India Business Excellence Fund – IV

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Page 1 of 14 COMPETITION COMMISSION OF INDIA Combination Registration No.C-2023/04/1021 Non-Confidential 16th August 2024 Notice under Section 6(2) of the Competition Act, 2002 filed by India Business Excellence Fund – IV CORAM: Ms. Ravneet Kaur Chairperson Ms. Sweta Kakkad Member Mr. Deepak Anurag Member Appearance: Mr. Rajshekhar Rao, Senior Advocate; Mr. Yatharth Vardhan Singh, Advocate; Mr. Nilav Banerjee, Advocate; Mr. Soham Banerjee, Advocate; Ms. Anisha Chand, Advocate; Mr. Dushyant K. Kaul, Advocate; Ms. Meherunnisa A. Jaitley, Advocate; Mr. Prakash Bagla, Managing Director, India Business Excellence Fund – IV. Order under Section 43A of the Competition Act, 2002 1. On 17th April 2023, the Competition Commission of India (Commission) received a notice under Section 6(2) of the Competition Act, 2002 (Act) read with Regulation 5A of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) filed by India Business Excellence Fund – IV (IBEF-IV/Acquirer) in relation to its Page 2 of 14 acquisition in VVDN Technologies Private Limited (VVDN/ Target). [Hereinafter the Acquirer and the Target are together referred to as Parties]. Description of the Parties 2. The Acquirer is Category II Alternative Investment Fund (AIF) incorporated in India and registered with the Securities and Exchange Board of India (SEBI). The Acquirer primarily invests in equity and equity-linked instruments and/or debt and/or mezzanine or other instruments of Indian or India related companies. It is a sector-agnostic fund, providing growth capital to mid-sized companies. 3. The Acquirer is managed by MO Alternate Investment Advisors Private Limited (MOAIAPL), whose ultimate controlling entity is Motilal Oswal Financial Services Limited (MOFSL). MOFSL is the ultimate parent entity of the Motilal Oswal group. Thus, the Acquirer belongs to the Motilal Oswal group (Acquirer Group). Motilal Oswal group is a diversified financial services provider with products/services such as retail and institutional broking, private wealth management, investment banking, PE, asset management and home finance. 4. The Target, a company incorporated in India, is primarily engaged in the business of providing electronic manufacturing services (EMS), original design manufacturing (ODM) and product design services. The Target provides EMS/ODM services to both domestic and global customers in the following business verticals: 5G, networking & Wi- Fi, Internet of Things (IoT), camera-based solutions, cloud-based solutions, and data center infrastructure. Transaction 5. Pursuant to the proposed transaction the Acquirer would acquire 8.12% to 10.57% shareholding in the Target on a fully diluted basis through a combination of secondary Page 3 of 14 share purchases of equity shares and subscription to Compulsory Convertible Debentures (CCDs) (Proposed Combination).1 Submissions in the Notice 6. The Acquirer submitted in the notice that the Proposed Combination will not result in any overlaps between the Acquirer Group on one hand (including portfolio companies of the Motilal Oswal Funds), and the Target on the other. As such, there are no horizontal, vertical, or complementary overlaps between the activities undertaken by the Acquirer Group and the Target. Hence, the Proposed Combination falls under the category of combinations mentioned in Schedule III of the Combination Regulations and is eligible for deemed approval under the Green Channel Route. 7. It was also submitted that there is an insignificant existing supply arrangement between the Target and MOAIAPL (through its portfolio company, [---------------------------------- -------------------------]. It was mentioned that ordinarily, the Target is not engaged in the business of (i) assembling Printed Circuit Board (PCB) for sale/ supply in the market; and/or (ii) manufacturing products for the medical/healthcare sector. The Target itself is neither engaged in, nor has the capability to manufacture the medical and health care related products that are manufactured by [-------]. However, due to the supply chain constraints faced by [-------] for delivering health care products during the Covid-19 pandemic, the Target provided miniscule PCB assembly services to [-------] on an ad hoc basis to support the nation in the fighting against the Covid-19. 8. It was stated that entire supplies made by the Target to [-------] were against the purchase orders issued in 2020 on account of supply chain constraints. It was further submitted that till date, there was no formal long-term arrangement between [-------] and the Target for such PCB assembly service, which demonstrated the ad hoc nature of the supply 1 The Acquirer Group currently has more than 25% but less than 50% shareholding in the Target through IBEF- III and post the Proposed Combination, it will continue to have more than 25% but less than 50% shareholding in the Target. Page 4 of 14 relationship between them. Further to such purchase orders, the Target assembled the PCBs based on requisite PCB design specifications provided by [-------] itself. These assembled PCBs were used as consumables by [-------] for its machines to undertake various tests including Covid-19. 