The equity investor landscape has changed significantly in India over the last few decades. Even with the Covid-19 pandemic, investors such as the Blackstone Group, APG Asset Management and CapitalLand Group are scouting for commercial assets in India.1 In fact Private Equity ("PE") investments in India hit a record high of $28.66 billion till September 2020 despite the COVID-19 pandemic.2 Understandably this has drawn the attention of the Competition Commission of India ("CCI"). The Chairman of the market regulator recently hinted that a new market study is likely to be launched to understand the trends and patterns of common ownership by PE investors in multiple firms within the same industry in India ("Market Study").3
- IS THE MARKET STUDY, A CUE TAKEN FROM OTHER JURISDICTIONS?
The suggested Market Study by the CCI can be seen as a ripple down effect of various studies and academic debates that are being conducted in developed jurisdictions coupled with the surge in PE investments in India. Recently in September 2020, in European Union ("EU"), the European Commission ("EC") and the Joint Research Centre ("JRC") had published a report on common shareholding in Europe ("EU Report")4. The EU Report does not call for or assist regarding any regulatory or legislative action, in fact it observes that "In reality, the phenomenon of common shareholding proved to be particularly complex, and disentangling its various effects continues to be challenging. Given that the literature in this area has not yet investigated in depth the channels through which influence is exerted, this certainly constitutes a good candidate for future research." However, the EU Report does observe a positive association between common shareholding and market power.
In USA, the study into common ownership and competition is prompted by two empirical papers which suggested a direct relationship between common ownership in the industry and resultant higher price for the consumers. The first paper examined the common ownership of US Airlines ("Paper on Common Ownership in Airlines") and suggested that there was 3 percent to 7 percent surge in prices of domestic tickets on the average U.S airline route which would not have been the case with separate ownerships.5 The second paper examines the US Banking industry ("Paper on Ultimate Ownership and Banking Competition") and suggest comparable results with respect to relationship between higher prices and common ownership6
Common ownership is a new economic reality7, which is being recognized by the developed jurisdictions like the USA and Europe. The concept refers to a situation where a third party, generally, an investor, concomitantly holds minority/ non-controlling equity shares in companies that are natural competitors in the same industry. With the wide acceptance of the new economic substance, it becomes pertinent for market regulators to test if such common ownerships can distort competition.
- COMPETITION CONCERNS STEMMING FROM COMMON OWNERSHIP OF PE INVESTORS
Although there haven't been many precedents, particularly in India, to indicate that common ownership result in anti-competitive effect, the CCI has taken note of possible competition concerns that may arise due to common ownership while dealing with an allegation of anti-competitive agreements8 and abuse of dominant position9 against Ola and Uber ("Cab Aggregators"). The issue for consideration before the CCI was whether the existence of common investors in the Cab Aggregators have or will lead to the erosion of competitive constraint that each poses on the other.10 However, the CCI did not find the Cab Aggregators in violation of the provisions of the Competition Act, 2002, as amended and regulations made thereunder ("Competition Act") since there was neither any evidence to suggest anti-competitive agreement nor there was abuse of dominant position that could be established resulting from common investors.
Surrounded by theoretical ambiguities, adverse effect of common ownership is yet to be concluded to demonstrate that it poses a competitive risk. However, in the meantime, academic debates suggest that competition between firms with common shareholders may be weakened due to reduced incentives to compete, even when those shareholders have only non-controlling minority stakes.11 The underlying theory of market studies is based on 'harm theories' that includes unilateral effect12 and coordinated effect13 amongst the firms with common ownership.
The unilateral and coordinated effects of common ownership fundamentally influences the behavior of the competing firms resulting in adverse effect on competition by giving the competing firms access to non-public, competitively sensitive information of each other (through the common investor which may amount to hub and spoke14 cartel). Even in the absence of any decisive influence, access to competitively sensitive information can lead to adverse unilateral or coordinated effects (such as cartel) amongst the competing firms with investments from common PE investors. The CCI in such cases, is well equipped with invoking enforcement provisions15 of the Competition Act.
With respect to the merger control regime, the broad competition concerns that are likely to be scrutinized by the CCI while analysing and approving combinations involving PE investments may include (i) lessening of competition between the acquiring and target firm with common investors16; (ii) lessening of innovation17; and (iii) possible abuse of dominant position by the PE investor resulting from common investment.
