ISSUE I : Competition commission takes hold of M&A activity

Introduction

Competition Commission of India (“CCI”) stepped into a new regulatory role with the release of CCI (Procedure in regard to transaction of business relating to combination) Regulations, 2011 (“Combination Regulations”) on May 11, 2011. Issuance of these regulations was a sequential step to the notification of combination provisions (sections 5 and 6) of the Competition Act, 2002 (“Act”) issued on March 4, 2011. As a result, CCI is now equipped with a complete set of substantive and procedural rules to scrutinize M&A transactions which cross the prescribed assets/turnover based threshold limits. Effective June 1, 2011, no transaction that is likely to have an “appreciable adverse effect on competition in relevant market in India” can be consummated without a prior approval from CCI.

This bulletin analyses this new regulatory framework, highlighting the potential impact of the Combination Regulations on M&A activity in India.

1. Transactions covered under the Competition Act

Section 5 of the Act has been very broadly cast and defines “combination” to include an acquisition of shares, voting rights, assets, or control of an enterprise or merger or amalgamations of enterprises. Essentially, all transactions crossing the following prescribed monetary threshold would require a prior notification to the CCI:

Threshold referencing India:

  • Acquirer and target having assets worth $330 million or turnover of $1 billion.
  • Acquiring “group” and target having assets worth $1.33 billion or turnover of $4 billion.

Threshold with world-wide reference:

  • Acquirer and target having assets worth $0.75 billion (out of which at least $167 million in India) or turnover of $2.25 billion (out of which at least $500 million in India).
  • Acquiring “group” and target having assets worth $3 billion (out of which at least $167 million in India) or turnover of $9 billion (out of which at least $500 million in India).

Interestingly, on March 4, 2011 (the same date on which combination provisions under the Act were notified) the government also issued an array of investor friendly notifications, including:

(i) an increase of 50% in asset/turnover based monetary thresholds to reach the present levels mentioned above;
(ii) amendment to the definition of “group” whereby groups exercising less than 50% of voting rights in other enterprise are exempt from the purview of the Act and Combination Regulations for a period of 5 years starting June 1, 2011; and
(iii) a similar exemption of 5 years to enterprises having assets below $56 million or a turnover of not more than $167 million.1

In our view, the monetary criterion alone is not appropriate to define the contours of a combination in every case. But, if the financial triggers are attracted that would compel parties to notify even small combinations having no appreciable adverse effect on competition, just on account of their size. On the other hand, dilution of the definition of “group” is a welcome move as it would ensure safe harbor for many more transactions involving group companies, than would have been the case with the earlier threshold of 26%.

2. Process of filing notice with CCI

2.1 Trigger Point: 30 days!

The Act mandates that CCI is to be notified within 30 days of an approval by the board of directors in case of intended mergers or amalgamations or execution of any agreement or “other document” in case of acquisitions. According to the definition inserted now in the Combination Regulations, “other document” will mean any “binding document” conveying or exhibiting the intention to acquire. In the context of “hostile takeovers,” mere execution of such a document by the acquirer itself would trigger the deadline of 30 days. The CCI will not interfere with transitory transactions where the relevant trigger event has occurred before June 1, 2011.

2.2 Form and fee

CCI is to be normally notified in Form I (a shorter form prescribing entries with respect to products/services, market share, etc.) with a stipulated fee of approximately $1,150. An inclusive list of transactions is provided under regulation 5(2) where Form I has to be filed. This list includes conglomerates, horizontally or vertically aligned entities with combined market share less than 15% or 25% in each case, acquisition by means of gift or inheritance, acquisition of control over an enterprise by a liquidator or administrator appointed through court proceedings or through a scheme approved under Sick Industrial Companies (Special Provisions) Act, 1985, etc.

In other cases, Form II is to be filed with a prescribed fee of approximately $22,400. This form contains detailed entries seeking information regarding relevant market structure, demand and supply in the market, entry and exit conditions, etc. It is apparent that the type of detailed information required by the CCI would necessitate filing certain confidential information which could, eventually, be leaked out to the market and competitors and may not be in the best interest of the transacting parties. In order to claim confidentiality, parties are required to formally request and specify cogent reasons, justification and implication on business for protecting confidentiality regarding any information supplied to CCI. Complete discretion rests with CCI in allowing any such request for confidentiality. Unless addressed properly, this could become a thorny issue as there will be inevitable reluctance to share confidential information without adequate security that it shall be preserved.

Any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to a covenant under a loan or investment agreement does not require a prior approval from CCI. Such bodies are just required to notify CCI in a simplified Form III without any fee in 7 days post such acquisition.

2.3 Onus of filing notice

In acquisition of shares, voting rights or control in an enterprise the acquirer is under an obligation to file the relevant form with the CCI. In case of a merger or amalgamation, the transacting parties are required to jointly file the appropriate form with CCI. Where the intended objective of a business transaction is achieved through a series of individual transactions (inter–connected or inter–dependant), one or more of which may amount to combination, the Combination Regulations provide that a single notice can be filed with the CCI in such cases. In the recently proposed combination of Walt Disney Company and UTV Software Communications, the complete transaction as proposed by the parties involved two steps: firstly, acquisition of shares held by public shareholders through a delisting offer under the Delisting Regulations, 2009 and, secondly, a subsequent acquisition from promoters. The acquirer filed a single notice in Form I and CCI approved the entire transaction through an order dated August 25, 2011.

Failure to file any of the prescribed forms can result in a penalty of up to 1% of the combined assets or turnover of the combined entity, whichever is higher, on the enterprise(s) that is under the obligation to file the relevant form in a particular case.

