[Prateek Bhattacharya is Associate Professor, Jindal Global Law School, Associate Dean & Associate Director, Centre for Postgraduate Legal Studies at Jindal Global Law School, O.P. Jindal Global University]
As the Competition Commission of India (CCI) completes 10 years of its merger control regime, it has begun to settle down as an ex ante regulator of mergers so as to become the effective agency that it was intended to be. The CCI is an increasingly powerful regulator, with an expansive role that includes investigative, regulatory, and quasi-judicial powers. It therefore needs to constantly improve itself and address long-standing concerns that have been plaguing competition law practitioners, businesses, and the regulator itself. One such concern is the lack of clarity on the CCI’s approach to the concept of “control”, namely what amounts to exercise of control over an enterprise, what are the degrees and categories of control, and how much weightage does the CCI place on control when reviewing combinations. Such clarity is required from a two-fold perspective – first, at the notifiability stage of a transaction where the nature of control may determine whether a transaction has crossed the CCI’s jurisdictional thresholds requiring notification and clearance, and second, whether there are any competitive effects arising out of such a control transaction resulting in an appreciable adverse effect on competition (AAEC) in India.
My paper “Competition Commission of India’s ‘Control’ Quandary – Practice, Precedent, and Proposals”, the final version of which has been published in the European Competition Journal (DOI:10.1080/17441056.2021.1921513), discusses these perspectives, along with identifying the degrees of control recognized by the CCI, comparison with the approach adopted by competition regulators in the United States, United Kingdom, and European Union, as well as comparison with the definition of control specified by the Securities Appellate Tribunal and the Securities and Exchange Board of India (SEBI), before proposing a way forward.
Triggering the CCI’s Jurisdictional Thresholds
While the term “control” has been expressed in varying forms and through different nomenclature, it can be defined as “the right to economic benefits that would flow from the resource and not the perpetual ownership of a resource” – Bharti Airtel Limited/ Bharti Hexacom Limited, Combination Registration No. C-2017/05/510, Order under Section 43A (11 May 2018). While there is no clear guidance from the CCI on such forms and degrees of control, the following can be identified on the basis of its own decisional practice: (1) controlling interest or de jure control; (2) de facto control; (3) decisive influence; and (4) material influence.
Additionally, the CCI has also provided for the Item 1, Schedule I exemption in its Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations), which overlaps with the CCI’s decisional practice when reviewing a transaction from a notifiability perspective. Item 1, Schedule I of the Combination Regulations exempts the acquisition of shares or voting rights that are made solely for investment purposes or in the ordinary course of business insofar as the shareholding does not directly or indirectly exceed 25%, or where the shareholders’ agreement or any other document facilitating such acquisition does not lead to an acquisition of control. The rationale behind the Item 1, Schedule I exemption is that minor acquisitions which are little more than drops in the ocean of competitive effects should not be caught in the CCI’s suspensory regime. This exemption was interpreted in a varied manner by different stakeholders (including a narrow interpretation by the CCI) resulting in both gun-jumping violations under section 43A of the Competition Act, 2002 as well as transactions being unnecessarily notified out of abundant caution. In 2016, however, the CCI brought some much-needed clarity by way of amendments to Item 1, Schedule I, such as introducing an explanation to “solely for investment purpose”, whittling down the 25% reference to a more realistic 10%, and clarifying that an acquirer’s rights must be the same as that of any ordinary shareholder in order to qualify for the exemption.
Control Transactions & AAEC Assessment
From an AAEC perspective, control transactions can be of three categories: acquisition of sole control, acquisition of joint control, and acquisition of negative control. All these categories indicate instances where there has been a change in the dynamics of a company due to an acquisition or formation of joint venture, which may cause a ripple effect in the markets where the companies operate. For example, negative control of a company in the FMCG industry by another company in FMCG may enable coordination between the two companies, thus reducing the level of competition in the market. The likelihood of such coordination is greater in companies that are ‘family controlled’, which is a uniquely Indian perspective, due to the material influence that titans of industry exercise in India, with the same person being a shareholder or director in multiple companies in the same industry on account of their expertise and reputation.
On a closer look at the CCI’s review of control transactions, it is clear that the CCI has adopted a strict approach towards notifiability and the subsequent standard of review for transactions involving parties who are directly or indirectly involved in the same or related line of business. The consistency of this approach is more significant when dealing with parties engaged in the same or similar products and/or services, whether by way of horizontal or vertical overlap. Accordingly, in transactions where the parties are in the same or related businesses and are not part of the same group, regardless of how small the transaction is with seemingly minimal overlaps, it is deserving of a notification to the CCI, which is the ultimate authority on whether a competitive concern exists, and which would need to decide whether qualitative control exists on a case-to-case basis.
Comparison with Other Jurisdictions
The paper proceeds to examine how control is viewed in the United States (US), United Kingdom (UK) and the European Union. It is noteworthy that “solely for investment purposes” under the Item 1, Schedule I exemption can be traced back to the Clayton Act, and that US merger control law indicates both de jure and de facto control, which have been incorporated into the CCI’s jurisprudence, although there is no guidance note. The United Kingdom’s Competition & Markets Authority (UK CMA), in contrast, has provided detailed guidance on how to approach control cases and an explanation into the characteristics of material influence, de facto control, de jure control as the primary levels of control. Finally, the European Union’s Merger Regulation makes reference to ‘decisive influence’ that can be said to be overlapping with the UK CMA’s material influence, a concept that has been introduced in India.
Additionally, the UK’s Enterprise Act, 2002 makes use of the term “cease to be distinct” in the context of a situation where two enterprises are either brought under common ownership or common control, and where material influence can also amount to such common control. The paper submits that this concept should be introduced into the Indian legal framework as it would serve as the underlying foundation upon which the various degrees or levels of control are built, allowing transacting parties to assess whether their transaction is amounting to an exercise or change in control.
The paper also compares the CCI’s position on control with the approach followed by India’s own securities regulators, SEBI and its appellate body the Securities Appellate Tribunal. In this context, the decision of Subhkam Ventures v. SEBI, and the SEBI Discussion Paper on Brightline Tests for Acquisition of Control become relevant to arrive at the conclusion that the findings of one agency should not be binding on other agencies where the two agencies have differing objects and purposes.
Aside from the introduction of the aforementioned “cease to be distinct” into Indian law, the paper discusses the need for the CCI to rely on empirical measures used by economists for correlating patterns of common ownership with firm behaviour and performance. Indices such as the Modified Herfindahl-Hirschmann Index, General Herfindahl-Hirschmann Index, and Banzhaf Power Index have been used to quantify and discuss the competitive effects of common ownership and, in the process, control rights.
The paper also discusses the need for the CCI to prepare a comprehensive guidance note on control to codify its observations in its various orders, most notably in UltraTech/Jaiprakash. Such codification should also include examples and scenarios as possible such as board representation, veto rights, voting power, influence over business and strategic decisions, ability to block resolutions, status and expertise, and the like. While such a list of examples may not be exhaustive, it would be extremely helpful from a practitioner’s perspective and can be easily updated by the CCI from time to time once the initial guidance note has been prepared.
– Prateek Bhattacharya