Merger Control Regime In India In Relation To Minority Investments
Nisha Kaur Uberoi
Partner and the National Head of the Competition Law Practice, Trilegal                                                                   
BLOG • 5 min read
This post briefly discusses the treatment of minority investments under the Indian merger control regime and its implications for private equity funds.
I. Introduction to Indian merger control regime and minority investment exemption
An acquisition of one or more enterprises or merger or amalgamation of enterprises, where certain prescribed assets or turnover thresholds ("Jurisdictional Thresholds") are exceeded needs to comply with the merger control provisions provided in Sections 5 and 6 of the Competition Act, 2002 (“Act”) and the Competition Commission of India (Procedure for transaction of business relating to combinations) Regulations, 2011 ("Combination Regulations").
The Combination regulations also provide for certain exemptions for minority investments for transactions where the parties exceed the Jurisdictional Thresholds (and do not benefit from the de minimis exemption).
Regulation 4 of the Combination Regulations read with Schedule I provides a list of transactions that would ordinarily be unlikely to cause an appreciable adverse effect on competition in India, and therefore a merger notification for such transactions need not normally be filed with the Competition Commission of India (“CCI”).
Of particular relevance to the private equity space is the exemption under Item 1 of Schedule I pertaining to minority investments, which applies to acquisitions:
  1. made ‘solely as an investment ’ or in the ‘ordinary course of business ’ ;
  2. which do not entitle the acquirer to hold 25% or more of the total shares or voting rights of the target company; and
  3. do not lead to the acquisition of ‘control ’ of the target.
((i) to (iii) are collectively referred to as “Minority Acquisition Exemption”).
In 2016, an explanation was added to the Minority Acquisition Exemption which clarified that an acquisition of less than 10% of shares or voting rights shall be treated as ‘solely as an investment ’ if the following conditions are met:
  1. the acquirer possesses only such rights exercisable by the ordinary shareholders of the target;
  2. the acquirer is not a member of the board of directors of the target enterprise and does not have a right or intention to nominate a director on the board of directors of the target enterprise; and
  3. the acquirer does not intend to participate in the affairs or management of the target enterprise.
(collectively, “Sub-10% Exemption”).
Notably, the Sub-10% Exemption is a borrowed concept from the United States’ competition merger control legislation (the Hart-Scott-Rodino Antitrust Improvements Act of 1976), which also exempts acquisitions of less than 10% from filing if the investor has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.
II. Application of the Minority Acquisition Exemption by CCI
For the applicability of the Minority Acquisition Exemption, all the three requirements must be met i.e., that it should be an acquisition of less than 25% stake, that does not give the acquirer ‘control’ over the target entity, and should be ‘solely as an investment’ or ‘in the ordinary course of business’. As such, the applicability of the Minority Acquisition Exemption must be tested on a case-by-case basis.
These requirements have been interpreted by the CCI in several of its orders, with the overarching position being that the Minority Acquisition Exemption would not be available to those transactions which cause or are likely to cause a change in control or are strategic in nature (explained below).
(a) ‘Solely as an investment ’ or ‘Ordinary course of business
In its decisional practice the CCI has interpreted ‘ordinary course of business ’ to mean ‘frequent, routine and usual’ and that “the activities for which business is established would be the activities in ordinary course [Bharti Airtel Limited, (C-2017/05/509)], whereas the phrase ‘solely as an investment’ means ‘passive investment’ and any investment in a target enterprise which is done with a strategic intent cannot be treated as ‘solely as an investment ’. [Zuari Fertilisers and Chemicals Limited/ Zuari Agro Chemicals Limited, (C-2014/06/181)].
Based on the decisional guidance of the CCI, a minority investment would not be considered as being ‘solely as an investment’ or in the ‘ordinary course of business ’ if:
  1. if the transaction is a repeat investment by an acquirer in the same sector (the CCI considers such investments to be strategic even if made by a private equity investor); or
  2. the parties to the transaction are competitors or are virtually situated [New Moon BV (C-2014/08/202)].
As recently as April 2020, the CCI observed that, “…private equity groups generally raise funds from individuals and corporations to make investment in businesses. The nature and extent of such investment could result in varying degrees of acquisition. A simple investment by a private equity firm could result in a minority shareholding without any right or ability to participate in the affairs of the target enterprise. Such an acquisition with shareholding less than 10% are currently regarded as acquisition solely as an investment [under the Sub-10% Exemption] …”
The CCI also observed that, “[a] holistic appreciation of the shareholding and the nature and extent of rights acquired in the target enterprise would be relevant in determining whether the given acquisition is a mere investment or not. Representation on the board of directors (nomination of a director or an observer) and/or its committees (audit committee, appointment & remuneration committee, etc.); veto or consultation rights with respect to strategically important corporate actions such as change in capital structure, mergers and acquisitions, appointment or termination of key managerial personnel, amendment to charter documents (articles of association and memorandum of association) and commencement of new line of business; and the right to access non-public information, are all relevant in determining whether the acquisition is a mere investment or strategic in nature.” [Canary Investment Limited/Link Investment Trust II/Intas Pharmaceuticals Limited, (C-2020/04/741)].
(b) ‘Control
The CCI has held that a board seat and/or affirmative rights enjoyed by a minority shareholder over certain strategic commercial decisions of the target are sufficient to be considered as (joint) control, even though the acquisition of shares/voting rights is of less than 25%. These control rights include, but are not limited to, a single board seat and/or veto rights over: (i) appointment and termination of key managerial personnel (including material terms of their employment); (ii) approval of the business plan; (iii) approval of budget; (iv) entry or exit into lines of businesses, or (v) amendment to the memorandum of association or articles of association.
