[Shriyansh Singhal is a 2nd Year B.B.A., LL.B (Hons.) Student at National Law University Odisha and Lavanya Chetwani is a 3rd Year B.B.A, LL.B (Hons.) Student at National Law University Odisha]
In recent years, regulatory developments in the realm of competition law in India have increasingly focused on scrutinising of Private Equity (‘PE’) investments, particularly minority stakes. The Competition Commission of India (‘CCI’) has moved beyond a purely quantitative approach, where control was traditionally assessed based on shareholding percentages, to a more nuanced, qualitative evaluation of investor rights and influence. This change is seen in the new CCI order (‘Goldman Sachs case’) where it penalized Goldman Sachs (India) Alternative Investment Management Limited (‘GS AIMPL‘) for failure to inform the regulator about its investment in Biocon Biologics Limited (‘Biocon Biologics’). This order once again makes clear that shareholding percentage is just one part of deciding control; instead, rights attaching to an investment are of prime importance. This pioneering step is a sign that small minority stakes also have been subjected to the scanner of the CCI from now on. This ruling will be an important precedent for PE funds, and it is a watershed moment in the evolving regulatory scenario of competition law.
In this post, the authors analyse the principal controversy in the Goldman Sachs case, the key takeaways from the ruling, its implications for private equity investments in India, and offer practical tips to address these challenges.
The Principal Controversy
As per section 6(2) of the Competition Act, 2002 (‘The Act’), notification of any combination (which also includes the acquisition) above a particular threshold is filed before the CCI. The CCI’s ruling in the Goldman Sachs case, it is now explicit that ‘combination’ is not just an outright acquisition of a majority stake. Even minority investments can become notifiable if they come together with certain rights that lead to de facto control or material influence.
The major controversy in this case pertains to GS AIMPL’s subscription to optionally convertible debentures (‘OCDs’) issued by Biocon Biologics. It was noted by CCI that “…these rights came with great privileges such as access to sensitive information and the ability to influence major strategic decisions and it was held that this was more than what a minority shareholder would be entitled to.” This marks a stark shift in the approach of CCI: moving from a purely quantitative mechanism for determining control to a qualitative assessment of the entitlements and influence that the investment confers.
The Goldman Sachs Case: Key Lessons
“Control” Beyond Shareholding
The shareholding did not alone inform the CCI’s order, which was also influenced by the rights substantive to the investment through OCDs. The rights granted to GS AIMPL “…were extensive, extending to access to sensitive confidential information, as well as rights that enable it to influence critical corporate decisions”, the CCI added, and “went well beyond what would normally be conferred on a minority shareholder.” More precisely, violation of section 6(2) of the act was found by the CCI. Industry experts agree to this, adding, “Even minority investments which give material influence or have strategic rights attached can still be seen, as a combination requiring notification.” It further reinforces the CCI’s focus on the ‘material influence’ element, which includes access to commercially critical data and the ability to influence strategic choices without needing a controlling position. An analysis similar to this have been provided by Economic Laws Practice (a law firm) which also highlighted CCI’s renewed attention to qualitative rights such as information rights, veto rights and board representation and how these rights can in effect bestow de factocontrol.
The CCI has examined the issue of control in various cases, emphasizing that control is not limited to majority shareholding but also extends to rights that confer material influence over strategic business decisions. In the Jet-Etihad Case (2013), the CCI analysed whether Etihad’s 24% stake in Jet Airways, along with its affirmative voting rights and board representation, amounted to “negative control”, allowing it to influence strategic decisions. The CCI held that control could arise even from contractual rights that enable an investor to block key decisions. Similarly, in the Thomas Cook (India) Limited Case (2014), the CCI examined whether the veto rights held by Thomas Cook over key operational matters in Sterling Holiday Resorts conferred control beyond its minority shareholding. The CCI reaffirmed that control could be established through governance rights, irrespective of shareholding percentages.
In the SCM Soilfert-Deepak Fertilizers Case (2018), the CCI scrutinized Deepak Fertilizers’ acquisition of a 24.46% stake in Mangalore Chemicals & Fertilizers Ltd (‘MCFL’), focusing on whether its “nuisance rights” such as veto rights over critical business decisions granted it material influence over MCFL’s operations. The CCI concluded that even minority investments could confer control if they enable the investor to exercise strategic influence. Additionally, in the Ultratech Cement-Jaiprakash Associates Case (2017), the CCI examined whether non-controlling minority shareholdings, combined with rights such as board representation and strategic veto powers, could lead to control.
These cases demonstrate that the CCI takes a substantive approach in assessing control, considering factors beyond just shareholding percentages, including voting rights, affirmative control over key decisions, and governance structures, to determine whether a transaction results in material influence over a target entity.
Rejection of “Ordinary Course of Business” Argument
Also critical to the CCI’s decision was its rejection of GS AIMPL’s argument that the investment was in the ordinary course of business. The commission is taking a stricter view of the concept. The CCI’s ruling was impacted by how long the period of the investment was. “The CCI has become increasingly wary of claims of `ordinary course of business.` The CCI is now asking for more tangible evidence to support such claims,” the experts reiterated. As a result, PE funds cannot rely on this exemption without detailed reasoning and supporting documentation. It is critical to demonstrate that thorough documentation exists of the intent and business rationale for the transaction, and how it is consistent with the fund’s existing investment strategy, in order to substantiate any claim of being `ordinary course of business. `
Gun Jumping and Penalties
As such, the CCI’s decision to slap a penalty for “gun-jumping” or doing a transaction before getting approval from the authority is a strong statement. This large penalty reinforces the CCI’s emphasis on pre-transaction notifications, a stronger deterrent and a measure that ensures PE funds respect competition law and that notifications are delivered in a timely manner.
