The Competition Commission of India (CCI) recently penalized Cairnhill CIPEF Limited and Cairnhill CGPE Limited in relation to notification of acquisition of 11% equity shares of Mankind Pharma Limited. The CCI opined that the combination was not exempted from notification as it granted certain affirmative rights to the acquirer, including the right to appoint 1 director on the board of directors at Mankind, thus conferring control to the acquirer. The case is the latest in the developing jurisprudence in the CCI relating to acquisitions “solely as an investment” or in the “ordinary course of business”. The present article seeks to shed light on the interpretation of two phrases through the orders of the CCI
The merger control regime in India under the Competition Act, 2002 (“Act”) provides for a mandatory notification of combinations (transactions which cross certain thresholds as provided in the Act) to the CCI. The statutory provisions also provide for a “suspensory regime”, i.e. suspension and non-consummation of the transaction pending approval by the CCI.
However, not every combination is notifiable. Exceptions have been carved out under the CCI (Procedure in regards to transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”) which provide that certain categories of combinations (as provided in Schedule I of the Combination Regulations) are not likely to cause appreciable adverse effect on competition in India, and hence such combinations need not normally be notified to the CCI before being put into effect.
Subject to satisfaction of conditions prescribed therein, Category I provides for exemption to acquisitions which are “solely as an investment” or in the “ordinary course of business”. However, the interpretation of the two phrases is merely straight-forward and, consequently, Category I is the most debated among all of the categories under Schedule I.
Category I of Schedule I of the Combination Regulations: The Contents
At its most basic, Category I provides for exemption from notification for two types of acquisitions, viz. those which are “solely as an investment” or those in the “ordinary course of business”. Further, exemption is subject to two conditions:
1- The acquirer does not hold 25% or more of the total share of voting rights of the target post the acquisition; AND
2- The combination does not lead to acquisition of control for the acquirer in the target enterprise.
Further, an explanation was added to Category I in 2016 clarifying the interpretation of the phrase “solely as an investment”. It was clarified that an acquisition of less than 10% of the shareholding in an enterprise shall be treated as “solely as an investment”. Even this clarification was subject to two conditions, viz.:
1- The acquirer should only have the ability to exercise such rights that are exercisable by the ordinary shareholders of the enterprise whose shares are being acquired; AND
2- The acquirer should not be a member of the board of directors of the target enterprise, should not have the right or intention to nominate a director on the board of directors of the target enterprise, and does not intend to participate in the management or affairs of the target enterprise.
Understanding “Solely as an investment” or “in the ordinary course of business”
It is of vital utility to understand the import of the phrase “solely as an investment” while assessing the applicability of Category I. The CCI considers that “solely as an investment” indicates a “passive investment” as against a “strategic investment”. Therefore, to qualify for Item-I of Schedule I, an acquisition must not have been made with an intention of participating in the formulation, determination or direction of the basic business decisions of the target or likely to cause or result in the same. Such participation by the acquirer in the business decisions of the target enterprise may be through various means including by means of voting rights, agreements, representation on the board of the target or its affiliate companies, affirmative/veto rights in the target, etc. The CCI considers that an investor/acquirer who anticipates seeking to influence management decisions is an “active” investor and such acquisitions will not be considered as “solely as an investment”.
Analysis of a few decisions sheds more light on the interpretation of Category-I by the CCI. In the acquisition of 20% stake in Shriram Capital Limited (SCL) by Piramal Enterprise Limited(PEL), the CCI considered that even though the effective shareholding acquired by PEL was less than 25%, the acquisition entitled PEL to acquire certain affirmative voting rights over matters such as (i) approval of the appointment of the Chief Executive Officer and the Chief Financial Officer of SCL; (ii) alteration of charter documents; (iii) determining the business plan and annual budget; (iv) appointment or removal of auditors; and (v) commencement of any new business line by SCL. Owing to the grant of affirmative rights, the CCI considered that PEL would exercise joint control over SCL and therefore the transaction does not fall under Category I.
It is interesting to take note of the acquisition of 24.46% of the share capital of Mangalore Fertiliser and Chemicals Limited (MFCL) by SCM Soilfert Limited (SCL). However, the CCI took note of a press release filed with stock exchanges stating that the acquisition of share capital of MFCL was a “very strategic and a good fit with the company’s business”. The CCI concluded that the acquisition was a strategic investment by SCL in MFCL and was not made solely as an investment.
Lastly, an exception to the above rules has been made through the decisional practice of the CCI. Acquisitions involving competitors are not viewed as “solely as an investment” or in the “ordinary course of business”. Consequently, Item I does not apply to acquisitions where the shares of a competitor are acquired. 
 Notice given by SCM Soilfert Limited, Combination Registration No. C-2014/05/175, order dated 10.02.2015, Para 8.3.
 Notice given by Piramal Enterprises Limited, Combination Registration No. C-2015/02/249, order dated 02.05.2016, Para 7(f).
 Notice given by Piramal Enterprises Limited, Combination Registration No. C-2015/02/249, order dated 02.05.2016, Para 7(a).
 Notice given by SCM Soilfert Limited, Combination Registration No. C-2014/05/175, order dated 10.02.2015, Para 8.4.
 Notice filed by Alibaba.com Singapore E-Commerce Private Limited, Combination Registration No. C-2015/08/301, order dated 07.10.2015, Para 5.
Article by Mr. M.M. Sharma and Mr. Danish Khan