Pertinently, while following the decisive influence standard for several years, in Ultratech, (C-2015/02/246) the CCI lowered the threshold for control to ‘material influence ’, which is internationally recognised to be the lowest threshold for control.
In order to eliminate ambiguity, the Competition Law Review Committee (“CLRC”) in 2019 proposed streamlining the exemptions to ensure that minority non-controlling acquisitions are expressly exempted from the obligation to notify. As such, to clarify the concept of ‘control ’ and applicability of the exemption in cases involving horizontal and vertical overlaps, the CLRC proposed amending the provision to specifically exclude certain minority acquisitions and recommended introducing a list of certain minority rights which would not be considered to be confer control.
More recently, in 20 February 2020, the MCA released a draft Competition (Amendment) Bill, 2020 (“Amendment Bill”), which proposed to amend the definition of ‘control ’ to include the ability to exercise ‘material influence ’ over ‘management or affairs or strategic commercial decisions ’. This lowering of standards of control from a competition perspective from decisive influence, which the CCI ordinarily relied on to ‘material influence ’ would increase the burden on industry and is not in line with the CCI’s past decisional practice in this space, save for two isolated instances when the CCI relied on material influence.
(c) 25% Threshold
In order to avail of the Minority Acquisition Exemption, the total shares or voting rights acquired pursuant to the acquisition must not be more than 25%. In case of convertible instruments, this exemption would not be available if the acquirer’s post conversion exceeds 25% shares or voting rights.
III. Application of the Sub-10% Exemption by CCI
The criteria for the application of the Sub-10% Exemption means that its application will be limited, to cover acquisitions of less than 10% stake in unlisted private companies and transactions undertaken on the stock exchange, which do not confer any rights to the acquirer (apart from ordinary shareholder rights).
31 acquisitions of less than 10% stake have been notified to the CCI since the introduction of the Sub-10% Exemption in 2016. In many of these transactions, the stake being acquired was less than 10% with no additional rights except the right to nominate a single director to the board of the target enterprise [most recently, in Emerald Sage Investment Limited/Apollo Tyres Limited, (C-2020/03/738)].
There have also been peculiar instances where merger notifications have been filed with the CCI for transactions which prima facie appear to have been eligible for the Sub-10% Exemption. However, such filings appear to have been made by way of abundant caution as there were existing commercial relationships between the parties [ NV Investment Holdings LLC/Shoppers Stop Limited, (C- 2017/12/538) and NV Investment Holdings LLC. / Quess Corp Limited, (C-2019/08/680)].
IV. Overlaps analysis
On 27 March 2020, the CCI revised the Notes to Form I and set out a materiality threshold for consideration of horizontal / vertical / complementary overlaps as follows:
The parties need only consider those entities in which they have:
  1. direct or indirect shareholding of 10% or more; or
  2. the right or ability to exercise any right (including any advantage of commercial nature with any of the party or its affiliates) that is not available to an ordinary shareholder; or
  3. a right or ability to nominate a director or observer.
(collectively, “ Materiality Thresholds”)
Accordingly, these Materiality Thresholds would also be relevant while assessing the applicability of the Minority Acquisition Exemption to assess whether a particular transaction qualifies as a repeat investment in the same sector which disentitles the applicability of the Minority Acquisition Exemption.
V. Assessment for private equity
It is common for private equity funds to invest in multiple companies in the same sector. However, given the restricted scope of the Minority Acquisition Exemption, several private equity players have had to notify minority investments with the CCI considering (i) the investor protection rights under the transaction documents being considered as conferment of control by the CCI, and/ or (ii) the fact that the private equity investor is getting a board seat, and/ or (iii) the transactions being repeat investment in the same sector, and hence being considered as ‘strategic ’ investments by the CCI.
The Materiality Thresholds have further diluted the applicability of the Minority Acquisition Exemption given that all investee companies in which the private equity fund has any right which are not available to an ordinary shareholder (such as information rights) will need to be considered for the overlaps analysis and resultantly the assessment for the applicability of the Minority Acquisition Exemption.
In a recent transaction, ChrysCapital acquired approximately 6% stake in Intas Pharmaceuticals along with a board seat and veto rights. Given the overlaps between the ChrysCapital’s existing investee company i.e. Mankind Pharma and Intas Pharmaceuticals, high market share of certain overlapping products and state of competition, ChrysCapital voluntarily offered to remove their director on the board of Mankind Pharma as a condition for approval for the acquisition of stake in Intas Pharmaceuticals. [Canary Investment Limited/Link Investment Trust II/Intas Pharmaceuticals Limited, (C-2020/04/741)].
Accordingly, the CCI views the issues surrounding common shareholders in competing enterprises such as interlocking directorates, and access to information very seriously and therefore the private equity funds should exercise caution and diligence from a competition perspective in their dealings while investing in competing entities.
There is an adage that if it isn’t broken, then don’t fix it. The CCI precedents have already reduced the applicability of the Minority Acquisition Exemption for private equity funds, and the further lowering of standard for ‘control ’ as proposed by the Amendment Bill will create an unnecessary regulatory burden on industry and private equity. The existing application of decisive influence should be the metric which should continue to be adopted by the CCI.
Internationally, the ‘material influence ’ standard is followed by United Kingdom where there is a voluntary (and not mandatory / suspensory) merger control notification regime. The European Union follows a ‘decisive influence ’ standard, which is what the CCI has largely relied on. The adoption of the material influence standard will lead to an unnecessary burden the industry to notify transactions on the basis of special status etc. The CCI will always have the ability to enquire into a transaction which was notifiable but was not notified, and as such, standard of control is neither required nor desirable.