When Routine Corporate Actions Trigger a CCI Notification: The Exemption that Merits a Closer Look

The “Item 8” Exemption

India’s merger control framework requires companies to notify the Competition Commission of India (”CCI”) and obtain prior approval before implementing a transaction that meets the prescribed thresholds under the Competition Act, 2002 (“Competition Act”), unless they are statutorily exempt. The Competition (Criteria for Exemption of Combinations) Rules, 2024 (”Exemption Rules“) set out twelve categories of exempt transactions.

Item 8 of the Exemption Rules covers a set of transactions that companies and their boards typically regard as entirely routine - share acquisitions through bonus issues, stock splits, buy backs or rights issues that do not result in a change in control.

The exemption rests on a straightforward premise: these corporate actions ordinarily affect the mechanics of shareholding without affecting the substance of governance. The shareholders who controlled the company before the action continue to control it in the same way after. That premise is reflected in the final condition of the exemption: “not leading to a change in control.” This is the operative condition on which the entire exemption rests. When a corporate action results in a change in control as a matter of objective fact, the exemption does not apply and a notification obligation is triggered. If the action has already been implemented (i.e., the shares allotted), the acquirer is exposed to “gun jumping” penalty proceedings.

How Each Action Can Produce a Change in Control

The CCI’s Frequently Asked Questions (“FAQs”) confirm that the exemption is assessed based on the objective outcome of the corporate action, rather than the shareholder’s intent. The FAQs clarify that transacting parties must be mindful of three material shareholding based “control” thresholds:

1. 25%, at which a shareholder acquires the ability to block special resolutions and thereby exercises joint control;

2. 50%, at which it acquires sole control over ordinary resolutions; and

3. 75%, at which it acquires sole control over special resolutions as well.

When a corporate action causes a shareholder’s stake to cross any of these thresholds, the exemption is not available, irrespective of whether the change was neither anticipated nor intended. Conversely, the target’s control could also change if a shareholder’s stake falls below any of these thresholds.

The text of the Item 8 Exemption is deceptively simple. However, practical realities may lead to significant complexities. Consider for instance:

1. In a buyback, the company purchases its own shares from those shareholders who choose to tender, and cancels them. A shareholder that chooses not to sell sees its proportionate holding increase automatically, because the same absolute number of shares now represents a higher percentage of a reduced share capital. This shareholder has not actively acquired anything. Nevertheless, if its shareholding crosses one of the three control thresholds identified above, it has acquired control for the purposes of the Competition Act, and a notifiable combination has occurred.

2. In a rights issue, a similar problem arises when shareholders do not exercise their entitlement in proportion to their existing holdings. If a shareholder allows its rights to lapse or renounces its entitlement, another shareholder may, unintentionally, end up with a significantly larger shareholding. If that stake crosses a control threshold, the exemption does not apply.

3. In a bonus issue, this issue presents itself in complex capital structures involving multiple classes of shares or where shareholders have differential voting rights. If a bonus issue disproportionately increases the voting weight of one class over another, it can inadvertently push a shareholder across a control threshold.

4. Stock splits and consolidations of face value present the least risk as they simply re-denominate existing shares. For instance, if fractional entitlements in a consolidation are rounded down and cashed out, slightly reducing total share capital and nudging a major shareholder’s percentage upward across a threshold.

The Problem: When the Exemption Falls Away, the Framework Struggles to Respond

Even where a company and its shareholders recognise that a buy back, rights issue, bonus issue, stock split or consolidation has produced a change in control, three questions arise that the existing framework does not cleanly resolve: who notifies, at what stage, and on what basis.

Who Notifies? The Competition Act places the notification obligation on the acquirer. In a conventional bilateral acquisition, this is straightforward. In a buy back, rights issue, bonus issue, stock split or consolidation, it is not. The current merger control framework is unclear on several aspects - the practical feasibility of such shareholders taking on the obligation to notify such acquisitions, particularly when the shareholder crosses the control threshold on account of the actions of other shareholders or the company itself, and when the notification obligation arises.

1. In a buyback, it is the party that chose not to participate that may “acquire” control. That shareholder has paid nothing, signed nothing, and actively chose to do nothing.

2. In a rights issue, the shareholder that crosses a control threshold will only know that it has done so at the end of the offer period, once all other shareholders have decided whether to take up, renounce, or allow their entitlements to lapse.

3. In a bonus issue, stock split, or consolidation, no shareholder takes any action at all. If a proportionate holding crosses a control threshold, the notification obligation has no obvious bearer, neither the company nor the affected shareholder has made an acquisition.

