However, the true intent and objective of this exemption seems to have been diluted by CCI practice and lost over time.

The Minority Acquisition Exemption

The Merger Control Regulations exempt from notification an acquisition of less than 25% of the shares or voting rights of an enterprise made solely as an investment (SIP) or in the ordinary course of business (OCB), not leading to an acquisition of control (Minority Acquisition Exemption). Thus, to avail of the Minority Acquisition Exemption, a transaction must necessarily meet all three conditions:

• the shareholding condition (less than 25% shareholding);
• the purpose condition (SIP or OCB); and
• the control condition (no acquisition of control).

It should be noted that the purpose condition (the second above) provides that the transaction must be SIP “or” in the OCB. These are therefore alternative conditions, and if either is met, the purpose condition is met. This article is focused on the OCB limb of the purpose condition.

Interpretation of the Minority Acquisition Exemption

Painting SIP and OCB with The Same Brush

In its early decisional practice relating to the Minority Acquisition Exemption, the CCI largely treated SIP and OCB as the same condition (rather than two different alternative conditions). The CCI’s orders initially did not provide separate reasoning in relation to the availability / unavailability of SIP and OCB and essentially painted them with the same brush. In orders where detailed reasoning was provided for the unavailability of SIP, the conclusion that followed was that the transaction was neither “SIP nor in the OCB”^[1] (without any separate reasoning for the unavailability of OCB being provided). However, the CCI subsequently corrected for this.

Initial Interpretation Given to “OCB”

The first detailed decision of the CCI in relation to the interpretation of OCB (as a separate limb) was in the Telecom Spectrum case^[2] in 2018 (although this case related to a different exemption which also used the term OCB it was clearly applicable to the term in Minority Acquisition Exemption). The CCI held that the term OCB was meant to refer to transactions which were “frequent, routine and usual” and “corresponds to revenue transactions for competition law purposes”. The CCI further clarified that “revenue transactions” were short term transactions, did not impact operating potential, and were reflected in the profit and loss account or income statement of the enterprise, as opposed to “capital transactions” which affected non-current items such as fixed assets and long-term debt and were reflected in the position statement of an enterprise.

The CCI also fairly noted that what constituted revenue and capital transactions varied from business to business, so that a capital transaction for one business might be a revenue transaction for another and vice versa. For instance, it explained that, for a seller of machinery, the sale of machinery might be an activity in the OCB as the same constituted its regular trade while for another entity, who was using a machine to produce goods for sale, the sale of such machine would be a capital transaction. Further, furniture held for sale by a furniture seller would be a current asset but, for the same business, the stock of furniture held for use in office furnishings would be a non-current asset.

This was the first real guidance provided by the CCI on the term “OCB” and provided much needed clarity to stakeholders. Further, it rightly considered the nature of business activities of the acquirer as a key consideration to assess whether the transaction in question was “frequent, routine and usual” for that business.

Shifting the Goalposts: Duration of Investment Becomes The Key Test

In March 2022, in the TPG case,^[3] the CCI held that transactions in ordinary course of sale and purchase of securities were done “solely with the intent to get benefited from short term price movement of securities”. The CCI also noted that acquisition in the OCB of sale and purchase of securities “neither entails right or ability of any of the party to the acquisition to participate in decision making process of another party(ies) to the acquisition nor results into access to commercially sensitive information nor envisages any other agreement or understanding having commercial significance”.

Therefore, unlike the Telecom Spectrum case, the CCI did not in this case consider the business activities of the investor / acquirer at all, which should typically be a key consideration to assessing whether the transaction is “frequent, routine and usual” for that kind of investor (as was the approach followed by the CCI in the Telecom Spectrum case).

This decision significantly diluted the ability of various private equity and other institutional investors to rely on the OCB limb of the Minority Acquisition Exemption as one of the key yardsticks that the CCI seemed to consider for OCB was the duration of the investment.

Therefore, investors undertaking medium to long term acquisitions as financial investments (merely for financial gain, without any controlling rights), effectively cannot rely on the OCB limb even though their “frequent, routine and usual” business is to undertake such investments, simply because the duration of the investment may be more than 1-2 years. This significantly dilutes the scope and availability of the exemption and brings back transactions that have no competitive effect in the market under the radar of the CCI. For instance, the average holding period for private equity players has been above 4 years in Europe since the start of the millennium^[4] and, in India, this is estimated to be 5.4 years on average.^[5] Data also reflects that financial investments held for longer periods tend to produce higher returns. However, all such “purely financial” investments cannot avail of the OCB limb of the Minority Acquisition Exemption merely owing to the holding period of the investments (notwithstanding that they may not impact the competitive landscape in any manner).

