Enforced in 2011, the Indian merger control regime envisages an ex-ante assessment by the Competition Commission of India (CCI) of all M&A transactions meeting certain financial thresholds provided in the Competition Act, 2002, as an anticipatory step to avoid potential anti-competitive outcomes such as creation of a monopoly or co-ordinated action by competitors. However, considering the need to avoid filing requirement for certain types of M&A transactions which are not likely to cause an appreciable adverse effect on competition, the CCI, by way of the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (Combination Regulations) exempted certain categories of M&A transactions from a notification requirement. One such exemption (provided in Item 1 of Schedule I to the Combination Regulations) deals with minority investments and exempts acquisitions of less than 25% shares, if they are made “solely as an investment” or in the acquirer’s “ordinary course of business”, with a categorical caveat that such transaction should not result in the acquisition of “control” (25% exemption).
Though the 25% exemption may, at first glance, seem extremely advantageous to private equity and other financial investors, the verbose riders under Item 1 and various CCI orders, considerably limit its scope. More often than not, acquirers are willing to err on the side of caution and seek the CCI’s approval, to avoid monetary as well as reputational loss. This article highlights a few of the issues that are encountered when determining the applicability of the 25% exemption and in particular, the phrase “solely as an investment”.
Interpreting “solely as an investment”
The 25% exemption provides that a minority acquisition when made solely as an investment, need not be notified to the CCI if it does not lead to an acquisition of control. The term “solely as an investment” has been construed to imply that a minority acquisition, made with a “strategic intent”, cannot avail of the 25% exemption. As is evident from various CCI orders, strategic intent itself has been inferred by the CCI on the basis of various factors such as the existence of a co-operation/partnership alliance, public statements made by the parties characterising the acquisition as “strategic”, and in some cases, based on the presence of the acquirer in horizontally/vertically linked markets. For instance, Alibaba’s non-controlling minority acquisition of 4.14% in Jasper Infotech (Snapdeal) was notified to the CCI since the parties were competitors.
Less than 10% exemption
A slight departure was noted in the CCI’s reading of transactions being undertaken solely as an investment through the introduction of a deeming explanation (10% exemption) in 2016, which provided that an acquisition of less than 10% shareholding, where the acquirer does not have: (i) rights which are not exercisable by the ordinary shareholders; (ii) the right/intention to nominate a director; and (iii) the intention to participate in the affairs or management of the target, would be regarded as a transaction made solely as an investment.
Unfortunately, the 10% exemption has led to greater confusion as it is not clear whether acquisition of less than 10% shares would by default become strategic in case it fails one of the three criteria mentioned above. This has resulted in situations where parties have notified acquisition of less than 10% shareholding, even when such acquisition was only accompanied with the right to appoint one director on the target’s board. For instance, P5 Asia Holding Investments (Mauritius) Ltd. (P5) notified an acquisition of 4.85% shares in Indus Towers Ltd. (Indus) given that the acquirer had the intention to nominate a director on the board of the target. While this transaction could not have benefitted from the 10% exemption, the CCI’s order did not clarify why the transaction could not have been classified as being undertaken in the “ordinary course of business”. Notably, there were no horizontal or vertical overlaps between Indus and P5.
A similar approach was followed by the CCI in TPG Manta/FTW, where the CCI required Thoma Bravo to become a notifying party since it had acquired the right to nominate a director on the target’s board. The CCI noted that Thoma Bravo’s investment along with a board seat did not meet the conditions laid out under the 10% exemption. However, despite noting that Thomas Bravo did not have any affirmative veto rights over the target’s strategic business decisions (which are typically viewed as amounting to control), the availability of the 25% exemption was not granted to it.
Evidently, the 25% exemption stipulates an or test i.e. a transaction may either be made solely as an investment or in the ordinary course to avail of the exemption. A fulfilment of either of these limbs should ideally be sufficient ground for claiming the 25% exemption. The aforesaid cases seem to place reliance on, and examine transactions only on the basis of, one of these limbs.
Solely as an investment when existing shareholding in competitors?
With the introduction of the 10% exemption, it was also thought that cases such as Alibaba/Jasper Infotech, where the acquirer was present in a competing or vertically linked business but acquired a non-controlling stake of less than 10%, would be viewed as a transaction undertaken solely as an investment. However, the CCI has recently reiterated its view from orders passed prior to the introduction of the 10% exemption. In New Moon/Mylan, a CCI decision prior to the introduction of the 10% exemption, the CCI had noted 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…
In the EMC Ltd./Mcnally Bharat Engg. Co. Ltd. order passed earlier this year, the CCI reiterated this view and held that where an acquirer and the target are engaged in the same, substitutable or competing businesses or where their businesses are vertically related, such acquisition of shares would not necessarily be termed as an acquisition made solely as an investment or in the ordinary course of business. While this case related to the acquisition of more than 10% shareholding in a competing entity, it remains to be seen whether the CCI would adopt a similar approach while assessing cases of less than 10% acquisitions.
Similarly, whether parties could rely on the 10% exemption in case of acquisition of a less than 10% shareholding if such acquisition is accompanied with a co-operation/partnership agreement, is also questionable.
While the CCI, through its orders, has created additional caveats to the 25% exemption and the 10% exemption, we cannot overlook the rationale for doing so. Pertinently, a blanket 25% exemption would be impractical and the CCI has been endeavouring to maintain a balance between assessing transactions which may potentially cause competition concerns vis-à-vis facilitating M&A with minimal regulatory hindrances.
However, certainty in the letter of law and its interpretation, forms a cornerstone of legislation. The CCI is a pro-active regulator and has repeatedly taken steps to evolve the regime, based on inputs received from stakeholders. To its credit, the CCI also actively runs a pre-filing consultation process, allowing parties to informally approach its officials to seek clarity on procedural and substantive issues. An additional step in clarifying the questions raised repeatedly, either through amendments or guidance notes, would also go a long way in establishing an efficient merger control regime.
Bharat Budholia is a Partner with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at email@example.com. Arunima Chandra is a Senior Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at firstname.lastname@example.org.
 SAAB AB(Publ.)/Pipavav Defence and Offshore Engg. Co. Ltd., Combination Registration No. C-2012/11/95 dated 1-1-2013; Sumitomo Mitsui Trust Bank Ltd./Reliance Capital Ltd., Combination Registration No. C-2014/12/235 dated 26-2-2015.
 Piramal Enterprises Ltd./Shriram Transport Finance Co., Combination Registration No. C-2015/02/249 dated 2-5-2016; SCM Soilfert Ltd./Deepak Fertilizers and Petrochemicals Corpn. Ltd., Combination Registration No. C-2014/05/175 dated 10-2-2015.
 New Moon B.V./Mylan, Combination Registration No. C-2014/08/202 dated 10-11-2014.
 Alibaba/Jasper Infotech (P) Ltd., Combination Registration No. C-2015/08/301 dated 7-10-2015.
 P5 Asia Holding Investments (Mauritius) Ltd./Indus Towers Ltd., Combination Registration No. C-2016/10/452 dated 7-12-2016.
 Combination Registration No. C-2016/10/439 dated 31-1-2017.
 Combination Registration No. C-2015/08/301 dated 7-10-2015.
 Combination Registration No. C-2014/08/202 dated 10-11-2014.
 Combination Registration No. C-2015/07/293 dated 26-4-2017.