9. It was stated in the notice that providing PCB assembly services for external sales is neither a core business offering of the Target, nor a strategic input for [-------] machines. Further, [------] also procures PCBs from other suppliers who are engaged in the business of assembling PCBs for external sales. The turnover generated from the supply of assembled PCBs to [-------] constituted less than 1% of the total turnover of the Target for FY 2021-22 which demonstrates the de minimis nature of this supply arrangement. Even otherwise, the Target is a marginal player in the market for assembling PCBs in India. While the overall market for assembling PCBs in India (in terms of value) was approximately at INR 8,000 crore in FY 2021-22, the Target provided assembled PCBs only to the tune of INR [--------------] in FY 2021-22. Accordingly, the Target had a miniscule market share in the range of [0-5] % in the market for assembling of PCBs in FY 2021-22. Issue of Letter for Clarification 10. The Commission in its meeting held on 06th June 2024 considered the notice and decided to seek clarifications from the Acquirer in relation to the information provided in the green channel filing, inter alia, with respect to the supply arrangement between the Target and MOAIAPL (through its portfolio company, [---------]) for the supply of PCBs. A letter was issued to the Acquirer on 19th June 2023 and responses were received on 17th July 2023 (after seeking extension of time by the Acquirer) and` 25th July 2023. Submissions in the Response 11. In response to the letter, the Acquirer inter alia submitted that the supplies made by the Target to [-------] should not be considered as an overlapping activity because (i) PCBs Page 5 of 14 are basic building blocks of any electronic device and are not a strategic input which may have demonstrated a vertical overlap; (ii) there is no agreement governing the supply commitments/relationship between the Target and [-------] for supply of PCBs; (iii) the Target does not offer PCB assembly as a business offering to its customers; and (iv) the extremely miniscule market share of the Target for assembling PCBs in India ensures that there cannot be any appreciable adverse effect on competition in India. 12. It was also stated in the response that the Proposed Combination was consummated on 19th April 2023. Accordingly, the Proposed Combination is hereinafter referred to as ‘Combination’. Further, it was submitted that the miniscule supply relationship between the [-------] and the Target for PCB assembly service had continued till date, in order to largely fulfill historical purchase orders. Issue of SCN 13. The Commission considered the matter in its meeting held on 31st October 2023 and prima facie observed that the activities of Acquirer through [-------] exhibited vertical/complementary relationship with the activities of Target. Thereby, the Combination does not appear to fall under Schedule III of the Combination Regulations. 14. Accordingly, the Commission passed an Order dated 31st October 2023 (SCN) directing the Acquirer to show cause in writing within 15 days of receipt of the notice as to why: (i) notice should not be found void ab initio in terms of first proviso to Regulation 5A (2) of the Combination Regulations and it should not be held in contravention of the provisions of Section 43A of the Act; (ii) it should not be held liable for contravening the provisions of Section 44 of the Act for making statements in the Notice, including Notice Declaration and Green Channel Declaration which are false in material particular; and (iii) it should not be directed, under Regulation 8(1) of the Combination Regulations, to furnish correct notice in relation to the Combination. Page 6 of 14 15. The SCN was communicated to the Acquirer vide letter dated 14th November 2023. The Acquirer submitted its response on 4th January 2024 (SCN Response). Response to SCN 16. Summarily, the response of the Acquirer to the SCN is brought out below. 17. The Acquirer has submitted that there is no violation of Section 43A of the Act inter alia for the following reasons: i. VVDN’s assembly of PCBs for [-------] was an ad hoc and temporary deviation from VVDN’s commercial practice as VVDN is not engaged in the external sales/assembly of PCBs (barring instances of captive consumption) as a primary commercial activity or business vertical. ii. Due to severe supply chain disruptions caused by Covid-19, as an extraordinary measure, [-------] issued purchase orders to VVDN for supplying PCBs to it, which were majorly utilised to manufacture the consumables forming part of [-------] “COVID-19 testing kits”. Prior to 2020, [-------] purchased PCBs from other commercial suppliers of PCBs. iii. The supplies made by VVDN to [-------] was on an ad hoc, need basis, and not a formal commercial relationship as there neither is nor has been any formal long- term agreement/arrangement between VVDN and [-------] for the supply of PCBs. Further, the supply of PCBs to [-------] has been consistently declining, in terms of both absolute numbers and as a percentage of total revenue generated by VVDN. The miniscule supply relationship that has continued till date is to largely fulfil historical purchase orders put in by [-------] during the onset of the pandemic. [---- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------] Page 