- SHOULD PE INVESTORS BE WORRIED?
The competition authorities in developed jurisdictions have taken note of unilateral and coordinated effect arising as a result of 'common ownership'. For instance, the Dutch Competition Authority and EC have penalized the PE investors under the parental liability principle. The Dutch Competition authority and EC have earlier held that private equity investors may be held liable for cartel conduct and infringements committed by their portfolio companies. The Dutch Competition Authority in a cartel case18 between flour producers ruled that an investment company can be attributed to an (ordinary) parent company in the same way and an investor with decisive influence cannot be seen as a purely financial investor. The European Competition Authorities in the Goldman Sachs19 case while upholding the parental liability of the PE investors for the infringements committed by their portfolio company stated that "the exercise of voting rights regarding strategic decisions for the business conduct of the subsidiary, such as the appointment of top management and the approval of business and management plans, is evidence of a clear exercise of decisive influence rather than a purely temporary financial investment." In India, although the principle of parental liability of passive investors has not yet evolved, however, the CCI while looking into an allegation of Appreciable Adverse Effect on Competition ("AAEC") being caused due to common investment of PE investors in competing firms, may consider evidence suggesting that (i) the competing firms have a role in deciding to have common investor(s); (ii) competition between the competing firms had been compromised because of the common investor; (iii) whether the common ownership of a PE investor is coupled with the ability to have decisive influence over the competing firms.
On the merger control front, the EC inter alia in Dow/DuPont20 and Bayer/ Monsanto21 decision examined the common ownership between competing firms and observed that common shareholding is to be taken as an 'element of context' in the appreciation of any significant impediment to effective competition. Further, the EC in the Bayer/ Monsanto decision also observed that common ownership should not disqualify an acquirer prima facie as a suitable purchaser of competing business, with regard to its independence. Both these aforesaid cases of common ownership required certain divestments in order to get approval by the EC. This clarifies one thing that common ownership as an 'element of context' may make it harder to persuade the competition authorities, and probably the CCI if it takes cue from the international jurisprudence, that the combination does not raise competition concerns.
However, the recent initiatives of Government of India namely Digital India, Start Up India22, Make in India23 and the recent steps taken towards easing the process of doing business in India, stands as a testimony for India being a pro-investment nation. In line with the aim of making India an investment destination, the Competition Act already carves out certain exemptions for promoting PE investments in India.
First and foremost, passive investments (below 10 percent) made solely as an investment24 and in ordinary course of business by the PE Investors that are not likely to cause AAEC may not require to be notified to the CCI25. However, provided the hefty penalty that may be imposed by the CCI on non-notification and considering the suspensory nature of the merger control regime, the competition trend indicates that investors with investments even below 10 percent, as an abundant caution, have notified the transaction/acquisition to the CCI for its approval due to the difficulty in self assessing control rights and the true meaning of 'passive investment' in privately held companies.26
The key question for the CCI while analyzing any minority PE investment however remains, whether the common minority ownerships of the PE investors across the firms operating in same or similar line of business is coupled with management and board seats or such veto rights which enable the PE investors to be an active investor27 i.e. to have decisive influence/ material influence28 on management and affairs of the competing firms.29
Further, the concerns arising out of common ownership involving PE investors in certain markets, especially in the data-driven markets, may escape the scanner of the CCI if the combining entities whether by way of a merger, acquisition of shares or control30 fall under the De-minimis threshold. A combination (merger/acquisition/amalgamation etc.) is outright exempted if the value of assets or turnover of the target entity is below INR 3.5 Billion or INR 10 Billion, respectively ("De-minimis Exemption"). Thus, De-minimis Exemption may be seen as a statutory support to the minority investments of the PE Investors in India especially in the venture capital space.
- INDUSLAW VIEW
The proposed Market Study by CCI's Chairman into common ownership by PE investors may not immediately pose a problem for the PE Investors but rather bring in more clarity regarding the do's and don'ts for PE investors. Being a market regulator, it is normal for the CCI to conduct market studies especially for markets that are ever evolving and dynamic. Previously the CCI had conducted a market study in the pharmaceutical sector followed by a market study on the e-commerce sector. One possible reason for conducting a study into common ownership by PE investors could be lack of broad academic consensus on its anticompetitive effects. However, PE investors should welcome any steps taken by the market regulator that brings in certainty and a chance to rectify gaps in their investment strategies, if any. At the same time, an aggressive posture on passive investments by an early-stage venture capital (as opposed to 'growth' private equity) investor in competing firms without distinguishing whether these are start-ups or mature businesses may be seen contrary to the intent of 'Start-Up India' and impact the essence of the venture capital ecosystem.
