The Competition Commission of India (CCI) is presently studying private equity (PE) investment in India in order to understand the impact that common ownership may have on competition in the relevant market. The decision to conduct the study was largely influenced by an increase in investments by PE investors in 2020 and by concerns arising out of an inquiry into potential abuse of dominance in the car hire services sector by Ola and Uber, which had common PE investors.
Under the Competition Act, 2002, unless the target’s assets or turnover are within prescribed limits, all investments or acquisitions that exceed certain thresholds must be notified to the CCI and receive its approval. However, an acquisition of less than 25% of shares or voting rights need not normally be notified if it is made solely as an investment or in the ordinary course of business, and does not lead to the acquisition of control of the target. Further, an acquisition of less than 10% is treated solely as an investment if the acquirer only has rights akin to those of ordinary shareholders; has not nominated, and is not entitled to nominate, a director to the board of the target, and does not intend to participate in the affairs or management of the target. This is the passive investor exemption.
PE investors seek protection for their investments in multiple ways, including through the appointment of directors or observers to the boards of their portfolio companies, information rights, and veto rights. These rights are usually contractually agreed even where the PE investors hold a minority stake and are not statutorily entitled to such rights. Despite the passive investor exemption, there are cases where PE investors have notified acquisitions of less than 10% to the CCI out of an abundance of caution. This is prompted by their concern that the CCI may not interpret investments in multiple companies operating in the same industry as passive investments.
The CCI study is focussed on analysing how an investor may use the information provided by one portfolio company with regard to its other investments in the same industry. The CCI has two main concerns: whether the PE investors holding stakes in multiple companies within the same industry have an incentive to dampen competition, and whether those investors have the means to influence the decisions of their portfolio companies. In considering Meru’s complaint against Ola and Uber, although the CCI did not find abuse of dominance had taken place through the activities or influence of the common investors, it observed that economic theory suggests that “where common ownership translates into control, there can be potential harm to the competition in concentrated markets”.
To alleviate the CCI’s concerns, and obtain approval, acquirers have previously made voluntary commitments, including ensuring that portfolio companies in the same industry do not have common directors; requiring directors to undertake that sensitive information will not be disclosed to directors of other portfolio companies, and implementing information control rules and adequate monitoring mechanisms.
Although the CCI’s study has not been completed, PE investors may for the present, consider having segregated teams and internal policies to protect against information leakage. While directors are not proscribed from serving on the boards of competitors, it may be prudent to avoid this.
The government has implemented initiatives such as Start Up India, and is focussed on creating an investment-friendly regime in India. It is, therefore, critical that the CCI changes from a subjective approach to setting clear, objective standards. This will allow PE investors to invest without any risk of inquiry at a later stage. PE investors will be able to reassess their investment strategy in terms of the contractual rights and protections they may have; the industries in which they may continue to invest, depending on their existing investments in the relevant market, and which investments are required to be notified to the CCI. The CCI’s market study is a step in the right direction.
Vandana Pai is partner and head of investments funds practice, and Gayatri Ramesh is an associate at Bharucha & Partners.
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