India: The Competition Appellate Tribunal's Take On Investment Only Exemption In India

On 30 August 2016, the Competition Appellate Tribunal passed an order upholding the penalty imposed on Deepak Fertilizers and Petrochemicals Corporation Limited and SCM Soilfert Limited for contravention of Section 5 and Section 6 of the Act. The decision of the Tribunal raises some interesting points regarding the scope of the 'investment only exemption' and highlights the ever increasing need for penalty guidelines.

Around a year ago, the then ended battle between Zuari Fertilizers and Chemicals Limited and Zuari Agro Chemicals Limited ('Zuari') on one hand and Deepak Fertilizers and Petrochemicals Corporation Limited ('DFPCL') and SCM Soilfert Limited ('SCM') on the other for control over the erstwhile Vijay Mallya owned Mangalore Chemicals and Fertilizers Limited ('MCFL') witnessed an unexpected consequence in the form of imposition of penalty under section 43A of the Competition Act, 2002 ('Act') for failure to notify their acquisition to the Competition Commission of India ('CCI'). The CCI vide separate orders dated 10 February 2015 imposed a penalty of INR 2 crore each on both Zuari and SCM for failure to notify their acquisitions in terms of Section 5 read with Section 6 of the Act.1

Recently, on 30 August 2016, the Competition Appellate Tribunal ('COMPAT') upheld the order passed by the CCI imposing fine on SCM and the DFPCL (person acting in concert).2 The importance of the decision increases as it provides more clarity on the scope of the investment only exemption which is included in Schedule 1 of the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 ('Combination Regulations').

Popularly known as 'investment only exemption'3 or the acquisition 'solely for an investment', Item 1 of Schedule I of the Combination Regulations creates a special rule for acquisition of shares which are (i) solely as an investment; or (ii) in the ordinary course of business (iii) in so far as the acquirer does not hold more than 25% shares or voting rights, (iv) not leading to control of the target enterprise. The explanation to Item 14 also provides that any acquisition of less than 10% shall be treated as solely as an investment provided that the acquirer has (i) the ability to only exercise rights of an ordinary shareholder and (ii) is not a member on the board of directors and does not have and does not intend to nominate a director on the board of directors and does not intend to participate in the affairs or management of the target enterprise.

Where an acquisition falls within the scope of Item 1 Schedule I, in terms of Regulation 4 of the Combination Regulations, a notice "need not normally be filed" within respect to such an acquisition.


The matter is in the interesting backdrop of a battle between Zuari on one hand and DFPCL and SCM on the other to get control over MCFL. In their bid to acquire control of MCFL, both companies had made open market purchases during April and July 2013. In particular, SCM with DFPCL as a person acting in concert had made open market purchases of 2,89,91,150 shares of MCFL on 03 July 2013 ('First Acquisition'). These shares represented 24.46% of the paid up capital of MCFL. Prior to this in April 2013 and subsequently in July 2013, Zuari also made open market purchases of shares of MCFL in four tranches amounting to 16.43 % (approx.) in the equity share capital of MCFL.5 None of these acquisitions were notified by either party to the CCI.

Subsequently, on 23 April 2014, SCM with DFPCL as the person acting in concert made certain open market purchases amounting to 0.8% of the equity of MCFL which entitled SCM to exercise more than 25% of the voting rights in MCFL. They simultaneously also made public announcement for acquisition of upto 26 percent of the equity share capital of MCFL through open offer. This was notified to the CCI on 22 May 2014 i.e. 29 days after the open market purchases had been 'consummated' ('Second Acquisition').

The CCI vide order dated 20 July 2014 'approved' open market purchases holding that there was no appreciable adverse effect on competition by the said acquisition, without prejudice to the proceedings under Section 43A of the Act.6

Thereafter, on 10 February 2015, the CCI passed an order under Section 43A of the Act holding that DFPCL and SCM had contravened the provisions of the Act by:

  1. not notifying the First Acquisition; and
  2. notifying the Second Acquisition after purchases had been made.

In view of the same, the CCI imposed a fine of INR 2 crore on DFPCL and SCM. In a separate order Zuari was also fined INR 2 crore for the open market purchases made in four tranches in April and July 2013.7

The decision of the COMPAT and its implications

On 30 August 2016, the COMPAT passed a final decision in the appeal preferred by SCM and DFPCL against the order dated 10 February 2015 passed by the CCI upholding the findings of the CCI on both the points.

