[Suyash Bhamore is a 3rd Year B.A. LL.B. (Hons.) student, NLIU Bhopal]
Background and Context
The Competition Commission of India (CCI) in order dated 20 June 2018 in Case No. 25-28 of 2017(Meru Cabs Case) ignited a discourse on antitrust risks perpetuating from common ownership. The Meru Cabs Casedefined common ownership as “a situation where large institutional shareholders such as investment funds, foreign wealth funds, pension funds, etc., hold minority stakes in a large number of companies that are active in the same industry and compete with each other.”
The topic is highly pertinent because of the general tendency among investment funds to spread their investments across various entities to mitigate the risks of investing singularly. The interface between common ownership and competition is a relatively new one, due to which there is no concrete groundwork to rely on when assessing the impacts of common ownership. To remedy this lack of discourse, the author endeavours to highlight the potential dangers of common ownership on competition in an Indian setting.
Firm ownership by common investors is believed to dampen the firms’ incentives to compete with the each other. To bring more clarity, consider a market without any instance of common ownership. Each entity will have huge incentives and ambitions to outperform their rivals, because there is no fear of marring their portfolio companies. But in common ownership, the common investor does not endorse aggressive strategies to win the market, with the reason being that an increase in one firm’s market share comes at the expense of its competitor’s market shares. Understandably, no investor would want to actuate aggressive competition between its portfolio companies, as competitive pricing will only end up harming one of their firms.
One may argue that institutional investors tend to invest only in minority investments and therefore pose no harm. But it must be realized that application of Indian merger control rules is restrained by the de-minimisexemption. The small target exemption provides immunity to the combining parties from obtaining approval from the CCI when the concerned assets are less than INR 350 crore or when the turnover is not more than INR 1000 crore. This means that combinations engendered by common institutional investors but covered by the de-minimis exemption can get consummated without any scrutiny. In essence, combinations between entities having minority shareholdings by common investors would not amount to a transaction notifiable to CCI, thus slipping beneath the scrutiny of the Indian regulator. This void in the Indian competition law exacerbates the apprehensions relating to common ownership.
The Theories of Harm
A similar set of concerns were red-flagged by the CCI in the Meru Cabs Case. Taking cognizance of the common investors, namely Tiger Global Management LLC, Sequoia Capital, DidiChuxing and the recently added SoftBank, the CCI anticipated diffusion of anti-competitive effects at two levels.
Firstly, common ownership can stimulate the investors to bring about a deliberate and unilateral increase in price (or reduction in quality) for a firm, to alleviate its other portfolio firms. Take for example, two firms A and B in a market, having a common investor and dealing in substitute goods. An increase in price by firm A will result in an increase in the revenue earned from each unit sold, but at the same time trigger a corresponding decrease in the number of customers. These disadvantaged customers will now resort to buying the same product from firm B because of the lower price. Had the owners of firm A and firm B been different, there was always a possibility of the fall in revenue due to reduced customers not being recompensedby the concurrent increase in prices. But having a stake in the both firm A and firm B takes away this fear of loss of profits. It’s a win-win situation for the common owner in any case.
Secondly, common ownership may create additional incentives for investors to facilitate collusion and earn foul profits. Common owners may want to engage in co-operation rather than competition through strategic interaction. It is very easy for the common investor to act as the cartel ringmaster and facilitate coordination between the invested firms. Although instances of cartel formation are present in dispersed markets as well, the presence of a common investor aware of the pricing plans and business strategies provides greater incentive to collude.
An important question left unanswered in the order was whether common ownership could perpetuate violation of the management’s fiduciary obligations. It is opined that a minor yet active shareholder wields enough say to influence material decision substantially. Extrapolating this argument to the case at hand, SoftBank is the largest stakeholder in Uber with 17.5% stake. SoftBank’s affiliate SIMI Pacific Pte. Ltd. holds a major shareholding of more than 25% stake in Ola. Furthermore, the common investor SoftBank has a right to appoint two directors in both Ola and Uber. For these reasons, it can be surmised that there is enough headspace for the common investor to give way to anticompetitive activities in breach of management’s fiduciary duties.
Although there is no empirical research work to suggest dissemination of anti-competitive effects from common ownerships, the concerns raised are not a case of tilting at windmills. The sudden surge of interest amongst the academia and regulators worldwide is indicative of the potential antitrust issues that may perpetuate from common ownership in the near future. Resultantly, there is a need to reinforce the currently available work with empirical findings to give the CCI teeth to bring action.
Eventually, there will be a need to amend the Indian competition framework to adequately address the problem of common ownership. But for now, the CCI should adopt a wait and watch approach before taking any hard actions. Jurisprudence on the issue of common ownership and antitrust is somewhat primitive, and well-reasoned theories of harm need to be developed before demarcating any safe harbours or boundaries for limiting common ownership.
In its parting note, the CCI made clear its intention of keeping a vigil over minority investors having shareholding in competing undertakings. Although the CCI did recognize a causal link between common ownership and mushrooming of anti-competitive effects in the banking and the airline industry, the degree to which common ownership represents a significant antitrust problem is yet to be decided. The order seems to have set the ball rolling and one can only hope for a swift resolution of the uncertainty surrounding the repercussions of common ownership. Furthermore, the order serves as a shot in the arm by strengthening the resolve of the legal scheme of Competition Act, which is to prevent all sorts of practices having adverse effect on competition.
– Suyash Bhamore