Since 2011, when the provisions of the Competition Act, 2002 ( the Act) relating to regulation of mergers and acquisitions from competition angle by the Competition Commission of India (CCI/Commission), were notified, and till date, large size corporate transactions between enterprises beyond the high thresholds, in terms of assets or turnovers, prescribed under Section 5 of the Act, (which qualify as "combinations') require giving advance notice to obtain the mandatory prior approval of the CCI, so as to remove likely appreciable adverse effects on competition ( in short, referred to as AAEC) in the relevant markets.
Schedule 1 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulation, 2011 ("Combination Regulations") prescribed by the CCI under the Act, lists out certain categories of transactions which are not likely to cause an AAEC and acquisition of less than 10% of shares or voting rights by an acquiring enterprise in another, solely as an investment, which does not lead to the acquirer gaining any "control" (read "material influence") over the other enterprise (referred to as "minority acquisitions") are exempted under Item No.1 of the Schedule 1 of the Combination Regulations, 2011.
The scope of "control" has evolved gradually over the years and as per the latest CCI orders on this issue, the benefit of exemption under Item 1 of the Schedule 1 of the Combination Regulations is available only when, firstly, the acquirer does not get a right to appoint a member/observer to the Board of Directors of the target enterprise or does not exercise any material influence on the day to day management or affairs , secondly, where the minority acquisition is below 10% and thirdly, where it is considered as "solely for investment purposes" (SIP), when the acquirer has ability to exercise only such rights as are available to an ordinary shareholder in the target enterprise.
Cases where the minority acquisition does not satisfy the above three conditions and the acquirer, presuming that being a minority acquisition of less than 10% shares or voting rights is automatically exempted from notifying to the CCI under Item 1 of Schedule 1 , may lead to violation , which is commonly referred to as "gun jumping", which attracts a huge penalty under Section 43A of the Act. Which may extend up to one percent of the Global turnover of the acquiring enterprise.
In a recent such case titled In re: Proceedings against Goldman Sachs (India) Alternative Investment Management Private Limited under Section 43A of the Competition Act, 2002 , the CCI , while coming to know about Goldman Sachs Alternate Investment Fund ("GS AIF" or "acquirer") acquiring minor shareholding of less than 10% of Biocon Biologics Limited ("Biocon" or "target') , without the acquirer having any right to appoint (or any right to nominate in the future) a member/observer on the board of directors of Biocon , vide its order dated 14.01.2025 initiated proceedings for "gun jumping" under Section 43A of the Act against GS AIF in relation to its recent subscription of optionally convertible debentures ("OCDs") in Biocon .
The transaction was executed through Securities Subscription Agreement and a Shareholders Agreement ("SHA"). The transaction involved the acquirer acquiring only 3.81% of the entire shareholdings of the target, on a fully diluted basis and it did not result in the acquirer getting either any control or material influence in the day-to-day management or affairs of the target or any Board seat etc.
Goldman Sachs AIF, bona fide presuming that this was a minority acquisition made solely as an investment (SIP) and was, therefore, exempted from the notifying requirement under Item 1 of Schedule 1 of the Combination Regulations, did not notify the transaction to the CCI and the transaction was given effect through the SHA executed on 07.11.2020 and closed on 09.12.2020.
Noticeably, pursuant to the transaction, the acquirer gained certain rights in relation to reserved matters, information rights which allowed it to access the certified copies of board/committee/shareholder meetings with related records ("Minutes Rights") and information relating to any direct change in certain shareholdings including certified true copies of the latest capitalization table ("access and reserved matter rights").
PROCEEDINGS BEFORE THE CCI
CCI issued a letter dated 04.02.2022 to the acquirer under Section 36(4) of the Act, seeking information and documents to assess whether proceeding under Section 20(1) and/or Section 43A of the Act be initiated against it. On consideration of the response received from Goldman Sach AIF, the Commission was of the prima facie view that the "minutes rights" granted to the acquirer were not a right available to the ordinary shareholder. The Commission observed that such rights facilitated the sharing of confidential and commercially sensitive information and strategic information of the target to the acquirer. Furthermore, the CCI noted that the access and reserved matter rights suggested that the transaction had a strategic nature rather than being executed in the ordinary course of business ("OCB") or solely for investment ("SIP"). Consequently, the Commission issued a Show Cause Notice ("SCN") to the acquirer, questioning why a penalty should not be imposed on it under Section 43A of the Act for failing to notify the transaction under Section 6(2) of the Act.
SUBMISSION BY THE ACQUIRER
In reply to the SCN, the acquirer submitted that the transaction was executed solely for investment purposes with the objective of obtaining a return on its investment without any underlying strategic intent towards participating in the affairs and management of target and, therefore, benefited from Item 1 exemption. Further, it was argued that the transaction was exempted from (a) Shareholding Condition (b) Control condition (c) SIP condition (d) OCB condition and met the exemption criteria under Item 1 of Schedule I of the Combination Regulations, including (a) Rights condition (b) Board condition (c) participation condition.