7 of 14 [--] [--------------------] [-----------] [--==------] [-----------] [--------------] [---------------------] [--------] [--------------] [--------------] [--------] [--------] [-------------] [---------] [------] [---] [--------] [-------------] [-----] [-----] [--------] [-------------] [-------] [--------] [--------] [---------------------- ----------------------- ----------------------- ----------------------- ------------------] [--------2] [------] [--------] iv. PCBs cannot be considered a strategic input material, but a basic input material for any electronic device. Such basic/ fundamental input items which have no strategic or sizeable importance for the downstream entity cannot be considered as a vertical/complementary linkage. v. There is no vertical/complementary relationship between VVDN and [-------------- --------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------] A vertical/complementary relationship can only arise between two commercially market facing enterprises. Such ad hoc supplies do not qualify as a vertical/complementary relationship. vi. Vertical/complementary relationship typically demonstrate three main characteristics i.e., internalization of double mark-ups, input foreclosure, customer foreclosure. As VVDN is not commercially focused on generating revenue through the sale/assembly of PCBs, the ad hoc supply by VVDN do not demonstrate these characteristics. vii. The jurisprudence that captive services do not constitute overlap should also apply to the case at hand which relates to ad hoc sales subsequent to an extraordinary 2 For completeness, the revenue of the Target from PCB assembly services in FY 2020-21 has been revised to accommodate the mobilisation charges (i.e., one-time payment received from [----------] which helped set up the physical facilities to assemble the PCBs for [----------]). Page 8 of 14 situation. While captive sales are different from ad hoc sales (as undertaken by VVDN), at a fundamental level neither captive sales nor ad hoc sales (in the nature undertaken by VVDN) are undertaken on a commercial basis to service third party consumers or as a business vertical to generate substantial revenue. viii. Even if the ad hoc supplies are considered a vertical/complementary relationship, given its miniscule and de minimis nature it should not be disregarded for the purposes of determining the availability of the green channel benefit owing to VVDN’s extremely miniscule market share in the market for assembly and sale of PCBs. 18. It is submitted that there is no violation of Section 44 of the Act, inter alia, for the following reasons: i. Prima facie, violation of Section 44 of the Act, fundamentally stems from the Commission’s preliminary conclusion that the ad hoc supplies made by VVDN to [----------] amounts to a vertical/complementary relationship. The Acquirer has knowingly or intentionally never made any statement which is false in any material particular either in the public summary or in the declarations. Therefore, a contravention under Section 44 of the Act does not arise in the current instance for the following reasons –  The Acquirer had itself disclosed the factum of supplies made by VVDN to [----------]. Factual statements made by the Acquirer were completely true and correct to the best of its knowledge and therefore, cannot be determined to be false.  Presenting “PCB supplies between VVDN and [----------]” as a vertical/complementary relationship was a question of subjective determination under the scheme of the Act which was a matter of legal determination. Hence, the proposition of treatment of PCB supplies between VVDN and [----------] falls outside the realm of constituting false information. Page 9 of 14  As VVDN is not primarily engaged in the commercial and external sale of PCBs to third parties, it duly considered that the ad hoc supply cannot qualify as a vertical / complementary relationship under the existing jurisprudence of competition law. ii. Irrespective of the findings of the Commission regarding whether such ad hoc supplies qualified as a vertical/complementary relationship, it cannot be stated that the Acquirer submitted any information which can be stated to be false in material particular or that the Acquirer knowingly provided false information to the Commission by identifying that the Combination did not exhibit overlaps. iii. Submissions demonstrating that the supplies made by VVDN to [----------] did not qualify as a vertical / complementary relationship was a “statement of opinion” and not a “statement of fact”. Accordingly, the determination of what sort of a supply relationship can constitute a vertical / complementary relationship, in itself, cannot be treated as a simpliciter true or false statement. iv. The Green Channel Declaration filed by the Acquirer wherein it has effectively declared that there exists no vertical / complementary relationship between itself (including [----------]) and VVDN is not a false submission. There is no intent on the part of the Acquirer to mislead or submit false information to the Commission. v. The Acquirer acted in compliance with existing precedents, guidance and global and Indian jurisprudence and has always demonstrated complete support and transparency with the Commission. Therefore, a penalty under Section 44 of the Act cannot lie against the Acquirer. 