Looking at Options: Picking the Correct Notification Framework

Introduction

The scheme of the Competition Act, 2002 (Act) requires an acquisition of control, shares, voting rights or assets to be reported to the Competition Commission of India (CCI) when (i) the transacting parties breach certain pecuniary thresholds; and (ii) a binding document is executed between the parties.

Shares are defined to include any security which entitles the holder to receive shares with voting rights, thereby attracting convertible securities within its ambit.

For that reason, the CCI’s position in relation to acquisition of convertible instrument has also been fairly settled wherein the parties to a transaction involving acquisition of convertible securities are required to secure preclearance from the CCI at the time of the acquisition of the convertible security itself. Simply stated, the CCI does not require the notification of convertible instruments at the time of their conversion, even though the competitive character of the market and the control structure of the target entity may starkly differ between the time the convertible instrument was acquired, and the time the convertible instrument was finally converted. This is true for both optionally and compulsorily convertible instruments.

However, the same cannot be stated regarding the position on the trigger and time for notification of an option to acquire shares. This piece attempts to trace the progression of the CCI’s decisional practice on “options” to ascertain what guides and distinguishes it from the CCI’s review matrix for acquisition of optionally convertible securities.

CCI’s original position on the acquisition of call options

The first occasion where the CCI considered the issue of options was in the combination of Reliance Industries Ltd.¹ (RIL)/Reliance Industrial Infrastructure Ltd. (RIIL)/Bharti AXA Life Insurance Co. Ltd. (Bharti decision) the CCI noted that the proposed transaction contemplated the acquisition of 57% and 17% shareholding by RIL and RIIL in Bharti while the remaining shareholding in Bharti continued to be held by its existing shareholder AXA SA (AXA). The parties also disclosed that AXA had the option to acquire 24% shareholding in Bharti from RIL. In this notification, the CCI refused to assess and approve the potential acquisition of shares by AXA noting that such acquisition “at a later date is not part of the present determination and shall be dealt accordingly as per the applicable laws at the time”.

This decision unequivocally laid out the CCI’s original position where the option to acquire shares in the future was to be assessed at the point of time when the shares were acquired. On the face of it, this position appears meritorious as it facilitates competitive assessment of a transaction in the context of the market dynamics prevailing at the time of exercise of the option.

Duality of position vis-à-vis review of optionally convertible instruments

Within less than a year of the Bharti case² the waters were muddied with CCI’s order involving the combination of Independent Media Trust³ (IMT decision) for the acquisition of zero coupon optionally convertible debentures (ZOCD). Per the proposed transaction, each ZOCD holder had the option to convert the ZOCDs into equity shares at any time within 10 years from the date of subscription to the ZOCDs.

Notably, instead of directing the parties to notify the ZOCDs at the time of exercising the option which per the Bharti⁴ decision would be a fitting time to review the competitive impact of said conversion, the CCI approved the transaction while noting that “each ZOCD entitles the holder to receive equity shares of the target companies, the ZOCDs are shares under the Act”.

While the approach adopted in the IMT⁵ decision related to convertible instruments, the underlying principle and logic ran contrary to the stance adopted for the acquisition of options in the Bharti⁶ decision. This is because optionally convertible instruments and the option to acquire shares, are both truly options at the end of the day which merely confer a right on the holder to acquire shares in the future without requiring the holder to mandatorily do so. The dissonance in the treatment of optionally convertible instruments and options by the CCI is therefore questionable.

Even from the standpoint of substantive assessment, the approach adopted in the IMT⁷ decision compels the CCI to prematurely assess the competitive impact of a possible future acquisition without any mechanism to appreciate the competitive concerns that will exist at the time of actual conversion, provided the conversion ever happens.

That said, from a procedural lens, the stance adopted in the IMT⁸ decision could be helpful as it constructively allows parties to notify a transaction as and when it is contemplated without second guessing notification and trigger documentation requirements at the time of conversion.

Impact of approving future acquisitions at the time of acquisition of the instrument/right

Akin to any ordinary transaction where the grant of clearance does not necessitate consummation of a deal, the approval of an optionally convertible instrument or an option right at the time of their acquisition does not necessarily require the parties to mandatorily undertake such conversion to equity or exercise of right to acquire shares.

Therefore, it is entirely possible that an approved acquisition of options or convertible instruments is not affected at all in the future. However, having the approval in advance provides significant comfort to the parties in terms of certainty and timelines when a conversion/exercise is, if at all, required to be undertaken.

Typically, while the CCI refrains from approving transaction steps which are not fully crystallised, there have been several instances (not necessarily pertaining to convertible instruments or options) where the CCI has approved a transaction leg which is conditioned upon happening of a future contingency. Therefore, it is arguable that finality of a transaction step is not an outright necessity for approving a transaction.