SCM and DFPCL raised the same contentions vis-ŕ-vis both the First and the Second Acquisition as it had before the CCI. Broadly speaking, DFPCL and SCM contended:8

  1. that vis-ŕ-vis the First Acquisition, it did not entitle them to hold 25 per cent or more of the total shares/voting rights in MCFL; and did not lead to an acquisition of control and that it was merely a purchase of shares, and that no additional management rights, such as affirmative voting rights, were attached to the same. Moreover, there was no intention to acquire control of MCFL, no strategic relationship with MCFL nor did the Acquirers envisage any involvement in the business and management of MCFL. DFPCL and SCM hence contended that, the First Acquisition fell within the scope of Item 1 of Schedule I of the Combination Regulations and there was requirement for a notification;
  2. that with respect to the Second Acquisition, it was argued that even though they were made prior to the notification, the shares acquired, representing 0.8 per cent stake in MCFL, were kept in an escrow account maintained with their escrow agent and depository participant and in so far as no voting rights accrued to DFPCL and SCM, the transaction was not consummated prior to the approval from the CCI.

The COMPAT however did not accept the contentions of SCM and DFPCL and dismissed the appeal. Agreeing with the CCI, the COMPAT's conclusion on each point is of some relevance and is discussed hereunder alongwith their implications for the sector.

On the scope of the investment only exemption

In line with what the CCI has held in its orders9 the COMPAT agreed that a strategic investment cannot fall within the scope of Item 1 Schedule I of the Combination Regulations. The COMPAT appears to have been influenced by the interpretation of a similar exemption i.e. the 'investment only exemption' in the US under the Hart Scott Rodino Act as well as the paper by OECD on Definition of Transaction for the Purpose of Merger Control Review.10 The COMPAT concluded that a strategic investment would not get the benefit of the exemption as the intention at the time of the acquisition was not just to make an investment "in a competitor company" rather it was "to play a strategic role beyond a passive investment."11 The press statements12 made in 2013 by the management of SCM and DFPCL were found to constitute evidence enough to prove the non passive nature of an investment. The COMPAT also relied on other contemporaneous evidence such as, "bulk / block deals following the rival acquiring shares in MCFL, size of equity stake acquired, the public announcement made through press release, the likely low return on price paid for the shares."13

The COMPAT hence agrees with the CCI that any strategic investment where the intention is to participate in the business activities would not be able to take benefit of the exemption. This approach of the CCI is in line with the recent decisional practice in the U.S. where the intention to participate in business is seen as antithetical to passive investment. 14 However, it is to be noted that the narrow interpretation of 'intention to participate in the business ' while interpreting investment only exemption can lead to a potential chilling effect on shareholder advocacy- something that was highly aptly described by Commissioners Ohlhausen and Wright in their dissenting statement in US. v. Third Point Partners Qualified L.P., Third Point Ultra, LTD, and Third Point Offshore Fund, LTD.15

Intention to participate is however not the only restriction on availing the exemption. As per the European Union16 as well as the OECD,17 even acquisition of minority shareholding ought to be dealt with caution as it can lead to anti competitive effects specifically where it leads to creation of structural linkages between competitors or in a vertical relationship.

Resultantly, in view of the orders of the CCI read with the previous orders18 and the decision of the COMPAT the following broad propositions emerge with respect to the exemption:

  1. the exemption would not apply where the acquisitions which are 'in the nature of strategic combinations creating structural linkages between competing enterprises or those active in vertical markets';
  2. that Item 1 applies only to 'passive investments' and there should be 'no intention of participating in the formulation, determination or direction of the basic business decisions of the target'.19

The CCI hence brought within the ambit of the Act, passive investments visibly neglecting the realities of investment protection rights or even instances of shareholder advocacy which do not intend to provide control.20

Another interesting observation in the order is the interpretation of Explanation to Item 1 wherein the COMPAT has noted that the explanation only indicates that any acquisition above 10% would require a closer scrutiny, however the exemption would continue to be in operation for any acquisition upto 25% which fulfills the other conditions of Item 1 of Schedule I.

