Private equity funds likely to face greater CCI scrutiny on small minority investments too

Last month, Goldman Sachs AIF was fined after failing to notify its small minority investment in Biocon Biologics—an associate company of Biocon.

Alternative asset investors, such as private equity funds, are bracing for higher scrutiny by the Competition Commission of India (CCI) following the competition watchdog's recent order against Goldman Sachs Alternative Investment Fund (AIF) last month. Goldman Sachs was fined after failing to notify its small minority investment in Biocon Biologics—an associate company of Biocon.

Legal experts say that minority investments, especially those involving the purchase of less than 10% equity in a company, typically did not require CCI approval if the purchase didn't come with potential controlling rights such as board representation or veto rights. However, in the wake of the Goldman Sachs ruling, private equity funds may have to reevaluate even small transactions that make them privy to potentially price-sensitive, market-related information, experts added. Notably, many PE funds hold varying stakes in multiple companies, which often operate in the same sector and market.

“The decision by the CCI to penalize Goldman Sachs AIF for failing to notify the transaction highlights the importance for investors to carefully assess the nature of their rights and obligations set out in the transaction documents when engaging in minority transactions, and whether the same allow them to exercise any form of control or influence that goes beyond a passive investment. Even subtle forms of control can trigger regulatory scrutiny and the need for notification,” said Rachna Jain, senior partner at Desai and Diwanji.

At the heart of the case is a shareholder agreement (SHA) signed between Goldman Sachs AIF and Biocon in November 2020. According to the pact, Goldman subscribed to optionally convertible debentures issued by Biocon Biologics, which would amount to a 3.8% stake in the company. The SHA also provided certain special information rights to Goldman, including rights to access minutes of board meetings. Goldman did not notify CCI regarding this purchase, as it was of the view that the said investment was a non-strategic in nature made in ordinary course of business and did not involve control.

In the 13-page order dated January 15, CCI noted that these special rights provided Goldman with preferential treatment compared to the ordinary shareholders of the company. The CCI observed that OCDs as instruments gave Goldman the choice to convert the debentures into shares in 2026 when the instruments matured.

“With access to the minutes right, GS AIF gains privileged access to all commercially sensitive information discussed and deliberated upon during the board meetings of Biocon. This information 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. In form, such access is not allowed to ‘ordinary shareholders,’ and in substance, such access is indicative of GS considering the transaction as strategic,” the CCI order said.

Legal experts say the CCI’s interpretation of special rights in this case could also significantly impact PE funds. The CCI compared Goldman Sachs' rights in the unlisted Biocon Biologics to the rights of regular shareholders in publicly traded companies, rather than comparing them to the rights of other investors in unlisted companies, experts added.

“The CCI order against Goldman Sachs has clarified the framework for assessing minority investments under Indian competition law, particularly when such investments involve strategic rights or long-term holdings. While acquisitions below 10% are generally exempt from mandatory notification, this exemption applies only if the investment is purely financial, with no rights or powers that could provide the investor with a degree of influence over the company,” said Shryeshth R. Sharma, Partner at SKV Law Offices.

The government introduced the concept of control through information rights in the 2024 amendments to competition law. Earlier, the law only considered direct rights such as board seats as control, but the newer amendments codified the approach of CCI to factor in indirect means of control, such as information rights.

“The CCI order is clear that Goldman’s right to access confidential information from Biocon's board meetings would not be available to an ordinary shareholder of a company. So, the transaction was not exempt from a CCI filing under Item 1. All the special circumstances highlighted by Goldman in its defense could be relevant either for mitigating gun-jumping penalties or for CCI's assessment of the transaction,” said Vivek Agarwal, partner at DMD Advocates.