On September 30, 2022, the CCI penalised PI Opportunities Fund – I and Pioneer Investment Fund (collectively referred to as ‘Acquirers’) in relation to its acquisition of 6.03% of shareholding in Future Retail Limited (‘FRL’) through market purchases, without the prior approval of CCI.^[1]

The CCI observed that the acquisition was consummated through on-market purchases on June 7, 2018, and despite it being a combination under Section 5 of the Competition Act, it was not notified before the CCI. Additionally, the Acquirers did not notify the combination even when they were asked to nominate a director in FRL’s board.

The Acquirers argued that this acquisition was exempt from prior notification to the CCI under Item 1 of Schedule 1 of the Combination Regulations. The Acquirers also argued that the acquisition is ordinarily likely to cause AAEC in India. The Acquirer’s core business was to evaluate investment opportunities. Thus, the investment made by the Acquirers in FRL was undertaken concerning their core activity. The Acquirers stated that they were not aware of the fact that after acquiring a stake in FRL, they would automatically be bestowed upon the right to appoint a director. Furthermore, it was also submitted that FRL invited directorship from the Acquirers on its own accord and accepting it did not result in the acquisition of control.

The CCI noted that the Acquirers had the knowledge that the seller had a board seat in FRL, and thus the intention of the Acquirers to participate in the affairs of FRL were clear. The CCI also referred to the principle of “substance over form” to conclude that it is immaterial how the Acquirers got directorship; the substance is that the Acquirers gained the ability to participate in the management of FRL. The CCI also concluded that the acquisition was not ‘solely as an investment’.

It was held that the first test for examining a transaction for being in ordinary course of business is whether the same is a revenue transaction or a capital transaction. The CCI acknowledged that revenue transaction and capital transaction may differ from business to business but held that the key consideration for ‘ordinary course of business’ test is that the activity in question should not even be an ‘investment’. Thus, if the transaction is a capital transaction, it will not be in the ‘ordinary course of business’ and since the Acquirers had themselves referred to the acquisition as an ‘investment’ which by its very definition constitutes a capital transaction being an item of ‘asset’ for the investing firm, the CCI held that the acquisition is not in the ordinary course of business and Item 1 exemption was not made available to the acquisition.

The CCI thus penalized the Acquirers for gun jumping and violating the provisions of Section 6(2) and Section 6(2A) of the Act. Consequently, under Section 43A of the Act, the CCI levied a penalty of ₹20,00,000 on the Acquirers for their conduct.

[1] Ref. No. M&A/Q1/2018/18.