The Final Nail in the Coffin

Most recently, in September 2022, in the PI Fund case^[6] (involving acquisition by an investment fund) the CCI has diluted the OCB limb even further. The CCI held that no “investment” can rely on the OCB limb of the Minority Acquisition Exemption. The reasoning provided by the CCI was that all investments were “capital transactions” (as discussed in the Telecom Spectrum case) and, therefore, no “investment” can rely on the OCB limb of the exemption. A similar finding was arrived at by the CCI in the Trian case.^[7]

Given this interpretation of OCB, it is now next to impossible to rely on this exemption. Given that the Minority Acquisition Exemption is meant for share acquisitions only (and not for other form of combinations such as mergers), the disqualification of share acquisitions (which are all generally considered to be “investments”) from the ambit of the exemption seems rather contradictory to the very purpose of its introduction. Such an interpretation is likely to lead to the OCB limb being rendered a dead letter and raises the question as to what transactions if any can rely on this exemption if “investments” of any nature are excluded from its ambit.

Such outcomes are likely to have a huge impact on the Government’s “ease of doing business” policy in India, impose significant transaction costs and compliance burden on parties, as well as impact the overall investment climate and appeal of India. Therefore, an alignment of the spirit and intent of the Minority Acquisition Exemption with its actual application by the CCI is warranted.

Conclusion

The spirit and purpose of the Minority Acquisition Exemption was to provide relief to investors and weed out transactions which would likely not cause any appreciable adverse effect on competition in the Indian market, given the minority non-controlling shareholdings involved in such transactions. It is important that the spirit and purpose of the investment is not overlooked while interpreting it.

The approach adopted by the CCI in the Telecom Spectrum case (of considering the nature of business activities of the acquirer while determining whether the transaction was in its OCB) seemed to be a balanced approach, and it would be helpful to revert to that approach (rather than the more recent approach of altogether disqualifying “all” investments). The approach of considering the business activities of the acquirer on a case-to-case basis has a reasonable foundation as they are a good indicator for determining whether the purpose and control conditions are both satisfied. For example, if the business activities of an acquirer clearly indicates that it undertakes share acquisitions for financial gain (purpose) without gaining any control over the target (control) on a routine basis (in the OCB), the exemption should be available to such entities, as such transactions are unlikely to cause any competition concerns in India.

Such an interpretation (focusing on business activities) will also be in line with jurisprudence from other antitrust jurisdictions which also have an OCB exemption as well (such as, Canada, where OCB transactions are considered as: “a routine business transaction, that is, the transaction is one which firms carry out in the conduct of business in general”).^[8] Further, it will also be consistent with the interpretation provided to OCB under other statutes in India by numerous other courts, including the Supreme Court of India.^[9]

Accordingly, the interpretation of the OCB limb should be revisited, to ensure that it does not remain a dead letter in the statute and is interpreted in such a manner which fixes the issue for which it was originally introduced.

Footnote

[1] SCM Soilfert Limited, CCI, Ref. No. C-2014/05/175 (10 February 2015); Zuari Fertilisers and Chemicals Limited and Zuari Agro Chemicals Limited, CCI, Ref. No. C-2014/06/181 (10 February 2015); EMC Limited, CCI, Ref. No. C-2015/07/293 (26 April 2017).

[2] Reliance Jio Infocomm Limited, CCI, Ref. No. C-2017/06/516 (11 May 2018). Before this, the CCI in another case (ITC Limited, CCI, Ref. No. C-2017/02/485 (11 December 2017)), had held that the purchase of intellectual property of a competitor “cannot be construed as being a transaction in the ordinary course of its business”. However, the CCI still concluded that the exemption was unavailable given that neither SIP nor OCB was available

[3] TPG Growth v. SF Markets Pte. Limited, CCI, Ref. No. C-2022/02/905 (23 March 2022).

[4] Prolonged Private Equity Holding Periods: Six Years Is the New Normal, Juha Joenväärä, Juho Mäkiaho and Sami Torstila, The Journal of Alternative Investments Summer 2022, (15 June 2022) (https://jai.pm-research.com/content/early/2022/06/15/jai.2022.1.165).

[5] Private equity holding periods reach all-time high in 2020, Private Equity Wire (22 April 2021) (https://www.privateequitywire.co.uk/2021/04/22/299092/private-equity-holding-periods-reach-all-time-high-2020).

[6] PI Opportunities Fund – Pioneer Investment Fund/ Future Retail Limited, CCI, Ref.No. M&A/Q1/2018/18 (30 September 2022).

[7] Trian Partners AM Holdco, Limited and Trian Fund Management L.P., CCI, Ref. No. C-2021/01/810 (30 September 2022).

[8] See Section 111(a) of the (Canadian) Competition Act, R.S.C. 1985, C. 34 read along with its guidance notes.

[9] Guidance Note under Section 188 of the Companies Act issued by the Institute of Company Secretaries of India; Anuj Jain v. Axis Bank and Others, Supreme Court, (2020) 8 SCC 401 (26 February 2020); Seksaria Biswan Sugar Factory Limited v. Commissioner of Income Tax, Bombay, Bombay High Court, AIR 1950 Bom 200 (19 September 1949) and Sheonandan Singh and Others v. Jeonandan Dusadh and Others, Calcutta High Court, 1908 SCC OnLine Cal 177 (30 July 1908).

This article was originally published in Mondaq on 1 April 2023 Co-written by: Aparna Mehra, Partner; Ritwik Bhattacharya, Principal Associate; Neetu Ahlawat, Senior Associate. Click here for original article

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