Competition Regulator Proposes A Lenient View For Minority Investment Deals
Competition regulator seeks to address the biggest roadblock for public market transactions.
Deepak Fertilisers & Petrochemicals Corporation Ltd. could’ve been spared a Rs 2 crore penalty in 2018 if the competition law viewed minority investments via open market purchases realistically. Since it doesn’t, the Supreme Court upheld the competition regulator’s stance that businesses cannot acquire minority stakes in publicly listed companies without Competition Commission of India’s nod if that transaction doesn’t meet the exemption thresholds.
The Competition Commission of India has now had a change of heart.
It has proposed an amendment to its merger control regulations that will allow businesses and investors such as private equity funds and sovereign wealth funds to make minority investments via public purchases on the stock exchange or negotiated transactions through block, bulk deals.
The regulator’s proposal is in line with the recommendations of the Competition Law Review Committee that had advocated a practical view towards market transactions that don’t lead to acquisition of control.
This is a significant departure from what the law mandates today. Minority stakes of less that 25 percent need prior CCI approval if they are not made ‘solely as an investment’ or in the acquirer’s ‘ordinary course of business’. A transaction that leads to acquisition of ‘control’ also needs prior regulatory approval.
This provision presents a unique challenge for minority acquisitions in listed companies if the deal meets CCI’s approval thresholds, Avaantika Kakkar, partner at Cyril Amarchand Mangaldas, pointed out. These transactions are typically executed immediately after an agreement is reached between the buyer and the seller to ensure that the price fluctuations do not affect the agreed value of the transaction, Kakkar said.
The requirement of a prior notification to the CCI and the ensuing waiting period jeopardises and conflicts with the legitimate right of acquirers to execute the transaction at an agreed upon price at the most opportune time on the stock exchange.Avaantika Kakkar, Partner, Cyril Amarchand Mangaldas
Further, there is no provision that allows parties to make a confidential filing. In public market deals, confidentiality is essential to ensure that third parties do not influence the price of the securities of the publicly listed company, Kakkar added.
To address this challenge, the regulator has now proposed that such transactions can be carried out without prior approval as long as two conditions are met:
- One, the acquirer must notify the purchase to the regulator without delay.
- Two, the acquirer should not exercise any right attached to the shares or influence the target entity.
It’s a great move by the CCI to enable ease of doing business and in line with other mature competition jurisdictions, Nisha Uberoi, partner at Trilegal, said. The CCI is relaxing the stance it took in Deepak Fertilisers, which was subsequently upheld by the Supreme Court, she added.
Deepak Fertilisers had purchased 24.46 percent in Mangalore Chemicals & Fertilizers Ltd. on the stock exchange without prior CCI approval. It notified the transaction to the CCI only after picking up an additional 0.8 percent in Mangalore Chemicals. The apex court had upheld CCI’s conclusion that Deepak Fertilisers should’ve sought approval before it acquired the shares.
While endorsing CCI’s proposal, Uberoi said that the regulator should specify the timeline within which the acquirer has to notify the purchase. A prescribed outer time limit would serve as a road map to industry to avoid and mitigate any gun jumping risk, she added.