CCI Imposes ₹40 Lakh Penalty On Goldman Sachs For Failure To Notify Investment In Biocon Biologics U/S 6(2) Of Competition Act

The Competition Commission of India (CCI) has penalized Goldman Sachs INR 40 lakh under Section 43A of the Competition Act, 2002, for failing to notify its investment in Biocon Biologics Limited.Background FactsGoldman Sachs AIF Scheme-1 (GS AIF) executed a Securities Subscription Agreement and a Shareholders Agreement (SHA) on 7.11.2020, and closed the transaction on 9.12.2020. Under the SHA, GS AIF gained Reserved Matter Rights, Information Rights and Access Rights. GS AIF is an investment scheme under the Goldman Sachs India Alternative Investment Trust, is registered with SEBI as a Category II Alternative Investment Fund (AIF). Biocon, a subsidiary of Biocon Limited, operates R&D centers in Bengaluru and Chennai and manufacturing facilities in Bengaluru and Malaysia.The CCI found that GS AIF failed to notify the transaction before consummation. On 4.02.2022, CCI issued a letter under Section 36(4) of the Act, seeking information. GS submitted its final response on 16.08.2022.On 18.05.2023, CCI noted that the Minutes Right, Access Rights, and Reserved Matter Rights suggested a strategic transaction, not a mere investment. CCI concluded the transaction should have been notified under Section 6(2) of the Act. On 25.05.2023, it issued a Show Cause Notice (SCN) under Section 43A. GS responded to the SCN on 29.06.2023. Submissions of Goldman SachsGS AIF stated that the transaction was solely for investment purposes and in GS AIF's ordinary course of business, with the objective of obtaining a return on its investment without any underlying strategic intent towards participating in the affairs and management of Biocon Biologics and therefore, it benefitted from Item 1 Provision.The Item 1 Provision provides an exemption for minority acquisitions if three conditions are satisfied:The acquisition does not entitle the acquirer to hold 25% or more of the total shares (on a fully diluted basis) or voting rights of the target enterprise, whether directly or indirectly (Shareholding Condition); andThe acquisition does not lead to an acquisition of control (including negative or joint control), voting arrangements, de facto control, or otherwise (Control Condition); andThe acquisition is solely as an investment (SIP Condition) or in the ordinary course of business of the acquirer (OCB Condition).Goldman Sachs referred to the explanatory clause of the Item 1, which states that an acquisition of less than 10% of total shares or voting rights is deemed "solely as an investment" if the acquirer:Exercises only rights available to ordinary shareholders in proportion to their holdings,Does not hold a board position or nominate directors in the target company, andDoes not intend to participate in the management or affairs of the target enterprise.It was submitted that the conditions were met since:The OCDs represent less than 10% of Biocon's share capital.GS AIF's rights under the SHA do not grant control or material influence over Biocon's management.GS AIF had no board appointment rights, and did not participate in Biocon Biologics' management.It was further submitted that the CCI has never penalized investors for using Optionally Convertible Debentures (OCDs) with such rights.GS submitted that the Transaction also satisfy the test of being in the “ordinary course of business” considering that the activities of GS AIF of providing funding, making investments etc. are 'frequent, routine and usual'.Observations and Findings of the CCIThe CCI noted that the Act defines shares as, '…shares in the share capital of a company carrying voting rights and includes— (i) any security which entitles the holder to receive shares with voting rights; (ii) stock except where a distinction between stock and share is expressed or implied;' Thus, the convertible securities constitute shares.The Commission observed that Minutes Right and Access Right goes beyond the rights of ordinary shareholders both in terms of form and substance. With access to Minutes Right, GS AIF gains privileged access to all commercially sensitive information deliberated upon during the Board meetings of Biocon. Minutes Right also confers access to commercially sensitive information which, inter alia, is the substantive underlying concern of Item 1 Provision.The Commission noted that the 'frequent, routine and usual' test for the ordinary course of business transactions is not limited to the execution of transactions but also weighs the intended span or time period of investment and the agreed role as an investor. The Commission noted that:“Any transaction which is made with the intent of remaining invested for a relatively longer period and involves the acquisition of any additional rights (compared to the rights of an ordinary shareholder) cannot be considered as in ordinary course of business.”The Commission held that that the Transaction was notifiable and by consummating the same without filing a notice under Section 6(2) of the Act, GS is liable to penalty...

CCI Imposes ₹40 Lakh Penalty On Goldman Sachs For Failure To Notify Investment In Biocon Biologics U/S 6(2) Of Competition Act

Tazeen Ahmed

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