015).

^[10]     Alpha TC Holdings / Tata Capital Growth, CCI, Ref. No. C-2014/07/192 (9 September 2014).

^[11]     Caladium Investment Pte. Limited / Bandhan Financial Services Limited, CCI, Ref. No. C-2015/01/243 (5 March 2015).

^[12]     Alpha TC Holdings / Tata Capital Growth, CCI, Ref. No. C-2014/07/192 (9 September 2014).

^[13]     Trian Fund / Unilever PLC, CCI, Ref. No. C-2022/06/940 (17 June 2022).

^[14]     PI Opportunities Fund I / Future Retail Limited, CCI, Order under Section 43A of the Act pertaining to Ref. No. M&A/Q1/2018/18 (30 September 2022).

^[15]     Ibid., at para. 37.

^[16]     Canary Investment Limited and Link Investment Trust II / Intas Pharmaceuticals Limited, CCI, Order under Section 43A of the Act pertaining to Ref. No. C-2020/04/741 (30 April 2020).

^[17]     Reliance Jio Infocomm Limited, CCI, Order under Section 43A of the Act pertaining to Ref. No. C-2017/06/516 (11 May 2018).

^[18]     Caladium Investment Pte. Limited / Bandhan Bank Limited, Bandhan Financial Services Limited and Bandhan Financial Holdings Limited, CCI, Ref. No. C-2015/05/278 (25 June 2015).

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