19. In view of aforesaid submissions, it is inter alia submitted that no penalty should be levied on the Acquirer. Further, it is submitted that the Combination has not resulted in any appreciable adverse effect on competition (AAEC) as VVDN’s market share in the market for assembling PCBs is merely in the range of [0-5] %. The competitors of VVDN shall not be foreclosed from supplying PCBs to competitors of [--------], inter alia, due to the fact that, (i) [--------] cannot exclusively source PCBs from VVDN as VVDN is largely not engaged in the commercial production and sale of PCBs and (ii) [----------] market Page 10 of 14 share is in the range of [0-5]% so even if VVDN were to exclusively supply PCBs to [----------], competitors of VVDN will continue to have access to remaining market. Therefore, a potential or existing vertical relationship between [--------] and VVDN, even if identified, will not cause AAEC in India. 20. The Acquirer has submitted that it should not be required to re-file a fresh notice for the Combination under Regulation 8(2) of the Combination Regulations. While filing the merger notice, the Acquirer has already provided partial information as required under Form I. Also, given the drop in COVID-19 infections and the consequent drop in testing for COVID-19, the market may be disregarded as not being relevant for an ex post facto analysis. Thus, in the interest of justice and equity, it should not be required to file a fresh notice for the Combination. 21. Based on above, it is prayed that the Commission may consider to conclude that: (a) IBEF-IV’s Notice is valid and deemed approval under Section 6 is valid and subsisting, (b) IBEF-IV has not contravened Section 43A of the Act, (c) IBEF-IV has not contravened Section 44 of the Act; and (d) IBEF-IV is not required to file a fresh notice to notify the Combination. Further, it is prayed that an oral hearing be granted to IBEF- IV and any other order, as the Commission may deem fit, may be passed for the ends of justice. Hearing by the Commission: 22. On 30th April 2024, the Commission heard the Acquirer on its response to the SCN. The learned counsel for the Acquirer completed oral submissions and sought permission to file an affidavit in relation to its existing supply arrangement with the Target. The Acquirer was directed to submit the said affidavit within one week. 23. The Acquirer through its fund manager i.e., MOAIAPL submitted the Affidavit dated 02nd May 2024 on 07th May 2024. In response to the Commission’s query as to whether VVDN supplied any PCBs to [----------] post Q1 of FY 2023-24, the Acquirer submitted Page 11 of 14 that, till Q1 of FY 2023-24, VVDN fulfilled historical purchase orders from [--------] and after Q1 of FY 2023-24, there has been no supplies of PCBs from VVDN to [--------]. It is further stated that the short-term PCB supply arrangement between VVDN and [------] stands fulfilled and entirely concluded. Observation of the Commission 24. The Commission has considered all material placed on record and the submissions made by the learned counsel during hearing. The Acquirer in its submissions has argued that PCBs are a basic input for any electronic device and not strategic input and hence the same would not constitute a vertical/complementary relationship amongst the Parties. However, the submissions made by the Acquirer show that [--------] provided design specifications and other assistance to the Target (an entity which was manufacturing PCBs for captive use) for assembly of PCBs for its Covid-19 test kits. This indicates that the PCBs supplied by the Target to [--------] required a particular design and manufacturing process. Further, based on the submissions, it is apparent that the PCBs are essential component for the functioning of Covid-19 test kits being manufactured by [-------]. Thus, it appears that the PCB assembly service provided by the Target (provision of PCB assembly service) and availed by [-------] (procurement of PCB assembly service) resulted in a vertical/ complementary relationship between them. Merely because the Target had earlier availed or could avail a similar service from other commercial suppliers does not imply that a vertical/ complementary relationship did not exist between the Target and [--------]. 25. Further, the argument that a vertical/ complementary relationship did not or could not arise between the Target and [--------], due to ad hoc nature of sales made to [--------]by the Target and for the reason that VVDN was not a commercial market player for sale of PCBs to third parties, appears to be erroneous and misplaced. As brought out above, it is clear that the provision of PCB assembly service by the Target to [--------] continued from FY 2020-21 onwards till Q1 FY 2023-24 and the Target also generated revenue from [-------] for such period. Noticeably, such revenue was generated by the Target even Page 12 of 14 at the time when the notice was filed with the Commission on 17th April 2023. Though the Acquirer could not definitively determine whether the PCB assembly services were provided by the Target against one purchase order or more than one purchase order, it is clear that the PCB assembly services were provided