At What Stage? In a bilateral acquisition, the notification trigger is the execution of a binding agreement or any other document that reflects the intention to acquire. The standstill obligation (i.e., the obligation not to give effect to any part of a notifiable transaction before the CCI approves a notifiable transaction) applies from that point. Corporate actions such as a buy back or a rights issue have no equivalent trigger document - it is possible to determine whether any shareholder has crossed a control threshold only after the offer period closes, i.e., when the corporate action is effectively implemented. In a bonus issue, stock split, or consolidation, there is no offer period: the corporate action and the change in shareholding are simultaneous. In each case, the change in control may be determinable only at the moment it has already occurred.

On What Basis? A further difficulty arises where the change in control takes place not by one shareholder increasing its holding, but by another shareholder’s shareholding reducing below a threshold. Consider this example. Company X has two shareholders: Shareholder A holding seventy percent and Shareholder B holding thirty percent. Company X conducts a buy back in which Shareholder B tenders all its shares. Shareholder A has not participated. Its absolute number of shares is unchanged. As a result, Shareholder A has moved from a position of joint control to sole control. Is Shareholder A obligated to notify the CCI? It has neither acquired any shares, signed any document, nor taken any positive step towards an acquisition of shares. The change in its shareholding is entirely a consequence of another shareholder’s decision. The CCI’s jurisprudence on control recognises that any shift along the spectrum of control is sufficient to trigger the notification obligation - including one shareholder acquiring sole control to pass special resolutions or another shareholder losing the ability to block special resolutions (as will be the case in this example). But the Competition Act’s notification framework is built around the premise of an acquirer taking a positive act of acquisition. Where no such act has occurred, the framework offers no clear answer.

The same question may arise in a rights issue where a shareholder does not participate, and its stake is diluted to below 25%. Even if another shareholder does not acquire the ability to pass special resolutions by virtue of its shareholding there has been a “change in control” for the purposes of the Competition Act simply on account of the other shareholder’s stake falling below 25%.

These scenarios illustrate a structural gap: the substantive competition law analysis asks whether control has changed, but the procedural notification architecture requires a positive act of acquisition to identify the party responsible for notifying. Corporate actions can produce one without the other. Further complicating matters, the merger control regime places gun-jumping liability on the party responsible for notification.

Does CCI’s decisional practice provide any answers?

CCI’s decisional practice confirms that such instances of passive crossing of control thresholds resulting from routine corporate actions will be treated as notifiable events, and a non-notification may invite gun-jumping penalties.

In CPPIB/ReNew (C-2022/06/936), CPPIB did not participate in a buy back and specifically argued that the resultant increase in its proportionate shareholding was protected under the erstwhile exemption, and only notified the transaction by way of abundant caution. The CCI rejected this argument, establishing that an automatic increase in voting rights beyond the 25% threshold due to a buy back confers negative control and triggers mandatory notification, despite the shareholder’s complete lack of active participation.

This strict approach towards passive changes in control was reinforced in the Bharti Airtel/Indus Towers (C-2024/08/1173). In that case, Indus Towers’ buy back passively pushed Bharti Airtel’s stake over the 50% control threshold, as it did not participate in the process. In both cases, the shareholders with an increased shareholding notified the CCI.

The clear takeaway - had either shareholder relied solely on the exemption and not notified, they would have likely faced gun jumping proceedings and statutory penalties under the Competition Act.

What Could Be Done

To address these issues, shareholders and companies may consider the following:

1. Pre-assess the impact on the target’s cap table: Before any buy back, rights issue, or bonus issue is approved, shareholders who may be close to any of these control thresholds should map the target’s shareholding structure and assess whether they could cross any of them as a result of the proposed action. In a buy back or rights issue, it is not possible to predict the level of participation in advance, so the analysis should model a range of scenarios, including the most extreme cases where the shareholders definitively cross these thresholds (for example, assuming none of the other shareholders participate in a rights issue).

2. Where the notifying party is unclear, use the Pre-Filing Consultation (PFC) process. The CCI’s PFC mechanism allows parties to seek informal (albeit non-binding and verbal) guidance without committing to a formal filing. Where the allocation of the notification obligation is genuinely uncertain, for instance in a rights issue or bonus issue, engaging with the CCI through this route before the corporate action takes effect could help avoid penalties for gun jumping.

3. Filing concurrently with the trigger: Under SEBI’s rights issue process, rights issues must be completed within 23 working days from board approval. Where a rights issue could potentially trigger a notification obligation, the parties should notify the CCI as soon as board approval is received and advocate for expedited review within the 23 working day timeline. However, since the Competition Act allows for a 30 working day Phase I review process, parties run the risk of gun jumping penalties if the 23 working day timeline runs out and allotment occurs, before the CCI has completed its review. To mitigate this risk, acquirers should immediately engage with the CCI through the PFC mechanism to explore whether allotted shares can be placed in escrow pending final approval, a workaround the CCI has permitted for on-market purchases under the 2023 amendments. While an escrow arrangement would not entirely eliminate the possibility of gun-jumping liability, it preserves the competitive status quo, prevents premature exercise of control rights, and demonstrates good faith to the CCI.