CCI keeping a close watch on PEs taking board seats in rival firms: Report

While the CCI has no issues with PEs owing minority stakes in rival companies, the watchdog wants these funds to choose only one firm in terms of board representation

The Competition Commission of India (CCI) is keeping a close watch on private equity (PE) funds taking up board seats in rival firms in the same sector, as it believes that such arrangements can adversely impact the competition landscape, The Economic Times reported on Tuesday quoting people aware of the matter. 

While the CCI has no issues with PEs owning minority stakes in rival companies, the watchdog wants these funds to choose only one firm in terms of board representation, and give up the directorship in rivals, sources told ET. 

"There is no problem if they take board seat in one company per sector but when they come back to seek CCI's permission for taking board seat in the second company, they are being told to choose only one company and give up board representation plans in the second one," one person aware of the matter told ET. 

The person explained, "With help of even a single board seat, a fund can essentially exert influence, be part of commercial decision making and also bring various issues to the notice of the company. Hence, we must be mindful of impact it would have on competition landscape," quoted ET. 

The CCI is also watching PE funds making incomplete disclosure over the extent of influence they exert on companies, ET reported, quoting its sources. 

For example, PEs, while acquiring stake in a firm, disclose to the anti-trust regulator that the buy is a passive investment, without any special rights or board seats. Hence the purchase does not have any material impact on the competition landscape. However, a few months post the CCI's approval, PEs take up board seats in the same firm, the ET report explained. 

"Passive investment itself means the investor doesn't get himself involved in the business operations of the company. However, even with one board seat they can exert influence," a second person mentioned above told ET. 

The person added, "Some of these funds are putting prominent industry figures as their representatives on the boards of companies. Due to the stature of these industry figures, any inputs they share in board meetings is taken seriously by the company which in other words is material influence."

The cross-ownership trend is more common in tech-driven startups, where big PE funds diversify their risks by owning equity across competing companies, sources told ET, adding that the funds in most cases also seek one board to safeguard their investments.