The acquirer, negating the Commission's concerns over the sharing of commercially sensitive information, submitted that in the usual course of business any investor/lender will need access to certain commercially sensitive information to evaluate whether funds being invested in a company are being utilized as agreed upon for commercial purposes and to ensure their invested capital is otherwise protected. It argued that such access was necessary for risk assessment and did not imply strategic control.
On the issue of "common minority shareholdings" in competing or vertically integrated enterprises, the acquirer clarified that the SHA explicitly prohibited the sharing of confidential information with its other portfolio companies. It also stated that, at the time of closing the transaction, it did not have any direct or indirect investments in companies that were horizontally or vertically related to the target in India.
Interestingly, the GS AIF , referring to some past orders of the CCI in which such minority acquisitions were exempted, stated that the Commission had not penalized any investor for investing via OCDs with such rights (where the right to appoint a board member/observer has also not been granted) and that the Commission has interpreted it as "solely as an investment" and as a passive investment where the investor does not intend to be involved in the formulation or determination of the day-to-day business decisions of the target.
CCI DECISION
The Commission observed that the issue whether the transaction involving minority acquisitions was required to be notified or not is primarily the subject matter of Item 1 of Schedule 1 Provision. The applicability of Item I Provision requires a transaction to satisfy the "Shareholding Condition" and "Control Condition" and "SIP Condition" or "OCB Condition".
The Commission, however, disagreed with the submissions of the acquirer and was of the view that "minutes rights" and "Access rights" forming part of the subject matter went beyond the rights of ordinary shareholders, both in terms of form and substance. The privileged access to commercially sensitive information discussed and deliberated upon during the Board meetings of target could include strategic plans, financial data, proprietary technology, business forecasts, and other confidential matters crucial to the competitive advantage and market position of the entities involved.
Therefore, the Commission opined that in form, such access is not allowed to the 'ordinary shareholders' and in substance, such access is indicative of acquirer considering the transaction as strategic rather than purely an investment, which, inter alia, is also the substantive idea underlying the exemption under Item 1 Provision. Consequently, CCI found it a case of violation of Section 43A of the Act and imposed a penalty of INR 40 lakhs (INR four million) on Goldman Sachs AIF.
This case illustrates what is commonly referred to as "substantive gun jumping" that is, deliberate failure to notify the transaction to the Regulator under a bona fide belief that notification of the transaction is not required under the extant regulations.
The CCI order broadens the interpretation of "ordinary shareholder rights" and "board conditions" for minority acquisitions under Item 1 of Schedule I of the Combination Regulations.
The key takeaway for investors considering similar transactions is that firstly even though it may appear yet the investors must not assume that certain rights in the target entity arising out of the SIP transactions automatically qualify a transaction for exemption as minority acquisition under the Combination Regulations, Secondly, even though rights proposed to be acquired in the target are similar rights which are given to all or a subset of investors then also the acquirer will not considered to be a "ordinary shareholder" under the Combination Regulations as the Commission will assess the nature and substance of rights granted, rather than merely whether similar rights are given to all or a subset of investors, thirdly, even though an investment is in the nature of SIP or OCB, if it grants an access to commercially sensitive or decision-making information to the parties, then it will be deemed strategic, thus requiring notification to the CCI.
The rights such as "minutes rights/access rights" granted to the acquirer also indicates indirect intention of the acquirer participating in the affairs of the company including the concerns of access to the business decision of the target. The CCI in its Section 43A order in Cairnhill CIPEF Limited & Cairnhill CGPE Limited and SCM Soilfert Limited, reaffirmed that transactions where the acquirer has direct or indirect participation in the business decisions of the target are not exempt under Item 1 to Schedule 1 of the Combination Regulations.
CONCLUSION
This latest order of CCI assumes significance for investment firms, including private equity or venture capital investors intending to acquire minor shareholdings in target companies. Investment firms looking to enter the Indian market must exercise caution when structuring their transactions to ensure compliance with Competition Law.
While transactions in the "OCB or SIP" may appear to be exempt under Schedule exemptions of the Combination Regulations, a substantive analysis may preclude the possibility of such exemption. In such cases, the mere fact that certain rights are granted to all, or a subset of investors cannot automatically be used as a pretext to seek exemption by classifying them under "ordinary shareholder rights".
Furthermore, the CCI, vide this order, has clarified that even if an investment firm has not invested in other entities with overlapping businesses, any rights gained by the acquirer despite appearing to be in the nature of ordinary rights may still require notification. As it enables the CCI to assess the potential impact of transaction on competition and the operational dynamics of the target entity in both form and substance.
To conclude, given CCI's evolving stance on the applicability of schedule exemptions under the Combination Regulations, it is advised that the investment firms must conduct rigorous regulatory due diligence before simply assuming their eligibility for exemption under Item 1 of the Scheule under Combination Regulations as it is crucial to mitigate the risks and avoid penalties by the Indian Antitrust regulator.
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