Common Ownership: Much Ado About Nothing?

Up until February 2023, nearly 14% of Indian households had invested in mutual funds. The aggregate value of these funds stood at INR 40.8 trillion and is continuously rising.¹ Similarly, despite the major slump caused due to Covid, private equity (PE) investments have hit a record high of US$ 40.1 billion.² The exponential growth of PE investments, and mutual fund investments in India suggests that some of these institutional investors would have significant holdings in many of the same companies. This has led to a debate about whether the investors’ “common ownership” violates antitrust laws by impairing competition among their portfolio companies. Briefly, CCI has articulated “common ownership” to mean a situation where large institutional investors “hold minority stakes in companies that are active in the same industry and compete with each other”.³ Crucially, “common ownership” has been used to enable the imputation of anti-competitive effects, even when the stockholdings of the institutional investor are not “large enough to give the owner control of any of those companies”.⁴

In this article, the aim is to streamline the debate around “common ownership” in the legal scholarship and diffuse certain misconceptions and presumptions which, in the authors’ opinion, shall aid in providing a fruitful direction to the debate.

Perspectives on common ownership

The current debate this article focuses upon is the special scenario in which “a small group of institutional investors” such as SoftBank, BlackRock, etc. collectively acquire a large shareholding in firms competing horizontally in the Indian economy. On one hand, there are proponents who believe that institutional investors hold shares in competing firms and cause these companies to compete with each other less aggressively.⁵ These investors may also pass competitively sensitive information (such as pricing information, etc.) prohibited under Section 3(3)⁶ of the Competition Act, 2002 (hereinafter referred as “the Act”). They further argue that by virtue of their shareholdings, the common investors can control these competitive entities and form part of the same “group” within the meaning of Section 5⁷ of the Act creating an avenue for violation of Section 4(1)⁸i.e. abuse of dominance as a group.⁹ Moreover, some academicians have relied on the economic evidence and legal theory provided by proponents as per se valid and proposed some far-reaching remedies. For instance, certain academicians have suggested that these institutional investors especially the PE/VC/mutual funds should “not own more than one per cent in more than a single company in oligopolies”¹⁰ and even suggested partial divestiture of PE/VC/mutual fund’s existing share owning as “the most appropriate step”.¹¹

On other hand, skeptics question the soundness of this legal theory and whether the empirical data provided is sufficient evidence. They argue that prohibiting common ownership would be a poor public policy decision as it would prevent investors from spreading risk across a diverse financial portfolio with low transaction costs.¹²

CCI’s treatment of common ownership

In the Indian context, CCI has shown little discomfort in embracing the notion that mere common ownership is an antitrust violation without any compelling evidence. For instance, in orders like Meru Travel Solutions (P) Ltd. v. ANI Technologies (P) Ltd.¹³, Apaar Infratech (P) Ltd. v. Maharashtra State Road Development Corpn. Ltd.¹⁴, Xyz v. Continental Milkose India Ltd.¹⁵, etc. CCI hesitated to apply this principle alone as the parties failed to establish a causal relationship between common ownership and softening of competition. Nevertheless, CCI has also decided to undertake a market study on ownership patterns of PE firms, especially in various companies in the same industry.¹⁶ Thus, it is not to be construed that the regulator lacks power to proceed against common owners but that CCI must analyse its implications vis-à-vis anti-competitive conducts in the market.¹⁷ Therefore, the authors provide four observations that would significantly pin down the focus of this legal debate in the context of India. This will help concentrate the legal arguments that would make our current framework more conducive to the competition law objectives.

Observations

Investment management as a dynamic structure

Firstly, a distinction must be made between economic ownership and investment management. Proponents for common ownership often conflate these terms and incorrectly attribute action taken by others to “owners”. It needs to be emphasised that the investors are persons or entities actually investing in the businesses, on the other hand, an investment manager is merely a nominal owner who acts as a fiduciary for such investors. Therefore, the investors are the real parties holding interest in the companies. Proponents argue that investment managers should be considered as true owners as they “typically” or “generally” aggregate their shareholding across their funds and vote for all the shares they manage together as a group (called a bloc). However, this assumption does not consider the separate market considerations that institutional investors face with regards to a decision of competing less aggressively.

Although, it has been shown that when deciding on shareholder proposals concerning environmental or social issues, the investment funds voted the same way for each of their portfolios.¹⁸ Yet, it does not tell us whether investors would vote the same way for a proposal that would direct the portfolio companies to compete less aggressively. In other words, there is no basis to say that SoftBank would not vote differently for each of its portfolio companies. Despite the fact that the competing entities have different stock positions in the market and therefore different competitive incentives and strategies to consider.

