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CCI Should Re-think Position On Affirmative Rights?

Published on Fri, Jul 24,2015 | 22:37, Updated at Fri, Jul 24 at 22:40Source : 

By: Punit Shah, Partner, Dhruva Advisors, LLP

Under the Competition Act, 2002 (‘the Act’), acquisition of shares solely as investments are exempted from giving notice to the CCI and seeking its nod for the acquisition, subject to compliance with certain conditions.  The Competition Commission of India (‘CCI’) in various orders over the years has been interpreting affirmative voting rights as tantamount to control and treating such acquisition of shares as not merely investments. Most recently, the CCI has taken the above view in the case of an investment by two PE funds, registered as foreign institutional investors (‘FPI / FII’) with SEBI managed by the Capital Group in Mankind Pharma Limited.

As an investor class PE Funds and FPI / FII do not typically look to seize or exercise control over companies that they invest in. They are largely financial investors investing in portfolio companies rather than strategic partners (such as overseas joint venture partners, etc.).

In other words they are interested principally in investing in a Target and working with the management of the Target to enhance its value for eventual sale and are not looking to acquire management control over such Target. Typically, these investors would negotiate rights such as affirmative voting rights (for e.g. change in articles of association, capital or corporate restructuring, etc.) and board representation as a part of such investments in order to protect their investment (given the stakes involved).  as opposed to seeking management or control over the Target.

The aforesaid affirmative rights typically only enable the investors to block the Target from undertaking identified actions and don’t equip the Investor to positively cause the Target to do any particular act. Control in general parlance would exist where there is proactive and not a reactive power. The term ‘control’ is not defined under the Act and hence its meaning is to be adopted from the Companies Act, 2013. The definition under the Companies Act, 2013 and SEBI Takeover Regulations[1] are more or less identical.

In the landmark ruling in the case of Subhkam Ventures[2],  while discussing the concept of ‘control and effective control’ the Securities Appellate Tribunal (‘SAT’) held that acquisition of affirmative voting rights does not tantamount to ‘control’ as defined under the SEBI Takeover Regulations. SEBI appealed the order before the Supreme Court and the parties reached an out of court settlement. However, the Supreme Court held that the question on whether negative control is ‘control’ remains open and that the SAT decision would not be treated as a precedent.

The CCI has been adopting a stance similar to that of SEBI on affirmative voting rights. Given the stated objective of the current government to improve the ease of doing business in India by reducing compliance burden and bottlenecks in order to attract foreign investment into India, it may be time for the CCI to reconsider its stance on treating affirmative rights as tantamount to acquisition of control. A change in stance coupled with an appropriate amendment to the Act would be seen as a positive step towards reducing the compliance burden on foreign investors such as PE Funds and FPIs / FIIs.

[1] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
2 Subhkam Ventures (I) Private Limited v/s SEBI (Appeal No. 8 of 2009 order dated January 15, 2010)

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