Key concepts of GROUP and CONTROL under the Competition Act, 2002 By Nandish Vyas and Geet Sawhney (Veritas Legal, India)*1 1 *Nandish Vyas is a partner at Veritas Legal, India and Geet Sawhney is an associate at Veritas Legal, India. The authors are grateful to Ms. Kanisha Vora for her valuable contributions in preparing this handbook. © Veritas Legal 2019 contents CHAPTER 1 • Item 1 – Private Equity Transactions INTRODUCTION ...................................04 • CCI’s orders provides inadequate guidance • Co-investors as notifying parties CHAPTER 2 • Notification for acquiring a single board seat? GROUP ................................................06 • Single board seat means ‘control’? • Controlling or non-controlling portfolio companies? • First Limb - Voting Rights • Second Limb - Control of the Board CHAPTER 5 • Third Limb - Management or Control of Affairs ITEM 8 AND 9 EXEMPTIONS .................32 CHAPTER 3 • Joint Control and Group under Item 8 and Item 9 CONTROL ............................................10 CHAPTER 6 • Various forms of Control – Controlling Interest vs. Joint Control GROUP UNDER SECTION5 AND – Negative Control through Shareholding SECTION 6 ...........................................36 – No Control beyond 25% • Disclosure of ‘group level information’ in notification form – Sole Control • Family Members covered under ‘group’? – Sole Control vs. Negative Control • Establishing ‘Control’ of Family Members – Joint Control • Identifying Group and Control – from a threshold – Joint Control over Group perspective – Joint to Joint Control/No change in Control • Identifying Group and Control – from competitive > Increased Stake assessment perspective > Exit of existing shareholders/investors > Mergers CHAPTER 7 – Joint to Joint Control/Change in Control GROUP UNDER SECTION 3 AND – Joint Control to Sole Control SECTION 4 ...........................................44 > Where acquirer already held 50% shares • Group under Section 4 > Where acquirer already held 51% shares • Group under Section 3 > Where 100% not acquired – Is group a single economic entity? – Joint to Sole Control by a Group – Factors for ‘single economic entity’ – Control as Decisive Influence – Is an ‘Association’ a group? – Control as Material Influence – Are Government Departments covered under Group? > Material Influence – Ex-ante vs. Ex-post – Are PSUs covered under Group? – Control through Voting Rights > Insurance Sector – Control through Shareholding caps > Railways Sector – Control through Common Ownership > Oil Companies CHAPTER 4 APPENDIX A .........................................53 ITEM - 1 EXEMPTION ............................22 • Determining Control under Exemptions • Item 1 – Minority non-controlling acquisition but still not SIP or OCB © Veritas Legal 2019 3 CHAPTER 1 INTRODUCTION The concepts of ‘group’ and ‘control’ are intrinsic to the Indian Competition Act, 2002 (Competition Act), from undertaking the threshold notifiability analysis and product overlap analysis under the merger control provisions to proving dominance of group in cases alleging abuse of dominance. The Competition Commission of India’s (CCI) interpretation of the terms ‘group’ and ‘control’ has evolved from 2011 to 2019, affecting not only the exemptions available to the combinations, but also altering CCI’s approach towards competitive assessment while reviewing such combinations. The CCI has approved more than 670 combinations, as on 2 July 2019, and has touched upon the concepts of group and control in many combination orders. Of these combination orders, approximately 20 orders provide lists of affirmative voting rights/veto rights which may tantamount to control as per the CCI, and more than 60 orders provide CCI’s interpretation of various forms of control under the Competition Act. In this handbook, Chapter 2 examines the three limbs of the definition of ‘group’ as provided under the Explanation to Section 5 of the Competition Act; Chapter 3 discusses the various forms of ‘control’ as described by the CCI in its various orders approving combinations; Chapter 4 highlights the importance of determining ‘group’ and ‘control’ in light of availing the Item 1 exemption (Item 1) under Schedule I of CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (Combination Regulations) and further links Item 1 and ‘control’ in light of private equity transactions; Chapter 5 highlights combination orders where the CCI has explained the significance of ‘joint control’ and ‘group’ in light of intra-group exemptions; Chapter 6 further elaborates on providing group level information to the CCI to conduct competitive assessments and establish ‘control’ through shareholding of common family members; lastly, Chapter 7 explains the CCI’s analysis of group in cases of abuse of dominance under Section 4 of the Competition Act and concept of ‘single economic entity’ under Section 3 of the Competition Act. The focus of this handbook is to trace the decisional practice of the CCI on these key concepts under the Competition