The implication for a hostile takeover

Not surprisingly the COMPAT agreed with the CCI that in terms of Section 6(2) and 6(2A) of the Act, the acquirer has to notify the CCI prior to giving effect to the transaction. The unambiguous wording of Section 6(2A) and "any person or enterprise, who or which proposes to enter into a combination" in Section 6(2) reveals that irrespective of the nature of the acquisition, an approval in terms of Section 6 of the Act has to be taken prior to consummation of the transaction. The COMPAT held that in so far as SCM and DFPCL had already acquired the shares prior to notifying the CCI, there were in breach of Section 6 of the Act. The mere existence of an escrow arrangement was not enough as the transaction had already been consummated. The relevance of Section 6 as providing for an ex-ante mechanism was also highlighted by the COMPAT. In this regard it may be relevant to note that the legislature in anticipation has provide guidance on what would be the trigger for a hostile takeover21 and the findings of the COMPAT for the reasons elucidated in the order are fairly sound. What is glaring is the continual absence of an assessment of whether consummation without notification can be penalized under Section 43A of the Act. Since, Section 43A of the Act makes only the contravention of Section 6(2) a violation and not Section 6(2A) of the Act, consummation without approval would technically attract no penalty. The point however awaits argument and adjudication.

The 'obligation' to fine

Another interesting aspect has been the findings of the COMPAT qua the penalty imposed. Taking cue from the decision of the COMPAT in Thomas Cook (India) Limited & Ors v. Competition Commission of India,22 SCM and DFPCL argued that in so far as the transaction was approved and there was no appreciable adverse effect on competition, the penalty ought not to have been imposed. The reliance was most accurate since the fact situation was comparable, however, in a turnaround from its previous decision, the COMPAT now held that, "(A)pproval under Section 31 is not even listed as a mitigating circumstance under Regulation 48 of the General Regulations which deals with the procedure for imposition of penalty."23 Further, the COMPAT also holds that for the purpose of Section 43A of the Act, "(F)ailure simpliciter has penal consequences. Further, the Appellants cannot escape the rigor of the provision by attributing failure to a bona fide interpretation constituting a reasonable cause."24 This marks a diametric shift from the previous decision where the COMPAT itself noted that "valid ground or justification for sustaining the penalty because the violation, if any, of Section 6(2) was purely technical.25" It is trite that a judicial authority is bound to ensure that its decisions are not inconsistent as such blatant inconsistency would reek of injustice. However, inconsistency in imposition of penalties is fairly rampant in the competition regime, including in penalties imposed u/sec 43A of the Act,26 creating the urgent need for finding guidelines to reduce arbitrariness.


A relevant takeaway from the case for industry as well as the practitioners is the limited scope of an exemption on grounds of passive investment. A highly conservative interpretation of Item 1 Schedule I as it stands now and the decisional practice of the CCI as well as the COMPAT, along with the developments in US and EU would suggest that the benefit of Item I Schedule I cannot be taken where:

  1. the acquisition is of more than 25% shares
  2. there is a horizontal overlap or vertical relationship with the target enterprise;
  3. the acquirer has any affirmative or veto rights that cannot be exercised by an ordinary shareholder;
  4. the acquisition is strategic in nature and the acquirer intends to participate in the affairs of the company;
  5. the acquirer is a member of a board or has the right to nominate a director on the board of directors or intends to appoint a director on the board of directors.

Needless to say that this interpretation would imply that a large number of transactions would require a notification despite not raising any competition concerns. This not just raises issues of regulatory enforcement priorities but also requires an assessment of what intention to participate in affairs would mean and if that would have a chilling effect on shareholder advocacy.


1. Order under Section 43A of the Act dated 10 February 2015 in Combination Registration No. C-2014/06/181 (Notice given by Zuari) and Combination Registration No. C-2014/06/175(Notice given by SCM)

2. Appeal No. 59 of 2015 dated 30 August 2016 (against order dated 10 February 2015 in Combination Registration No. C-2014/06/175)

3. The term is loosely borrowed from an identical exemption for passive investment provided in the Hart Scott Rodino Act Hart-Scott-Rodino Act, 15 U.S.C. §18a, (U.S). which has been interpreted rather narrowly by the FTC in the recent past. See generally U.S. v. VA Partners I, LLC, ValueAct Capital Master Fund, L.P., ValueAct Co-Invest International, L.P.; US. v. Third Point Partners Qualified L.P., Third Point Ultra, LTD, and Third Point Offshore Fund, LTD; United States v. Bigarli Holdings Inc.

