PE, VC-driven deals to face enhanced competition scrutiny under new rules

The CCI has broadened the scope of control, which, in turn, narrowed the number of deals that can be eligible for seeking exemption. Under the new rules, even if a fund doesn’t have a board position but has the right to have an ‘observer’ on the board, then the deal would need the CCI's approval.

“It is correct that the new rules for combinations issued by the CCI do make it difficult for PE and VC transactions going forward. There is indeed the requirement to notify transactions where the investor has access to competitively sensitive information. The new norms will complicate things for PE/VC investors,” said Avaantika Kakkar, Partner (Head - Competition Law), Cyril Amarchand Mangaldas. “The other criteria listed in the new rules, however, have been enforced by the CCI for some time. There have been instances where the investment with an observer seat was required to be notified to the CCI,” she added.

“A crucial exemption concerns minority acquisitions, more relevant for private equity investors, where the investor proposes to acquire less than 25% of the shareholding or voting rights in the target. As per the rules, the exemption cannot be claimed if (i) the investor is getting a board/ observer seat or a right to access commercially sensitive information of the target (typically through information rights), or (ii) the investor or its group entities or their affiliates have overlapping business interests in India. For acquisitions below 10%, CCI will not assess overlaps, making the exemption available if the other condition is met.” Said   Vaibhav Choukse, partner Competition Law, JSA.

Even deals where funds are entitled to receive any commercially-sensitive information about the company in which they have invested would need prior approval of the CCI. The new rules also stipulate that if the fund has investments in other companies from the same or related sector, then the transaction will not get any relief, say legal experts.

“Although such minimal rights are essential for investors to protect their investments and are not necessarily intended to influence the management of the businesses, the CCI is concerned about the potential for commercially-sensitive information to be exchanged between competing enterprises via common shareholders. The  concern is that even the sharing of commercially-sensitive information, without explicit collusion, may restrict competition by reducing the uncertainty regarding the future actions/conduct of the competitors,” said Akshayy Nanda, partner, Saraf and Partners.

“The impact of common minority ownership in competing enterprises on competition has triggered a raging global debate. Despite the limited economic research to date linking common ownership in competing entities to higher market prices, the CCI aims to proactively ensure that competitive dynamics are preserved.” he added.

Additional compliance burden

In the absence of any exemption, these funds would have to file merger documents with the CCI. Consequently, the funds would need to be approved by the anti-trust regulator before the deal can be closed. An additional layer of compliance burden increases the deal time frame by about 50 days, according to legal experts. Technically, in such filings, the CCI also has power to force the parties to amend deals in case of any anti-competition concerns. However, no further changes are suggested by the CCI to an existing deal.

“At a time when the government is taking more initiatives to ease PE/VC investments in India with various regulatory changes, one has to navigate through the framework of the new CCI rules, carefully. ‘Observer’ position is not an identified legal construct under the Companies Act, 2013 and usually these positions are taken up for better monitoring of the investments made by PE/VCs,” said  Sohini Mandal, Founder, Nilaya Legal.

New challenges for digital technology firms 

These changes are a part of a larger rejig in the combination rules aimed at capturing deals happening in the digital technology space under the CCI's purview. Those deals where the target company had assets worth more than Rs 1,250 crore or has a turnover of more than Rs 3,750 crore are required to be notified to the CCI.

Since technology companies are by and large asset light and are often loss-making, they managed to stay out of the purview of the rules. Now, CCI has introduced a new condition saying if the enterprise value of the deal is more than Rs 2,000 crore, then it would also require the anti-trust regulator's approval.

“The new regime, undoubtedly, expands the ecosystem of investment and acquisition deals for which CCI filing or approval is required,” Said Deepak Joyce, partner, Joyce Law. “It needs to be seen how the rules work in cases where a clutch of investors are participating in an investment round of more than Rs 2,000 crore. If a single investor is putting in less than Rs 2,000 crore whether such investor would also need to make the requisite filings with CCI is another point to be noted,” he added.