On December 17, 2021, the CCI imposed a penalty of Rs20,00,000 under Section 43A of the Competition Act on Investcorp India Asset Managers Private Limited (‘Investcorp India’) in relation to its acquisition of private equity and real estate investment management businesses of IDFC Alternatives Limited (‘IDFC Alternatives’)^.[1]

Investcorp India is engaged in providing investment management services and management, operation and supervision of investment vehicles including, inter alia, alternative investment funds and venture capital funds. IDFC Alternatives is engaged in investment management and offers portfolio and risk management, investment banking and advisory services. On February 1, 2019, Investcorp India had acquired real estate fund management and private equity fund management businesses of IDFC Alternatives on a slum sale basis for a lump sum consideration. The funds which were a part of the transaction comprised – Investcorp Infrastructure Fund I, Investcorp Private Equity Fund II, Investcorp Real Estate Yield Fund and Investcorp SCORE Fund.

On January 14, 2020, the CCI decided to inquire into the impugned transaction and accordingly asked Investcorp India to furnish necessary details about the transaction. Upon perusing the response of Investcorp India, the CCI was prima facie satisfied that Investcorp India ought to have given a notice under Section 6(2) of the Competition Act regarding the impugned transaction. However, since no such notice was provided, the CCI issued a notice under Sections 20(1) and 43A of the Competition Act to Investcorp India to show cause as to why no penalty should be imposed on Investcorp India.

In its submission, Investcorp India argued, inter alia, that there had been no acquisition of control over the investee/portfolio companies of the venture capital fund (‘VCF’) and the alternative investment funds (‘AIF’). The trustee has legal and beneficial ownership over the assets of the funds, and the beneficial interest in these assets lies with the unitholders. It was further argued that the transaction benefitted from de minimis exemption and that the Indian Accounting Standard 110 did not require an investment manager to consolidate the financials of investee/portfolio companies of funds managed by an investment manager. The CCI considered the oral and written submissions made by Investcorp India to assess matter under four broad heads: (i) Acquisition of control over portfolio entities; (ii) De minimis exemption; (iii) Accounting Standard 110; and (iv) Proportionate share in the financials of the underlying investee/portfolio companies to be considered.

In relation to the acquisition of control over portfolio entities, the CCI noted that, by way of the transaction, Investcorp India had become the manager of the concerned VCF and AIFs. Per the CCI, the investment structures envisaged demutualisation of investment management and ownership that allowed the investment manager to enjoy a control over the management of the fund although the overall supervision of certain other aspects lied with the trustee. Therefore, since acquisition of control was one of the forms of combination under Section 5 of the Competition Act, the CCI observed that the acquirer was required to give a notice in terms of Section 6(2) of the Competition Act read with relevant provisions of the CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011. In its order, the CCI also remarked that a mere existence of joint control of the trustee or the unitholder did not negate the control exercised by the investment manager of the fund.

With respect to de minimis exemption, the CCI held that the exemption was applicable in cases wherein only the financials of the acquired fund management are considered. However, since the present matter concerned pooled investment schemes that led to demutualisation of investment management, the value of the assets and turnover of the controlled portfolio entities were also deemed relevant. Thus, the CCI held that the portfolio entities of the Acquirer were sufficient to meet the threshold under Section 5 of the Competition Act. With respect to Accounting Standard 110, the CCI observed that the position of the Accounting Standards was not relevant for the purpose of testing the thresholds prescribed under Section 5 of the Competition Act. A fund management arrangement, where the ultimate beneficiaries have given authority to the investment manager to enjoy control over management of the fund, the assets and turnover of the fund would be attributable to the financials of the investment manager for the purpose of Section 5 of the Competition Act as well the de minimis exemption. Lastly, addressing the argument that the assets and turnover of the investee should only be considered on a proportionate basis i.e. to the extent of shareholding and control over the given target entity, the CCI observed that Section 5 of the Competition Act did not operate on the basis of proportionality. Hence, once control is established, the complete financials of the fund/target were to be attributed to the fund manager, for the purpose of Section 5 of the Competition Act.

In sum, the CCI concluded that the acquisition of real estate and fund management and private equity fund management businesses of IDFC Alternatives by Investcorp India was a combination in terms of Section 5 of the Act. However, Investcorp India, being the acquirers, had failed to provide a notice to the CCI as required under Section 6(2) of the Competition Act. Accordingly, the CCI imposed a penalty of Rs20,00,000 on Investcorp India under Section 43A of the Competition Act.

[1] Proceedings against Investcorp India Asset Managers Private Limited under Section 43A of the Competition Act, 2002.