All effects are not anti-competitive effects

Secondly, there is limited empirical evidence at this time which suggests that common ownership harms competition. In fact, only a small fraction of economic research uncovers a link between common ownership and a higher level of pricing, and even these studies do not establish a correlation.¹⁹ Though the mechanism of causing harm, if it exists, is unknown, many proponents nevertheless presume a causal relationship that supports identifying an antitrust violation and applying a broad remedy.²⁰ This strategy puts the legal cart before the economic horse because not all anti-competitive effects are illegal. Based on the empirical information currently available, it is, at best, simply premature to declare common ownership a violation of competition laws and compel the restructuring of billions of dollars’ worth of investments.

Statutory flexibility in dealing with common ownership

Thirdly, in arguing for active application for common ownership, the proponents seem to dilute the already existing thresholds in the Competition Act²¹. For instance, under Section 3, the notion of “common ownership” already serves as a means to show an exchange of sensitive information (with substantial evidence) between competitive entities by virtue of common investors, for establishing an anti-competitive agreement. In that, the proponents when arguing that “the opening up of a channel for agreement by institutional investors creates a high likelihood of companies to collude in a manner which can evade the scrutiny of the CCI”.²² They suggest that since there is common ownership, there exists a possibility of exchange of information, and therefore, the entities should be made liable. Interestingly, CCI has itself noted that mere common ownership is not enough (though it might be factually relevant) to prove the anti-competitive effect under Section 3.²²

Alternatively, Explanation (b) of Section 5 of the Act defines a “group” to include control over the management or affairs of an enterprise. In that, the proponents²³ have argued that mere material influence (that is, generally used for combination transactions)²⁴ as a standard of “control” is enough to show that common ownership exists and therefore the competitive entities should be considered a group for the purpose of Section 4. Notably, “material influence” implies merely the presence of factors which give an investor the ability to influence the affairs and management of the enterprise. Therefore, their formulation for imputing anti-competitive effects on institutional investors seems to be that the mere ability to influence management despite minority stockholding in competitive entities is sufficient for grouping competitive entities and declaring them as dominant. This formulation ignores that such a low threshold of “control” is used in combination transactions because they involve different economic principles and a more obvious threat to competition than does common ownership in case of abuse of dominance.²⁵ For instance, a merger between two entities indicates a potential value addition in their market share, whereas in cases of abuse of dominance, the notion of “group” is utilised to indicate an already existing market share [including other factors provided under Section 19(4)²⁶] of both companies that has been misused.

Adequacy of existing legal framework

Fourthly, “common ownership” does not require antitrust enforcers to apply a completely new analytical framework for the purported problems. The current competition law principles are sufficient to tackle the concerns raised by proponents and remain effective in challenges that common ownership may create. Based on the evidence presented by proponents, their main concern with common ownership, in essence, underlies the conventional conducts that may reduce competition, such as hub-and-spoke models, exchange of sensitive information, deliberate parallelism in oligopoly markets, etc. However, the law already enables the regulator with sufficient measures to investigate such transactions and determine their anti-competitive effect. For instance, provisions provided under Sections 3(3) and (4) of the Act through their indirect application are used to punish the hub-and-spoke cartel.²⁷ Similarly, Section 3(3) of the Act already prohibits the exchange of commercially sensitive information.²⁸ Along with prohibiting deliberate price parallelism by oligopolies.²⁹ Thus, the current framework is effective in dealing with cases of the abovementioned conventional conducts even when orchestrated by means of common ownership.

Conclusion

In summary, it seems that the debate surrounding common ownership has been rife with a thicket of assumptions, and a hotly contested body of empirical work. At bottom proponents’ complaints focus either upon conduct that is not unlawful or upon allegedly anti-competitive conduct that, if proven, could be attacked under established antitrust doctrines addressing horizontal conspiracies and the exchange of competitively sensitive information. The way forward in this debate must require cognizance of the fact that “common ownership” is not a ground for proving anti-competitive conduct, for instance, it must not be a precondition enough to show that two competitive entities are a group for the purpose of Section 4. Accordingly, it can be concluded that the notion of common ownership is only one of the means that facilitates such anti-competitive conduct. Therefore, it is important that the scope of debate must focus on investigating causal relationships between common ownership and its anti-competitive effect. Secondly, and from a practical standpoint, a presumptive application of common ownership to prohibit institutional investors from holding small, non-controlling stock positions in competing firms is both a poor policy and contrary to established law in the context of the growing economy of India.