[Nishant Pande is a law graduate (B.A. LL.B. (Hons.)) from the NALSAR University of Law, Hyderabad (Class of 2021)]
In late 2020, the Competition Commission of India (‘CCI’) expressed its intention to study the ownership patterns of private equity (‘PE’) investors. The CCI’s concern was based on the possibility that minority shareholdings of PE investors were not mere passive investments and they could, thus, influence competition. This enquiry came in the aftermath of plausible anti-competitive effects in the market because of PE investors’ acquisitions. This post investigates the legal issues and impediments related to conglomerate mergers in India in the context of investments made by PE investors. It also seeks to identify a potential change in the regulatory approach towards conglomerate mergers.
Merger Control in India
Before dealing with the issue at hand, it is pertinent to explore briefly the merger control regime under the Indian competition law regime. Sections 5 and 6 of the Competition Act, 2002 (‘the Act’) are the primary provisions that deal with merger control, and these are bolstered by the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘the Regulations’). While section 5 provides various types of thresholds for a notifiable transaction i.e., a combination, section 6 governs these combinations. Other than the thresholds contemplated under section 5, there are various other exceptions to notification of a transaction such as the de minimis exemption, Schedule I of the Regulations and the ‘Green Channel’ route.
The Sui Generis Nature of PE Investments
With respect to acquisitions of less than 10% of the target enterprises’ shareholdings, a combined reading of Item 1, Schedule I of the Regulations and its explanation make it amply clear that these minority investments need not be notified to the CCI in case they do not result in transfer of control and when they are “made in the ordinary course of business” or “solely for the purpose of investment”. As can be gathered from the CCI’s Chairperson’s speech at the CII Annual Conference on Competition Law and Practice, PE investors acquire less than 10% in multiple enterprises operating in the same market, which results in common ownership. This could potentially mean that these acquisitions are strategic investments.
Viewing this issue strictly from the lens of Item 1, Schedule I can only help us analyse whether the PE investments are exempt from notification to the CCI or whether are they strategic in nature and, hence, notifiable. In case they are strategic, they would become notifiable to the CCI and it would then determine if they cause an appreciable adverse effect on competition [‘AAEC’] in any market in India. However, this enquiry into AAEC paints a much more complicated picture. By their very nature, PE investors are primarily engaged in making investments in other enterprises, as has been also been observed by the CCI while adjudicating upon combinations related to them (as can be seen here and here). The business conducted by PE investors would, in most instances, have no vertical relationship or horizontal overlap with the enterprises they invest in. It is noteworthy that according to the decisional practical of the CCI, when there is no vertical relationship or horizontal overlap between the parties to the transaction, there is no AAEC (as can be seen here, here, and here). Consequently, even when investments by PE investors are notifiable to the CCI, such transactions will cause no competition concern.
The ‘Green Channel’ route introduced by the Union Government augments the CCI’s decisional practice to not consider conglomerate mergers (i.e., transactions which cannot be classified as horizontal or vertical) as problematic. In a nutshell, the Green Channel route grants deemed approval to combinations of parties that do not have a vertical relationship, a horizontal overlap, or a complementary relationship. It is highly unlikely for PE investors to be providing goods or services that are complementary to the enterprises they invest in. Resultantly, even if Item 1, Schedule I of the Regulations does not exempt PE investors’ minority investments from notification to the CCI, the CCI’s jurisprudence and the Green Channel route would certainly garner approvals to PE investments.
Recourse for the CCI
In a situation where PE investments technically lie outside the domain of the CCI’s scrutiny, what options does the competition watchdog have to tackle the potential competition concerns arising out of these investments? One avenue at its disposal, based on the observations made in the market study proposed by the chairperson in his speech, would be to review the PE investments ex post facto. That being said, such an ex post facto enquiry would be, in spirit, contrary to the report of the High Level Committee on Competition Policy and Competition Law (‘Raghavan Committee Report’), the principal document which constituted the backbone of the Indian competition law regime. Paragraph 4.8.2 of the Raghavan Committee Report envisaged pre-notification of combinations, as that would “reduce the social cost of potential post-merger unscrambling.” The CCI’s chairperson revealed that PE investors had made many strategic investments in India during the COVID-19 pandemic, and ex post facto enquiries into a plethora of investments would be tedious and inefficient considering the rationale behind paragraph 4.8.2 of the Raghavan Committee Report.
An alternative to an ex post facto enquiry could be a change in stance towards conglomerate mergers. Not only are conglomerate mergers considered innocuous by the CCI, but the Raghavan Committee Report also, under paragraph 4.7.1, observes that conglomerate mergers “do not pose any threat to competition.” If a change in approach is effectuated, the CCI may be able to curb the possibility of future harm to competition because of PE investments and it could also prevent similar instances in other markets where conglomerate mergers are common occurrences.
It is noteworthy that, while the Indian competition law regime has considered conglomerate mergers to be inconsequential, at the international stage there is ambiguity regarding competition harm due to such mergers. On one hand, the European Commission (‘EC’) has a history of reviewing conglomerate mergers. In recent years, the EC has conducted in-depth Phase 2 investigations in cases such as M.8084 – Bayer/Monsanto and M.8306 – Qualcomm/NXP. Furthermore, it has issued clearances contingent on behavioural commitments to eliminate conglomerate concerns in cases such as M.7822 – Dentsply/Sirona and M.8124 – Microsoft/LinkedIn. That said, on the other hand, the Federal Trade Commission [‘FTC’] of the US has not brought any challenge against a conglomerate merger in recent times notwithstanding the fact that section 7 of the Clayton Antitrust Act of 1914 considers conglomerate mergers as transactions that may lessen competition.
While there is no consensus between mature competition law jurisdictions on how conglomerate mergers must be handled, it cannot be outrightly denied that such mergers have the potential to produce competition concerns. This potential, combined with relaxations provided by the CCI’s decisional practice and the Green Channel route, requires serious deliberation and discussion. An ex post facto enquiry like in the case of PE investors is not only undesirable, but it also does not assist in catering to the potential overarching problem of conglomerate mergers and their consequences.
– Nishant Pande