4. The explanation was added vide amendment on 7th January 2016.

5. Combination Registration No. C-2014/06/181 order dated 10 February 2015 (Notice given by Zuari) at paragraph 3

6. Combination Registration No. C-2014/05/175 order dated 30 July 2014 (Notice given by SCM)

7. Supra n. 1

8. Supra n. 2 at para 8.1, 8.2 and 9

9. Supra n. 1

10. OCED, Directorate for Financial and Enterprise Affairs Competition Committee, Definition of Transaction for the Purpose of Merger Control Review, DAF/COMP(2013)25, 24 January 2014

11. Supra n 2 at para 8.5

12. See generally, which would apply to SCM as well. Also see,

13. Supra n. 2 at para 8.6

14. See supra n. 3. Illustratively, in U.S. v. VA Partners I, LLC, ValueAct Capital Master Fund, L.P., ValueAct Co-Invest International, L.P. the Value Act made simultaneous investments in two companies after they announced their intention to merge. Value Act's statements to its investors stated that purchasing a stake in each of these firms would allow it to "be a strong advocate for the deal to close," which would in turn "[i]ncrease probability of deal happening." If the deal encountered "regulatory issues," ValueAct "would be well positioned as an owner of both companies to help develop the new terms." The FTC was of the opinion that benefit of the investment only exemption would not extend to the acquisition. Value Act eventually settled the case. (See for further details).

Similarly, in US. v. Third Point Partners Qualified L.P., Third Point Ultra, LTD, and Third Point Offshore Fund, LTD an investment by Third Point of less than 10% but accompanied by conduct which was contrary to such an intention including, attempts to contact people who becoming CEO of the Yahoo!, steps to assemble an alternate board of directors and drafting correspondence to Yahoo to announce that they were prepared to join Yahoo were enough to take away the benefit of the investment only exemption. (See for further details)

15. Dissenting Statement of Commissioners Maureen K. Ohlhausen and Joshua D. Wright, In the Matter of Third Point, File No. 121-0019, August 24, 2015. Available at:

16. European Union, Commission Staff Working Document, Towards more effective EU merger control, Brussels, 25.6.2013 at page 3

17. Supra n. 10

18. Supra n. 1 and Order dated 10th November, 2014 in Combination Registration Number C-2014/08/202 at para 9 and 10

19. Ibid para 8

20. At para 8, of Order u/s43A in Combination Registration Number: C- 2014/06/181 the CCI states, "Therefore, to qualify for 'exemption' under Item 1 of Schedule I to the Combination Regulations, an acquisition must not have been made with an intention of participating in the formulation, determination or direction of the basic business decisions of the target. Further, it is observed that while such participation may be through various means including voting rights, agreements, representation on the boards of the target enterprise or its affiliate companies, any of the affirmative or veto rights in the target enterprise or its affiliate companies...."Supra n. 3

21. Proviso to Regulation 5(8) states, "that if the acquisition is without the consent of the enterprise being acquired, any document executed by the acquiring enterprise, by whatever name called, conveying a decision to acquire control, shares or voting rights shall be the "other document"

22. Appeal No. 48 of 2014 order dated 26 August 2015. The COMPAT in this order concluded that in so far as market purchases made previously had been disclosed and eventually the acquisition had been approved, no penalty should have been imposed.

23. Supra n. 2 at para 10.1

24. Ibid at para 11.8

25. Supra n. 22 at para 21

26. See generally, fine imposed by the CCI in Combination Registration No.C-2015/07/289 order dated 14 July 2016 (Notice given by Eli Lily) where a fine of INR 1 crore was imposed. The same may be contrasted with fine imposed in Combination Registration No.C-2015/02/249 order dated 2 May 2016 (Notice given by Piramal Enterprises) and Combination Registration No.C-2015/01/241 order dated 16 February 2016 (Notice given by GE/Alstom) where for similar conduct a fine of INR 5 crore.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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