Moreover, the issues arising out of common ownership are not only of regulatory interest but also of great interest to other shareholders of the portfolio firms themselves. Several investment agreements already have contractual guardrails built in. These include:
- Absolute 'Non-Invest' Provisions. These enjoin the investor to not invest in competing firms in the same jurisdiction. Such proposals face stiff resistance from investors due to their monitoring difficulty as well as impact on possible M&A sponsor opportunities. Interestingly, such a covenant could amount to a barrier to entry attracting Section 3(4) read with Section 3(1) of the Competition Act and must be examined carefully.
- Non-Invest Incentives. Shareholders Agreements often permit competing investments but with significant strings attached. These can be strong measures including loss of board seat, access to detailed information rights as well as significant dilution of affirmative vote and pre-emptive rights. . Such covenants are well negotiated in most shareholders agreements.
- Governance Hygiene. PE investors typically resist the fetters imposed on what is ultimately a finance investment. However most large funds readily agree to 'clean teams' (i.e., different sets of executives involved in similar portfolio companies), non-disclosure obligations imposed on their board nominees as well as the super imposing the default company law conflict obligations of directors onto the investor as well to the extent possible or negotiated.
It is expected that such contractual measures will be seen less in terms of 'commercial asks' and more in terms of prudent governance as the PE industry matures and becomes subject to deeper regulatory oversight. Moreover, private equity and venture capital firms would be well advised to have internal compliance programs controlling data integrity through clean teams and ethical walls when handling competitively sensitive information such as pricing among portfolio companies from the diligence stage itself.
1. Global private equity firms scout for mispriced commercial assets in India, (September, 2020), available at: https://economictimes.indiatimes.com/industry/services/property-/-cstruction/global-private-equity-firms-scout-for-mispriced-commercial-assets-in-india/articleshow/78390532.cms
2. Private equity investments hit record high of $28.66 billion in 2020, (October, 2020), available at: https://www.thehindubusinessline.com/news/national/private-equity-investments-hit-record-high-of-2866-billion-in-2020/article32783524.ece
3. Mr. Ashok Kumar Gupta, the Chairman of the Competition Commission of India said in the Annual Conference on Competition Law and Practice, organised by industry body the Confederation of Indian Industry - Competition Commission to study ownership patterns of PE investors, December 04, 2020, available at:https://www.business-standard.com/article/finance/competition-commission-to-study-ownership-patterns-of-pe-investors-120120400618_1.html
4. Rosati, N. Bomprezzi, P. Ferraresi, M. Frigo, A. Nardo, M., JRC Technical Report, Common Shareholding in Europe, (September 2020), available at: https://publications.jrc.ec.europa.eu/repository/bitstream/JRC121476/jrc121476_jrc_commonshareholding_final.pdf. -The Report can be seen as the first comprehensive study conducted by the EU pursuant to Margrethe Vestager's (former Commissioner for Competition in European Commission) statement in year 2018 which indicated that the EC was 'carefully' looking at whether common ownership is in fact prevalent in the EU, also see, Janith Aranze, DG Comp looking into common ownership, says Vestager, February 2018, available at: https://globalcompetitionreview.com/dg-comp-looking-common-ownership-says-vestager
5. Azar J et al., Anti- competitive effects of Common Ownership (2016)
6. José Azar et al., Ultimate Ownership and Bank Competition (2016)
7. Anna Tzanaki, The Rise of Common Ownership: A Call to Arms for Competition Policy?, (July,2019)
8. Section 3 of the Competition Act, 2002
9. Section 4 of the Competition Act, 2002
10. Meru Travel Solutions Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. and Ors., (Case No. 25-28 of 2017), decided by the CCI on 20 June 2018 under Section 26(2) of the Competition Act. In the background, it was alleged that cab aggregators have common investors, viz. Tiger Global Management LLC and DidiChuxing, Accordingly, they are part of the same group and liable to be assessed under 'group' for the purpose of analyzing abuse of dominance. Further it was also noted that SoftBank held minority stakes in both Ola and Uber and there was presence of SoftBank nominee directors on their respective boards.