As such, the fact that the CCI was willing to approve ZOCDs stand, testament to the fact that absolute certainty is not a necessity to receive approval of a transaction step. Drawing an analogy, so long as an option is well defined in its duration, scope and operation, there is arguably no reason why an option should not be met with parity in treatment with optionally convertible instruments.

Interaction of options/optionally convertible instruments with inter-connection rules

The interconnected regulations embodied under the Combination Regulations, 2011, mandate parties to file a single merger notification encompassing all the transaction limbs in a multi-step transaction that are contemplated by the parties to meet the ultimate objective of the transaction.

Notably, if acquisition of an option is being contemplated alongside a vanilla notifiable acquisition, then the existence and contours of the option is mandatorily required to be notified to the CCI. Under the scheme of the Act and its allied regulations, a notifiable composite transaction (which includes multiple steps comprising the whole transaction) is usually approved in its entirety by the CCI. Stated otherwise, the CCI’s approval is not typically deferred for certain limbs of a composite transaction that are seen to be inextricably linked to the larger transaction.

In this context, the principle underscoring the IMT⁹ decision harmonises the commercial practicalities with the interconnection regulations. Under the construct of the IMT¹⁰ decision, the acquisition of an optional instrument can be reviewed and approved alongside all inter-connected notifiable steps. It would not be possible to adopt this approach under the position advocated by the Bharti¹¹ decision, since under the Bharti¹² decision construct the CCI is forced to ignore a notified step (involving options) and cause it to be evaluated at the future date.

Recent decisions involving options

The standard formulated in the Bharti¹³ decision were diluted once again in the combination of Reliance Jio Infocomm Ltd., In re,¹⁴ (RJIO case) where the CCI approved an option to acquire spectrum provided that the option was exercised within 1 year.

This conditional approval was arrived at after noting the significant uncertainty surrounding the exercise of option rights and the likelihood of changing competitive dynamics in the future. It is speculated that at this time, the CCI probably attempted to harmonise the Bharti¹⁵ decision standard with the IMT¹⁶ decision rationale to allow approval of options so long as the exercise is done within a finite time period when the competitive assessment by the CCI will not go stale or rendered meaningless.

However, in a surprising move, in 2020, the CCI did not approve Axis Bank’s right to acquire additional shareholding proposed to be acquired, within 42 months i.e. 3.5 years of the initial acquisition in Max Life.¹⁷ Once again, in 2021, the CCI rejigged its position and in Sumitomo Mitsui Financial Group Inc. (Sumitomo)/Fullerton India Credit Co. Ltd. (FICC)¹⁸, it granted clearance to an acquisition of shareholding by way of put/call option within a period of 2-5 years from the date of completion of the initial acquisition.

Most recently, the CCI’s stance on reportability and assessment of option rights suggests that parties must notify an acquisition of shares pursuant to an option right only when such right is exercised a view now seemingly frozen through a slew of the CCI’s recent decisions.

For instance, the CCI’s recent order of 2022, in the combination of Air India Ltd./AirAsia (India) Ltd.¹⁹ (Air Asia case), was notified pursuant to the exercise of the call option right held by Tata Sons Private Limited in Air Asia (India) Limited.

This position was earlier echoed in the 2021 combinations of Plum Wood/MrBhavish Aggarwal/ANI Technologies²⁰, and MacRitchie/Fort Canning/MrBhavish Aggarwal/ANI Technologies²¹ (jointly the Ola cases). In the Ola cases, while the parties had disclosed the option to buy shares at a future date (on the occurrence of certain circumstances) as transactions interconnected with the primary acquisition, the CCI nonetheless only approved the main transaction and stated that a requirement to give notice regarding such potential acquisition shall be determined at the time when the right to exercise has accrued.

Conclusion

The CCI’s journey has witnessed several twists and turns over a decade in the context of options and optionally convertible instruments. While the approach adopted in the Air Asia²² case and the Ola²³ case signals a return to original stance adopted in the Bharti²⁴ decision, a fine balance between the otherwise competing positions in the Bharti²⁵ decision and IMT²⁶ decision would likely reconcile the differences and uncertainty that somewhat continue to loom over the reportability of options.

Ultimately, options (put or call), or other optionally convertible instruments only create future equity entitlements and unless it is clear from legally binding agreements that they will be exercised soon, a reporting requirement may not be necessitated until the time of their exercise. This position would be in sync with the CCI’s mandate to assess a more real time competitive impact of a transaction closer to the date of actual acquisition of shares, rather than a crystal ball gaze into the future.

Finally, uniformity is an undisputed welcome hallmark in any regulatory process, and one would only hope for the regulator to utilise a consistent standard to improve predictability of the merger clearance process by treating options and optionally convertible securities at par.

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