Over the past decade, India's rapid economic expansion has been significantly underpinned by high-growth startups backed by private equity and venture capital. These investments have fuelled innovation, job creation and sectoral transformation.
To safeguard against potential anti-competitive effects arising from such investments, the Indian competition law regime mandates pre-closing approval for transactions which meet certain financial thresholds. Notably, nearly half of all merger control filings in 2024 and 2025 were financial sponsor-led deals before the Competition Commission of India.
Even when investments cross the thresholds, they may avoid an approval requirement from the CCI by limiting shareholding and refraining from acquiring governance rights such as affirmative voting rights, board representation through a director or observer, or access to commercially sensitive information.
The CCI's mandatory standstill requirement generally results in a two-to-three-month review period. In many instances, investors, to expedite deal timelines, dilute essential rights, compromising their ability to effectively participate in or strengthen their position on a company's cap table. These strategies could compromise governance and investor protection in the long term. In brief, the current framework inadvertently punishes responsible investment by forcing investors to waive protections for fear of losing access to investment opportunities.
A calibrated, function-focused adjustment to the regime can strike the right balance between preservation of competitive integrity, maintaining corporate governance standards and funding target entities prior to seeking a CCI approval.
Inter-Connection Regime in Indian Merger Control
The Indian merger control framework mandates that where multiple steps are undertaken as part of a common intent, all such steps must be disclosed through a single filing, even if certain steps would not independently require approval.
Crucially, as the suspensory obligation applies to every step, this framework prevents "slicing and dicing" of transactions to circumvent regulatory oversight. This mechanism prevents piecemeal implementation of a transaction and to ensure that the CCI has complete latitude to assess and, where necessary, address competition concerns arising from potentially problematic transactions, without being constrained by partial consummations.
This framework also prevents financial sponsor transactions from being broken into separate steps, where exempt elements of an investment can be completed prior to a CCI approval, while control-conferring rights can be closed after the CCI approval.
Proposed Solution to Ease Capital Raising, Regulatory Scrutiny
To resolve the above concerns, the CCI may consider a model where the principles of inter-connection are suspended where:
- a transaction pertains solely to a financial investment by a financial sponsor (which is not a strategic deal);
- the transaction involves investment by the investor into a singular target.
With the above background, the following approach can be considered. Through a common or series of executed transaction documents, the financial sponsor would first agree to acquire such shareholding and rights that are together capable of benefiting from any one of available exemptions, and parallelly also agree to acquire additional shareholding and/or rights which, by themselves would disqualify the availability of any available exemptions.
Pertinently, all rights and shareholding that are inter-connected and are proposed to be acquired by the financial sponsor as part of its overall investment must be comprehensively covered in the executed document(s).
Following execution of the transaction documents, the financial sponsor would immediately be permitted to consummate the exempt portion of the investment and to remit the consideration attributable to that portion. At the same time, a merger notification would have to be filed with the CCI in respect of the remaining portion of the transaction, which cannot avail of an exemption on a standalone basis.
Once an approval from the CCI is received, the financial sponsor would be allowed to consummate the remaining portion of the investment and transfer any additional consideration payable in respect thereof.
However, if the CCI forms the view that this portion of the transaction raises competition concerns, it may prohibit this part of the acquisition or permit it only subject to such conditions or remedies as it considers appropriate.
Under this approach, investors can proceed with transaction components that would not, in any case, require a CCI approval and can be undertaken without a CCI approval, allowing timely capital infusion, while retaining the ability to pursue additional rights without exposure to gun-jumping risk which enables greater participation in the corporate governance of the target.
Consolidating all rights in a single instrument also prevents post-closing reneging, thereby enhancing certainty and confidence for all stakeholders and the regulator.
This process also allows the CCI:
- receive full visibility into the entire transaction through their review of all the transaction documents; and
- retain full authority to review rights that may raise competition concerns without expending resources on reviewing parts of the transaction that can be completed by investors even without approaching the CCI.
This system ensures that the CCI's oversight over competitive risks emanating from financial investments remains intact, whilst ensuring that investors are not compelled to dilute rights or postpone funding solely due to time constraints.
Conclusion
The principle of inter-connection is a well-considered approach grounded in global jurisprudence. However, like many regulatory frameworks, a one-size-fits-all approach may not suit every scenario.
In the past, the Ministry of Corporate Affairs and the CCI have introduced targeted carve-outs and respite for specific transactions and industries from facing the full force of the existing competition law framework. Sector-specific exemptions and open market purchase carve-outs are prime examples.
Preventing anti-competitive risks arising from financial investments should not come at the cost of sound corporate governance. A targeted refinement of the inter-connection principle should be considered by the CCI, as part of India's broader commitment to strengthening the ease of doing business framework.
Anshuman Sakle is a partner and Soham Banerjee is a counsel at Khaitan & Co.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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