Act. 4 © Veritas Legal 2019 © Veritas Legal 2019 5 CHAPTER 2 GROUP The term ‘group’ generally implies a degree of connection, cooperation, or common interest among its members. There are three limbs/tests of the definition of ‘group’2 as contained in Explanation (b) to Section 5 of the Competition Act - (i) the first test is whether an enterprise has the ability to exercise 50% or more3 of the voting rights in another enterprise; (ii) the second test is in terms of ability to control a majority of the board of directors; and (iii) the third test, which is most dynamic, is in terms of ability to control or manage the affairs of the other enterprise. It is apparent that to constitute a ‘group’, the entities in question must first qualify to be an ‘enterprise’ under Section 2(h) of the Competition Act. The next qualification to determine ‘group’ pertains to the aforementioned tests i.e. inter-se holding, directly or indirectly, 50% or more voting rights or power to appoint 50% or more of the members of the board of directors or control the management or affairs of the other enterprise.4 For instance, in 2012, in Kansan News Private Limited vs. Fast Way Transmission Private Limited5, all three limbs of ‘group’ were satisfied.6 However, it is to be noted that the three limbs are ‘either/or’ tests and fulfilment of even a single limb would confer belonging to a group.7 For example, if a particular enterprise does not hold 50% shares8 in another enterprise, it may still have the ability to control it, if it has majority on the board of directors of that enterprise.9 In the matter of EMC/MBECL10, which involved the acquisition by EMC Limited (EMC) of 19.77% shareholding of McNally Bharat Engineering Company Limited (MBECL), the CCI investigated and concluded that EMC (the acquirer) and one of its promoter group companies (i.e. MKN Investment Private Limited (MKN)) belonged to the same group, based on the observation that the Managing Director and the Joint Managing Director of EMC were two of the three directors on the board of directors of MKN. Similarly, even in the event an enterprise has neither the requisite shareholding nor the ability to control a majority of the board of directors, 2. Explanation to Section 5 — For the purposes of this Section,— a) …..; b) “group” means two or more enterprises which, directly or indirectly, are in a position to — (i) exercise twenty-six percent or more of the voting rights in the other enterprise; or (ii) appoint more than fifty percent of the members of the board of directors in the other enterprise; or (iii) control the management or affairs of the other enterprise. 3. The Ministry of Corporate Affairs (MCA) had exempted the ‘Group’ exercising less than 50% voting rights in another enterprise from the application of provisions under Section 5 of the Competition Act by way of notification in 2011. The MCA notification in 2016 extended the validity of the exemption for a further period of five years, i.e. until 4 March 2021. MCA Notification S.O. 673(E) – dated 4 March 2016 - “In exercise of the powers conferred by clause (a) of Section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts the ‘Group’ exercising less than fifty per cent. of voting rights in other enterprise from the provisions of Section 5 of the said Act for a period of five years with effect from the date of publication of this notification in the official gazette.” 4. Arshiya Rail Infrastructure Limited vs. Ministry of Railway and Ors. (Case No. 64/2010, 12/2011 and 02/2011); Association of Third Party Administrators vs. General Insurers’ (Public Sector) Association of India and Ors. (Case No. 107 of 2013) 5. M/s Kansan News Private Limited 177, Industrial Area, Phase -I, Chandigarh -160002 vs. M/s Fast Way Transmission Private Limited Lajja Tower, Sham Nagar, Ludhiana, Punjab and Ors. (Case No. 36 of 2011) 6. The CCI observed that (i) Mr. Gurdeep Singh (opposite party) had more than 50% share in Fast Way Transmission Private Limited (Fast Way) and Hathway Sukhamrit Cable and Datacom Private Limited (Hathway) and 99% share in Creative Cable Network Private Limited (Creative Cable); (ii) he was controlling and managing the affairs of Fast Way, Hathway and Creative Cable directly and (iii) he was a Managing Director in Fast way and director in Hathway and Creative Cable. Thus, Mr. Gurdeep Singh, Fast Way, Hathway, and Creative Cable were held to be part of same group. 7. Order under Section 44 in UltraTech Cement Limited/Jaiprakash Associates Limited (C-2015/02/246) 8. Section 2(v) of the Competition Act states ‘shares means shares in the share capital of a company carrying voting rights and includes -……’ 9. Alok Industries Limited/Grabal Alok Impex Limited (C-2012/01/28); EMC Limited/McNally Bharat Engineering Company Limited (C-2015/07/293) 10. Order under Section 43A in EMC Limited/McNally Bharat Engineering Company Limited (C-2015/07/293) 6 © Veritas Legal 2019 it is possible to infer control by virtue of the ability to control and manage the affairs of another enterprise.