1. BACKGROUND

1.1 On December 17, 2021, the Competition Commission of India ("CCI") passed an order1 penalising Investcorp India Asset Managers Private Limited ("Investcorp") for failing to notify its acquisition of the private equity and real estate investment management businesses ("Target Businesses") of IDFC Alternatives Limited ("IDFC") 2 by way of a slump sale (hereinafter referred to as the "Transaction").

1.2 Invoking its look back powers under Section 20(1) of the Competition Act, 2002 ("Act"), 3 and pursuant to its meeting dated January 14, 2020, the CCI sought information from Investcorp in relation to the Transaction vide its letter dated January 17, 2020. 4 Based on Investcorp's submissions, the CCI prima facie observed that the Transaction ought to have been notified and thus, on December 21, 2020, issued a show cause notice to Investcorp for its failure to notify the Transaction.

1.3 Investcorp's primary contention was that the Transaction availed the benefit of the 'de minimis exemption' 5 and was not notifiable to the CCI, as the value of assets and turnover of the portfolio entities of the Target Businesses ought not to be considered for computing the thresholds prescribed under the de minimis exemption ("De Minimis Threshold"). In this regard, Investcorp submitted that: (i) it did not acquire control over the portfolio entities of the Target Businesses as they were only managed by IDFC; (ii) the value of assets and turnover of the Target Businesses alone needs to be considered for computing the De Minimis Threshold; and (iii) the Accounting Standard 110 does not require the investment manager to consolidate the financials of the portfolio entities of the funds managed by it.

1.4 Further, Investcorp submitted that even in the event the value of assets and turnover of the portfolio entities of the Target Businesses are considered, the financials considered by the CCI should be proportionate to the extent of shareholding and control exercised by the Target Businesses and if proportionate values are considered, such aggregate turnover will not breach the De Minimis Threshold.

2. CCI's FINDINGS

2.1. The CCI rejected Investcorp's submissions that the financials of the portfolio entities of the Target Businesses are not required to be considered for computing the thresholds provided under Section 5 of the Act ("Jurisdictional Threshold") and the De Minimis Threshold, and held that the Transaction could not have availed the benefit of the 'de minimis exemption'. While doing so, the CCI observed the following:

2.1.1. In relation to whether Investcorp acquired control over the portfolio entities of the Target Businesses, the CCI observed that pursuant to the Transaction, Investcorp acquired the Target Businesses, i.e., the investment management business of IDFC, and became the manager of the underlying funds. Regarding the relation between funds, their portfolio entities and their investment managers, the CCI noted that: (i) pooled investment schemes usually involve the demutualisation6 of investment management and ownership, wherein the subscribers give authority to the investment managers to control the operations and the management of the fund; (ii) funds have varying degree of interest, (such as, sole control, joint control, mere financial interest, etc.), in their portfolio entities depending on the shareholding and contractual rights; and (iii) investment managers through their ability to exercise and protect the fund's interest in its portfolio entities, enjoy control over such portfolio entities of the fund. Thus, in the instant case, the CCI concluded that as Investcorp acquired the entire Target Businesses (i.e., the investment manager) which exercise operational control over their portfolio entities, Investcorp by way of the Transaction acquired control over the Target Businesses' portfolio entities as well. Further, the CCI clarified that: (a) even if the overall supervision of the fund may lie with the trustee; or (b) the fund maybe jointly controlled by the investment manager, trustee, and unitholder; such factors cannot negate the control of the investment manager over the fund.7

2.1.2. In relation to the applicability of the de minimis exemption, the CCI observed that the investment manager exercise control over the portfolio entities of the fund; hence, in the case of acquisition of an investment management business, the value of assets and turnover of its controlled portfolio entities will have to be considered for computing the De Minimis Threshold and the Jurisdictional Threshold. As such, in the instant case, the CCI concluded that the De Minimis Threshold as well as the Jurisdictional Threshold are breached, when considering the value of assets and turnover of just two portfolio entities of the Target Businesses. 8

2.1.3. In relation to the treatment of the financials of the portfolio entities as per the Accounting Standard 110, the CCI observed that such standards are not relevant for computing the Jurisdictional Threshold. Given that in a fund management arrangement, control is exercised by the investment manager over the portfolio entities of the fund, the consolidated financials of the portfolio entities will be attributed to the financials of the investment manager for computing the Jurisdictional Threshold and the De Minimis Threshold.