by the Target to [--------] for more than two years from which the Target also generated revenue. Accordingly, there does not appear to be merit in the argument that the sales were ad-hoc in nature or there was no commercial market facing activity. Even otherwise, when the Target has capability to provide a service, merely because such service was being provided commercially only to one entity and not to others or was not a primary activity, does not imply that a vertical/ complementary relationship did not or could not exist between them. 26. Given the above, the Commission finds that there existed a vertical/complementary relationship between [--------] and the Target at the time of filing notice with the Commission. Accordingly, the criteria of green channel prescribed under Schedule III of the Combination Regulations was not met and the Combination did not qualify for the green channel prescribed under Regulation 5A of the Combination Regulations. 27. Before proceeding further, it is noted that apart from above, the learned counsel also argued during hearing that the green channel filing was made by the Acquirer after availing pre-filing consultation facility of the Commission and reliance was placed upon certain precedents. Regarding pre-filing consultation, it is pertinent to note that such facility is merely an assistance to provide non-binding guidance to the stakeholders based on the information disclosed by them at the time and without prejudice to the assessment of the case on receipt of the formal notice. Aside from the precedents, the availability of green channel depends upon whether criteria for green channel approval are satisfied in a case. The determination of whether a particular notice qualifies for a green channel filing requires a fact-based assessment. The eligibility criteria for approval of combinations under green channel are objective and specific i.e., no overlap between the parties to the combination, their respective group entities and/or any entity in which they, directly or indirectly, hold shares and/or control. This criterion needs to be determined Page 13 of 14 and satisfied in the facts and circumstances of each case. As observed above, in the instant matter, the criterion was not met. 28. It is to be noted that the first proviso to sub-regulation (2) of Regulation 5A of the Combination Regulations provides as under: “Provided that where the Commission finds that the combination does not fall under Schedule III and/or the declaration filed pursuant to sub-regulation (1) is incorrect, the notice given and the approval granted under this regulation shall be void ab initio and the Commission shall deal with the combination in accordance with the provisions contained in the Act” 29. Thus, in light of the above, the Commission finds that, the notice and deemed approval, under Section 31(1) of the Act read with Regulation 5A of the Combination Regulations, granted to Combination is void ab initio. As the Combination has already been consummated, the Acquirers are liable for penalty under Section 43A of the Act, which reads as under: “If any person or enterprise fails to give notice under Section 6(2) of the Act, the Commission shall impose on such person or enterprise a penalty which may extend to one per cent of the total turnover or the assets, whichever is higher, of such a combination” 30. It is to be noted that Section 43A of the Act prescribes the extent of penalty that can be levied for failure to file notice. However, the Commission has sufficient discretion to consider the conduct of the parties and circumstances of the case to arrive at an appropriate penalty. 31. The Acquirer, in its response to SCN, has inter alia submitted that the services were provided by the Target to [--------] in exceptional circumstances and there existed only a miniscule supply relationship amongst parties. Further, the Acquirer disclosed the Page 14 of 14 existing relationship on its own, extended cooperation through the course of proceedings and supplied requisite material/documents. While all these can be considered as mitigating factors, it is evident that the Combination did not meet the criteria of green channel prescribed under Schedule III of the Combination Regulations and on account of the same, the Acquirer cannot be exculpated of the statutory obligation prescribed under the Act and the applicable regulations. 32. Thus, considering the facts and circumstances of the case and the conduct of the Acquirer, the Commission decides to impose a penalty of INR 10,00,000 (Rupees Ten Lakhs Only) on the Acquirer under section 43A of the Act and not to impose penalty under section 44 of the Act. The Acquirer shall pay the penalty within 60 days from the date of receipt of this order. Further, the Acquirer is directed to file a fresh notice under Regulation 8 of the Combination Regulations providing complete information as required under the applicable form within 30 days from the date of receipt of this order. 33. It is made clear that nothing used in this order shall be deemed to be confidential or deemed to have been granted confidentiality, as the same has been used for the purposes of the Act in terms of the provisions contained in Section 57 thereof. 34. The Secretary is directed to communicate this order to the Acquirer.