Jurisdiction - India
Reports and Analysis
India – Concept Of Control Under The Competition Act, 2002.

19 April, 2013


Investors today seek to protect their investments through a bevy of rights, both positive and negative. 


These rights give them varied degrees of control over the business affairs of the investee company. An investment by an enterprise which leads to the acquisition of ‘control’ over another enterprise may require notification to CCI under Section 6 of the Act, provided the transaction meets the asset size or turnover value thresholds prescribed under Section 5 of the Act.


Moreover, if an enterprise is said to ‘control’ another, the two will qualify as ‘group’ companies under the Act, exposing them to a different set of asset and turnover thresholds. Therefore, the question which arises is: when might the rights secured by an investor cease to be mere investment protection
rights and become so extensive that CCI treats them as leading to ‘control’ over another enterprise. This article seeks to analyze the definition of the term ‘control’ as contained in Section 5 of the Act and CCI’s approach in interpreting the term in merger cases. 

Explanation (a) to Section 5 of the Act defines the term ‘control’ to include, ‘controlling the affairs or management by (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise’. On a plain reading, this definition provides little clarity on when the rights secured by investors lead to ‘control’ over another enterprise. To compound things, the Combination Regulations specifically state that acquisition of ‘control’ as well as transfer from ‘joint control to sole control’, requires pre-merger notification to CCI.

In the recent past, CCI has examined the issue of what constitutes ‘control’ within the meaning of Section 5 of the Act. In its decision dated August 9, 2012 relating to the acquisition of shares in Multi Screen Media Private Limited, CCI acknowledged that joint control over an enterprise may arise out of contractual arrangements between its shareholders. For instance, CCI observed that veto rights enjoyed by a minority shareholder over certain strategic commercial decisions may result in a situation of joint control over an enterprise. CCI specifically identified four types of rights which may be construed to confer ‘control’ over an enterprise by the investor(s).


These include veto rights with respect to (a) engaging in a new business or opening new locations/offices in other cities; (b) appointment and termination of key managerial personnel (including material terms of their employment); and (c) material terms of employee benefit plans. At the same time, CCI was careful in distinguishing rights resulting in a situation of joint control from mere investment protection rights. It qualified its decision by saying that an assessment of control would depend on the facts and circumstances of each case, with due consideration to the statutory and contractual rights of the shareholders. CCI further elaborated on the concept of ‘control’ in a more recent decision (i.e. dated October 4, 2012) pursuant to which the acquisition of joint control by Century Tokyo Leasing Corporation over the leasing division of Tata Capital Financial Services Limited was approved. In its order, CCI observed that veto rights could create a situation of control over the assets and operations of an enterprise when they pertain to –


(a) approval of the business plan;

(b) approval of annual operating plan (including budget);

(c) discontinuing any existing line or commencing a new line of business; and

(d) appointment of key managerial personnel and their compensation.


CCI’s approach on the issue of ‘control’ appears to differ from the view taken by the securities market regulator under the SEBI Takeover Regulations. For instance, the Securities Appellate Tribunal (‘SAT’) in Subhkam Ventures Private Limited v. SEBI ruled that only affirmative rights, and not veto rights, would amount to control. Subhkam, a stakeholder in MSK Projects, was given
the power to nominate a director whose affirmative vote would be essential to approve certain key functions like amendments to the articles, changes in share capital, annual business plan, restructuring of the company and the appointment of key officials in
MSK Projects. SAT construed control to be a proactive power, as distinct from a reactive power. On appeal, the Supreme Court of India, did not rule on the issue of what constitutes control and categorically stated that SAT’s
decision on this issue would not constitute a precedent.


As a result, the status of negative control under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’) remains undecided. The issue of what constitutes negative control had again come up in the matter of Clearwater Capital Partners/Kamat Hotels, where SEBI has taken the view that affirmative voting rights, including the right to prior consent in relation to


(a) any alteration of share capital, including by way of buy-back of shares,

(b) alteration of rights relating to the
existing shares,

(c) corporate restructuring, and

(d) formation of subsidiaries and joint ventures granted to Clearwater gave Clearwater ‘control’ over Kamat Hotels for the purposes of the Takeover Code. The matter is currently in appeal before SAT.

CCI’s approach, however, resonates with the practice in relatively more mature jurisdictions, such as the European Union (‘EU’) and the United States (‘US’). In the EU, control is defined as the possibility of exercising decisive influence on an undertaking. This possibility can exist on the basis of rights, contracts or other means, either separately or in combination. Further, the EU Commission Consolidated Jurisdictional Notice (‘Jurisdictional Notice’) defines the term ‘joint control’ as a situation where two or more undertakings or persons have the possibility of exercising decisive influence over another undertaking. As per the Jurisdictional Notice, joint control may exist where the rights of the minority shareholder extend to decisions on issues such as:


(a) determination of budget;

(b) business plan;

(c) major investments; and

(d) appointment of senior management. These four conditions are similar to the conditions specified by CCI in its two merger decisions discussed above.


Similar to the EU approach, US competition authorities also examine the ultimate control or influence that a shareholder may have on another enterprise. The US antitrust authority, the Federal Trade Commission (‘FTC’) has, on several occasions, analyzed minority shareholdings for elements of control, especially in the context of private equity firms picking up stakes in competing companies. In carrying out such an analysis, similar to the EU and Indian approach, FTC examines whether the veto rights enjoyed by the investor allow it to influence the investee company’s budgetary allocation, business plan and small capital expenditures.


At the same time, FTC does not just limit its analysis to whether the investor enjoys such rights, but also examines the effect of such rights on competitive conditions in the market. For example, in transactions involving partial acquisition of shares in an enterprise, FTC would also examine whether such an acquisition may lessen competition by either


(a) enabling the acquiring firm to raise prices or decrease output by controlling or influencing the other firm; or

(b) altering the incentives of the acquiring firm to compete with the second firm. In this respect, FTC’s approach marks a clear departure from CCI’s approach in the two cases discussed earlier.


CCI’s approach while interpreting the term ‘control’ appears to be consistent with the global best practices. While CCI has done well to identify the broad contours of what may constitute control in the context of acquisition of minority stake in a company, the ultimate analysis would vary from case to case. Investors and the industry, on the other hand, must keep in mind that the accrual of rights which go beyond the traditional minority protection rights, in lieu of an investment, may trigger a notification requirement to CCI, subject to asset & turnover thresholds.




For further information, please contact:


Aparna MehraAZB & Partners
Rahul SatyanAZB & Partners



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