3. Evaluation of proposals by CCI

Prima facie opinion: CCI is obligated to make a prima facie opinion regarding appreciable adverse effect of the proposed transaction on the Indian market within 30 days of filing the notice. There were varied apprehensions in the industry on competence of CCI to approve the proposed combination within this prescribed short span of 30 days. However, on July 26, 2011, CCI came out with its first order approving an acquisition by Reliance Industries Limited and Reliance Industrial Infrastructure Limited of 74% stake held by Bharti Group in each of two joint venture insurance companies, namely Bharti AXA Life Insurance and Bharti AXA General Insurance. The order approving the transaction was passed in a record time of just 18 days. Going ahead the competition regulator has already given its nod to 4 more proposed transactions, well within the timeframe of 30 days. Certainly, CCI has started at the right pace and it remains to be seen if such time shall be maintained going forward.

Detailed investigation: If unsatisfied at the preliminary stage, CCI could go for a detailed investigation, and, in such a case, would endeavor to pass an order within 180 days as opposed to the 210 days. It is noteworthy that despite the global concern there is no commitment to approve within the reduced period of 180 days. The obligation of CCI is merely confined to best efforts. There is also a provision for deemed approval in case CCI does not pass an order within 210 days.

It remains unclear when the clock will start and the 210 days period will commence because chances are that the CCI will seek additional clarifications/information and that process could prove to be time consuming. Only time will tell whether the 210 period will be extended or curtailed and respected. So far, the prognosis appears to be encouraging.

Another conundrum remains in case of takeovers or substantial acquisition of shares of listed entities. In case parties execute an agreement to acquire more than 15% of voting rights in a listed company, this would trigger the “open offer” obligation under the Takeover Regulations. At the same time, a notice would also be required to be filed with CCI under the Combination Regulations. This may lead the transacting parties embroiled between the competition and securities law, as they might not be able to complete the open offer within the time stipulated under the Takeover Regulations for want of clearance from CCI which can, in turn, lead to payment of interest on offer price to tendering shareholders at a rate decided by Securities Exchange Board of India (“SEBI”).

4. Transactions which are not required to be notified

The Regulations under schedule I enumerate a list of transactions which are unlikely to cause any appreciable adverse effect on competition in India. The list includes:

  • An acquisition of shares or voting rights of an enterprise solely for the purpose of investment or in the ordinary course of business. In this case, the total share holding or voting rights of the acquirer should not exceed 15% and should not lead to acquisition of control over the enterprise. This limit of 15% was in line with the earlier threshold for making an open offer under the Takeover Regulations in case of listed companies. But, with coming into force of the new Takeover Regulations on October 22, 2011, SEBI has accepted the year old proposal of Takeover Regulations Advisory Committee and consequently increased it to 25%. It has to be seen in due course of time if CCI would follow the newly notified Takeover Regulations.
  • Any consolidation of holding where the acquirer already has more than 50% of share holding or voting rights in the target except when such acquisition leads to sole control from joint control. The Combination Regulations are silent upon any acquisition or consolidation of shareholding between 15–50%. This is in contrast to the new Takeover Regulations, which allow consolidation of shareholding in a listed entity through “creeping acquisition” of 5% in a financial year without getting indented by open offer requirement, in case the acquirer holds 25% or more in the target and till he transgresses the maximum permissible non-public shareholding limit of 75%. The Combination Regulations, on the other hand, does not provide for such leverage. A clarification on this particular point is very much required, as an acquisition of 5% of voting rights in a financial year in cases where it does result in change of “control” in an enterprise, would not cause any significant appreciable adverse effect on competition in the relevant market and should be exempted.
  • An acquisition of stock-in-trade, raw material, stores etc. in ordinary course of business.
  • An acquisition of bonus or right shares not leading to control.
  • A combination taking place entirely outside India with “insignificant local nexus” and effects on relevant market in India. Regrettably, no objectives or parameters are provided to determine “insignificant local nexus.”

The Combination Regulations state that these transactions are “ordinarily not likely” to cause an appreciable adverse effect in relevant market, leaving it on the parties to assess the implication of their proposed combination and make a decision on notifying CCI.

5. Pre -Merger consultation

The Combination Regulations failed to provide any pre–notification consultation. But, in conformity with international practices and paying regard to the demands from industry, CCI has recently started a separate mechanism, an informal and verbal consultation with CCI staff on appointment. It is unclear at this stage what assistance the staff would provide, but in essence it could be confined to clarification/guidance for completion of forms. CCI has also upfront clarified that such consultation should not be construed as its opinion and would not have any binding effect on it. The regulator should clarify the nature of assistance it is going to provide under this new mechanism. The consultation process should certainly extend to clarification on transactions that take place entirely outside India but would still require filing of a form with CCI on account of “significant local nexus.” At the least, CCI staff should review the relevant form and intimate parties of changes, if any, or any additional information/documents that ought to be supplied to avert delays at a later stage.

Conclusion

The combination provisions under the Act have finally gathered full force after being at abeyance for almost a decade. There is some jurisprudence that exists with regard to anti- competitive agreements and abuse of dominant position in India, and now specific merger control regulations are a step in right direction for healthier competition in the market. Industry anticipates a slowdown in the M&A investment in order to allow for time taken by the CCI for issuing its approval. CCI is required to make sure that it strengthens the pre- merger consultation mechanism and regularly comes out with clarifications to remove ambiguities. Nonetheless, CCI has gathered the right momentum by approving all the initial combination proposals in less than 25 days, and this indicates favourable and efficient regulatory framework in days to come.

Author:
Ankush Goyal

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