New Delhi, April 8 -- In filings before the Competition Commission of India (CCI), few issues shape the scope and complexity of a merger notice as decisively as identifying the ultimate controlling person or persons (UCP) of the acquirer and entities that may be affiliates of the UCP.
For over a year now, parties engaged in mergers have had to grapple with what seems to be a gap in the rules governing the identification of such affiliates. This has raised significant concerns for UCPs of companies who also serve as independent directors on the boards of other companies. Greater clarity from the regulator to address this gap is the need of the hour
The 2024 overhaul: A material expansion of the affiliate test
Under Indian competition laws, once a UCP is identified, parties must examine the activities of all entities that qualify as an affiliate of such UCP to assess potential overlaps with the activities of the target. The test for the identification of an "affiliate" was materially broadened in September 2024 through a series of changes to the competition law regime.
After the changes, an entity can now qualify as an affiliate not only through traditional indicators such as shareholding or board representation rights, but also through the right or ability to access "commercially sensitive information" (CSI).
Briefly, if a UCP can access CSI in any entity, such entity is seen as an affiliate of the UCP. While the precise contours of "access to CSI" continues to evolve, it includes the right to access board materials and minutes.
Independent directors and access to CSI
The expanded definition of "affiliate" raises complex questions for UCPs who hold independent directorships across companies. Under Indian corporate law, an independent director is appointed to provide impartial oversight. The role is subject to stringent independence criteria and fiduciary obligations. Independent directors do not represent any shareholder and cannot act at the behest of any nominating entity, reinforcing their obligation to act independently and in the best interests of the company. They are also required to avoid situations involving any direct or indirect conflict of interest and are prohibited from deriving any undue gain or advantage for themselves or their relatives, partners, or associates.
Critically, although independent directors routinely receive board materials and minutes, which are CSI, they are prohibited from using such information to secure any competitive advantage.
Distinguishing independent directors from nominee directors and shareholders
At this juncture, it is crucial to note that the position of an independent director is legally and commercially distinct from that of a nominee director. A nominee director typically represents a shareholder's interests and, in practice, may serve as a conduit for information between the board and the nominating shareholder. In such cases, the transmission of CSI to the shareholder may enable such shareholder to derive competitive benefits.
Similarly, a shareholder with negotiated information rights to access board materials and/or minutes may, in principle, use that information for competitive purposes.
By contrast, as an independent director operates within a framework that prohibits such use, the receipt of CSI does not create risks of economic integration or strategic alignment with other entities.
Therefore, while access to CSI through a nominee director or information rights by an acquirer group entity necessitates an analysis of possible theories of harm through identification of overlaps with the target, such an assessment should not be required where a UCP is an independent director.
Practical consequences for merger control
As access to board materials and minutes by virtue of independent directorship are treated as "access to CSI" for merger control purposes, under the existing legal construct, companies connected solely through independent directorships are treated as affiliates.
Further, in notifiable transactions, parties are required to undertake expanded overlap assessments which increase analytical and evidentiary burden. Acquirers may also need to collect additional data from otherwise unrelated companies solely because of broadened affiliate linkages. Identification of additional overlaps not only extends the notice preparation process, but can also lengthen CCI review timelines, even in circumstances where there is no realistic risk of competitive harm - as explained above.
This concern is particularly acute as many senior professionals, who also act as natural UCPs to various acquirers, serve as independent directors across multiple unrelated enterprises owing to their experience and stature.
The need for regulatory clarification
The definition of "affiliate" has material consequences for notifiable transactions where an increase in the number of affiliates of a UCP increases the likelihood of identifying overlaps with the target. With increasing overlaps, parties must coordinate with a larger number of entities to collect market data for the merger notice. A greater number of overlaps may also invite heightened scrutiny from the CCI, potentially extending review timelines. In short, the scope of the affiliate test directly affects transaction timelines and approval complexity.
These implications underscore the need for clear regulatory guidance. Given this, the CCI may consider clarifying that, for the purposes of identifying overlaps, "access to CSI" should not include the receipt of board materials and minutes solely by virtue of an independent directorship
Such clarification would also preserve the integrity of the expanded informational test while ensuring that the affiliate concept remains anchored in economic reality rather than formalistic connections. It would also help reduce friction between corporate governance laws, which are designed to ensure the "true independence" of independent directors, and competition rules.
(Anisha Chand is Partner, Soham Banerjee is Counsel and Alisha Mehra is Principal Associate at Khaitan & Co. The views expressed are personal.)
Published by HT Digital Content Services with permission from VC Circle.