CCI Sets its Focus on PE Investments – What Does it Mean?

Amidst the countless hardships on the Indian economy induced by the COVID 19 pandemic, a silver lining remained the record inflow of private equity (PE) investments of over USD 28.66 billion. Given the scale and steady stream of investment flow, the Competition Commission of India (CCI) too witnessed an uptick in the number of deals being notified for prior clearance. However, what perhaps changed was the level of scrutiny afforded to such investments. For background, PE investments which are typically structured as minority acquisitions of sub 10 / 25% shareholding with board representation and certain affirmative voting/veto rights are often perceived as “control” conferring rights, since they grant the investor the ability to influence the business decisions of the portfolio company. Therefore, investments accompanied by such contractual rights are not considered as passive financial investments and require prior approval from the CCI. 

The competitive significance of PE investments is amplified when the investors hold a portfolio of competing firms or firms operating in the same market/value chain. In fact, the CCI deems such investments to be strategic in nature and considers such investments to be “sector-based consolidations”. 

The reason why common ownership prompts an antitrust assessment is because consolidations can diminish competition (price and non-price), innovation and technical development in a market. Such acquisitions can also result in coordinated effects through common directorships which, akin to a hub, can facilitate the exchange of competitively sensitive information amongst competing firms. A popular example of the correlation between common ownership and market conduct is revealed from a study of the United States’ airlines sector which showed an upward price trend linked to the entry of the same set of PE firms as minority shareholders in the airlines. The takeaway is that portfolio companies have a greater incentive to raise prices if they share a common owner, in effect, to the detriment of consumers.  

In a similar vein, common shareholding across a value chain can also result in exclusivity arrangements that can lead to market foreclosure. Such market foreclosures are typically caused by restricting input supplies to competitors.  

As outlined above, given the probable impact on the competitive conduct of portfolio companies, antitrust agencies find it relevant to examine investment patterns, contractual rights, and motivations behind PE investments. 

The theories of possible competitive harm discussed above coupled with observations from the CCI’s international counterparts in the Dow/DuPont and Bayer/Monsanto cases have reignited the discussion of competitive effects of common ownership in competing entities. Playing catch-up and in the pursuit to understand the overall PE play better, Mr. Ashok Kumar Gupta, (Chairman, CCI) very recently announced the commencement of a study to analyse minority PE investments and their implications on the competitive character of the relevant markets.  

Undertaking such a market study in the current environment is not a surprising move. The CCI has, in the past, initiated sector specific studies in pharmaceutical, e-commerce, media and telecom markets, etc. Findings in these studies, to the extent completed and published, have triggered investigations into potential anti-competitive conduct against identified market participants. As such, if the PE study reveals areas that merit antitrust scrutiny, the possibility of an investigation against PE players cannot be entirely ruled out. 

PE firms must also be cognizant that the liability for unlawful conduct by portfolio companies can rest on them. Attribution of liability for infringement by portfolio companies, and the imposition of penalties on PE players is not an unusual phenomenon, and many reputed international PE players having faced the music in mature jurisdictions such as, the United States and the European Union. 

All in all, the launch of this study signals tighter and closer CCI scrutiny of minority investments by PE firms. PE houses should no longer presume that minority acquisitions equal absence of antitrust issues and hurdle-less clearance.  

More importantly, to assess potential antitrust risks, a PE firm’s relationship with its portfolio companies through ownership and governance rights must be closely examined juxtaposed with the market positions of those portfolio companies. Further, sector focused PE funds are implored to revisit their compliance policies to ensure that sufficient safeguards are built-in to insulate them from antitrust liability. It is also an opportune time for PE houses to run a diagnosis on their portfolio and avoid unpleasant surprises that could have been tackled with timely intervention.