The Creeping Acquisition Doctrine
This case also sheds more light on a descendant of the “creeping acquisitions” doctrine. Though not directly discussed here, the CCI’s focus on substantive control mirrors a wider trend of challenging transactions that could lead to de facto control incrementally. The doctrine maintains that small stakes can add up, and invocations, when combined with other rights or strategic leverage, can permit creep toward control and leakage through conventional notice thresholds. These ‘nuisance rights’ are initially very small, but can arguably gain power over time, which means that PE funds are always hunting for these kinds of investments.
The CCI’s increased scrutiny of information rights, board representation, and veto powers shows a willingness to look beyond immediate shareholding. This requires PE funds to not only do extensive due diligence on the target of the current investment but also ensure that their investment strategy does not unfairly ramp up warning signals of creeping acquisitions. In relation to potential future impact, this is a must if they wish to stay abreast of the changing regulatory landscape and remain free of possible fines.
The doctrine of creeping acquisitions has been examined in several international cases, particularly in the European Union, the United States, and Australia. In the Thyssenkrupp / Tata Steel Merger Case (2019), the European Commission blocked the proposed joint venture between Thyssenkrupp and Tata Steel, citing concerns that even partial control and coordination between the two firms would lead to a significant reduction in competition in the European steel market. The Commission noted that the gradual consolidation of market power through joint ventures and minority shareholdings could have anticompetitive effects similar to outright mergers.
Similarly, in the Ryanair/Aer Lingus Case (2010-2015), the UK Competition and Markets Authority (‘CMA’) ruled that Ryanair’s minority stake of 29.8% in Aer Lingus conferred significant influence, enabling it to block strategic decisions and harming competition in the airline sector. In the Staples/Essendant Case (2019), the U.S. Federal Trade Commission (‘FTC’) scrutinized Staples’ acquisition of Essendant, noting that even a partial acquisition with certain governance rights could raise competitive concerns.
Australia has also addressed creeping acquisitions under its competition law framework. The Metcash/Franklins Case (2011), reviewed by the Australian Competition and Consumer Commission (‘ACCC’), highlighted the risks posed by the gradual accumulation of market power. Metcash’s acquisition of Franklins, although appearing as a single transaction, was assessed in the broader context of its earlier acquisitions that had progressively reduced competition in the wholesale grocery sector. The ACCC’s scrutiny of the deal underscored how competition regulators consider past acquisitions to evaluate whether a firm is systematically gaining dominance through incremental purchases.
These cases illustrate how global competition regulators are increasingly focusing on creeping acquisitions, recognizing that competition concerns can arise not only from outright mergers but also from incremental increases in control through governance rights, minority shareholdings, and strategic influence over business decisions.
Impact on PE Funds
As discussed above, the Goldman Sachs case carries important and nuanced implications for PE funds. First, it significantly increases the compliance burden on investors. PE funds must now conduct thorough legal due diligence even for minority investments of any size. This requires carefully reviewing investment agreements to identify any rights that could potentially trigger concerns under competition law, particularly with the CCI.
Second, the case heightens the likelihood of regulatory scrutiny. Even a straightforward investment in a seemingly non-strategic sector could attract CCI attention if the investment includes rights that, in aggregate, amount to joint or coalitional control. This added scrutiny can slow down deal closures and increase regulatory costs.
Lastly, Alternative Investment Funds (AIFs) must recognize that their structures do not exempt them from competition law obligations. This was underscored by the CCI’s recent action against the investment manager of GS AIMPL, which highlights that compliance responsibilities extend not only to the fund itself but also to the fund manager. It is crucial for AIFs to understand this distinction and apply it practically in their day-to-day operations.
Recommendations
These developments must compel PE funds to adopt a proactive approach towards competition law compliance. First and foremost, they should engage with legal experts sooner in the investment process. This should promote the identification and resolution of potential competition law issues at an earlier stage of the process and prior to any legally binding commitments.
In addition, investors must conduct comprehensive due diligence when entering a deal. This includes a thorough assessment of all aspects of the investment, with particular attention to potential competition law risks. Investors should carry out an in-depth analysis of the target company’s market position, the competitive landscape, and the rights associated with the investment. Furthermore, they should maintain open and transparent communication with the CCI. Active engagement with the CCI and the timely provision of all necessary information will help ensure a smooth and efficient review process, reducing the risk of delays and penalties.
Finally, PE funds should examine their existing portfolio of minority investments. This case of Goldman Sachs demonstrates the evolving position of the CCI towards minority investments. As a result, funds must review their existing investments to ensure relevance to the new regulatory framework.
Conclusion
The levy levelled on GS AIMPL under Section 43A of the act is a part of a larger trend towards greater regulatory control over minority stakes in India. The evolving definition of “control” and tight regulatory enforcement of the duty to notify by the CCI will bring about a paradigm shift in the investment strategy of sector specific PE funds.
The message is clear – substance over form is the new standard. No longer can PE funds consider the percentage of shareholding while determining the CCI notification requirement of a deal and proceed accordingly. Rather, the rights that accompany an investment, no matter how infinitesimal, are the matter under consideration now.
To sum up, the Goldman Sachs case serves as an eye-opener to Indian PE funds. The message it sends is one of going forward and pro-active compliance with competition law. PE funds can navigate the new regulatory landscape and avoid the risks that come along with it on minority holdings in entities by diligence in law, proper disclosures, and legal counsel. There is an obligation to comply, as has also been upheld in the practice of CCI that, ignorance of the law is no excuse.
– Shriyansh Singhal & Lavanya Chetwani