2.2. In relation to the proportionate consideration of the financials of the portfolio entities to the extent of the shareholding/ control exercised by the fund, the CCI observed that there is no provision for proportionality under Section 5 of the Act for computing the Jurisdictional Threshold. As such, even if an enterprise acquires material influence (i.e., the lowest level of control) over another enterprise, the complete financials of that enterprise will have to be considered for the purposes of computing the Jurisdictional Threshold.

2.3. In view of the above, the CCI concluded that the Transaction breached the Jurisdictional Threshold as well as the De Minimis Threshold and was thus, notifiable under the provisions of the Act. However, given the cooperation extended by Investcorp in its inquiry, the CCI deemed fit to impose a penalty of INR 20 lakh (approximately USD 26,667)9 on Investcorp for failing to notify the Transaction to the CCI.

3. INDUSLAW VIEW

3.1. This order gains prominence as it sheds light over the CCI's treatment and classification of the relationship between an investment manager, the fund managed by it and the portfolio companies of the fund. The CCI has clarified that for the purposes of the Act, investment managers (on account of the authority given by the unitholders/ subscribers of the fund), enjoy 'control' over the operations and management of the fund and its controlled portfolio entities (also termed as 'operational control'). In line with its decisional practice,10 the CCI has clarified that operational control is considered as an indica of 'material influence', the lowest degree of control. Hence, in case of acquisition of an investment management business, the value of assets and turnover of the fund's controlled portfolio entities will have to be considered for the purposes of computing the Jurisdictional Threshold and the De Minimis Threshold. Thus, the order brings clarity regarding the methodology for computation of the De Minimis Threshold and the Jurisdictional Threshold for combinations relating to the acquisition of an investment management business.

Footnotes

1 Order available at: https://www.cci.gov.in/sites/default/files/Notice_order_document/order/Orderin.pdf.

2 Investcorp acquired a venture capital fund and three alternative investment funds from IDFC, namely: (i) IDFC Infrastructure Fund 3, registered as a venture capital fund; (ii) IDFC Private Equity Fund IV, registered as an alternative investment fund; (iii) IDFC Real Estate Yield Fund, registered as an alternative investment fund; and (iv) IDFC Score Fund, registered as an alternative investment fund.

3 Section 20(1) of the Act, empower the CCI to scrutinize a 'combination' to ascertain whether it has caused or is likely to cause an appreciable adverse effect on competition in India for a period of 1 year from the date on which the combination has come into effect.

4 The CCI also requested for information from Investcorp vide a subsequent letter dated September 30, 2020. The CCI's letters requesting Investcorp for information were responded by Investcorp on February 25, 2020, and October 21, 2020, respectively.

5 The Government of India by way of a notification dated March 27, 2017, exempted transactions from requiring notification to or approval from the CCI for a period of 5 years, if the target enterprise has either assets of the value not exceeding INR 350 crore (approximately USD 47 million) in India or turnover not exceeding INR 1,000 crore (approximately USD 133 million) in India.

6 Under this demutualised mechanism, the unitholders enjoy the beneficial ownership of the fund whereas, the investment manager enjoys control over the operations and management of the fund.

7 The CCI observed that as long as the investment manager is responsible for decision making relating to the operational management of the fund, it would enjoy control over the fund.

8 GMR Energy Limited and Star Agri warehousing and Collateral Management Limited.

9 Converted at 1 USD = INR 75.

10 Combination Registration No. C-2015/02/246, UltraTech Cement Limited, order under Section 44 of the Act, available at: https://www.cci.gov.in/sites/default/files/246_44_PublicV.pdf (Para 12.10).

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