11. Alec J. Burnside* and Adam Kidane, Common ownership: an EU perspective, (March, 2020), available at;
12. Unilateral effects due to common ownership may incentivize unilateral price increases, or reductions in innovation and quality that may be unprofitable for a firm, but beneficial for its investors if they also hold shares in its competitor(s). -Meru Travel Solutions Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. and Ors., (Case No. 25-28 of 2017)
13. Co-ordinated effects amongst the competing firms due to common ownership where it may create additional incentives to investors to facilitate collusion and earn illegal profits from such collusion at the cost of the consumers. Meru Travel Solutions Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. and Ors., (Case No. 25-28 of 2017)
14. Hub and spoke arrangement refers to exchange of sensitive information between competitors through a third party that facilitates the cartelistic behaviour of such competitors Samir Agrawal v. ANI Technologies and Ors. - (Case No. 37 of 2018)
15. Section 3 of the Competition Act can be invoked for anti-competitive agreements such as cartel amongst the competing firms and Section 4 for unilateral conduct of a dominant firm.
16. Hearing on Common Ownership by institutional investors and its impact on competition - Note by the United States, Organisation for Economic Co-operation and Development, (November 2017)
17. Dow/DuPont - (Case M.7932), decided by the European Commission on March 27, 2017
18. Case number- 17/257, decided by Board of Appeals for Business on March 19, 2019
19. The Goldman Sachs Group, Inc. v European Commission - (Case T-419/14), decided by the General Court (Eighth Chamber) on July 12, 2018. The case is pending before the Court of Justice in Case -595/18 P
20. Dow/DuPont - (Case M.7932), decided by the European Commission on March 27, 2017
21. Bayer/Monsanto - (CASE M.8084), decided by the European Commission on March 21,2018
22. Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India, Read more at: https://www.startupindia.gov.in/content/sih/en/about-startup-india-initiative.html
23. The Make in India initiative was launched by Prime Minister in September 2014 as part of a wider set of nation-building initiatives. Devised to transform India into a global design and manufacturing hub, Read more at: https://www.makeinindia.com/about
24. To analyse whether an investment is made 'solely as an investment' the CCI may inter alia consider: Representation on the board of directors (nomination of a director or an observer) and/or its committees (audit committee, appointment & remuneration committee, etc.); veto or consultation rights with respect to strategically important corporate actions such as change in capital structure, mergers and acquisitions, appointment or termination of key managerial personnel, amendment to charter documents (articles of association and memorandum of association) and commencement of new line of business; and the right to access non-public information, are all relevant in determining whether the acquisition is a mere investment or strategic in nature." Canary Investment Limited/Link Investment Trust II/Intas Pharmaceuticals Limited, (C-2020/04/741).
25. Explanation to Item 1, Schedule 1 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011
26. Beige-Link/ Mankind (Combination Registration No. C-2018/04/565), Amazon.com NV Investment Holdings LLC/Shoppers Stop Limited, (Combination Registration No - 2017/12/538), Amazon.com NV Investment Holdings LLC. / Quess Corp Limited (Combination Registration No -2019/08/680), Canary Investment Limited/Link Investment Trust II/Intas Pharmaceuticals Limited, (Combination Registration No -2020/04/741)
27. For instance, the CCI in the Cab Aggregators Case held SoftBank to be an 'active investor' for having the ability to exercise material influence over competing firms despite it holding minority shareholding (passive investment).
28. Material influence, the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc. Ultratech Cement Limited (C-2015-02-246).
29. Certain changes are expected in the existing Indian merger control regime due to the draft Competition (Amendment) Bill, 2020 ("Competition Bill"), introduced in February 2020. The Competition Bill inter alia proposed to amend the definition of 'control' to include the ability to exercise material influence over management or affairs or strategic commercial decisions. However, if such amendment is accepted then the standard of control will be further lowered which may require a competition examination of the impact of passive investments by the PE investors.
30. Although the provisions of the Competition Act do not lay down a substantive test for 'control', the 2 CCI by way of its decisional practice, has interpreted 'control' under the Act to include both positive control as well as negative control. The CCI treats the acquisition of any of rights relating to the annual business plan, the annual budget, appointment of key managerial personnel and their remuneration, investment decisions (without any materiality thresholds), entry or exit from lines of business, or amendment to the memorandum of association and articles of association, etc. as acquisition of control.
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