Mergers & Acquisitions Screening on the Anvil under the Indian Competition Act 2002 Need for tweaking

ng the Draft Combination Regulations

G.R. Bhatia,1 Partner & Head, Competition Law Practice, Luthra & Luthra Law Offices, New Delhi.
e-mail : gbhatia@luthra.com

Very recently the Competition Commission of India had released revised draft regulations dealing with the procedure governing enquiries into notifiable transactions. The key highlights of the Regulations have been discussed here and some grey areas which need to be addressed by the CCI are outlined.

There is greater recognition more than ever before that competition in markets is benign for one and all. However, maintaining fair and free competition is a formidable challenge. To achieve this mission, the competition regimes around the world seek to frown upon/tame anti competitive actions. The anti competitive public actions emanate from policies, laws and byelaws evolved by State or its bodies (the recent examples are: portability of mobile number hitherto disallowed; replacing policy of licencing with auctioning of scarce spectrum to intending telecom service providers; the crediting of interest in saving bank accounts on daily basis from 01.04.2010; review of regulation of saving bank interest rate payable to saving bank account holders by the RBI resulting in lack of competition inter-se scheduled banks in this market). Realising that formulation of policy is a prerogative of the State, the Indian Competition Act casts an obligation upon the competition watchdog to render advice and undertake advocacy on such issues of the State. The recent Annual Report of the Korean Fair Trade Practices Commission (KFTC) mentions that over 300 laws have been amended in Korea pursuant to advice/recommendation of KFTC. It is anticipated that India will soon pick up on this dimension. The other compartment of Indian Competition Act relates to prohibition/regulation of certain actions of economic actors (enterprises). This compartment has three components, namely:
1. He is former Additional Director General, Competition Commission of India (CCI)/Monopolies and Restrictive Trade Practices Commission (MRTPC), New Delhi. The views expressed are the views of the author.

(a) prohibition of anti competitive agreements (ACA); (b) prohibition of abuse of dominance (AOD) by enterprises or group; and (c) regulation of certain combinations (M & As). While the latter is an ex ante analysis, the former two prohibitions are ex post. The provisions relating to ACA and AOD have been effective from 20 May 2009 and, as on date, over 150 enquiries/investigations are in different stages before the sole national competition watchdog, the Competition Commission of India (CCI). These enquiries are against enterprises engaged in various business sectors including real estate, banking, telecom, film and entertainment, airlines, pharmaceutical, infrastructure, IT, etc. As on date, the provisions pertaining to third component, i.e. regulation of combinations are not yet in force. On 4th March, 2011, however, the Government of India has notified that these provisions shall come into force with effect from 1 June 2011. These provisions prohibit a combination which causes or is likely to cause appreciable adverse effect on competition (AAEC) in the relevant market in India and declares such structural change as void. Merger control (referred to in the Act as the regulation of combinations) has two phases first, the filing of a notice disclosing details of the merger or acquisition, along with the requisite fee; second, a review of the notice to formulate the prima facie opinion (initial review); and, finally concluding as to the existence of any AAEC as a result of the proposed combination in the relevant market in India. The CCI shall accord approval in case the initial review does not give rise to competition concerns. Otherwise, it will proceed with an

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Mergers & Acquisitions Screening on the Anvil under the Indian Competition Act 2002

enquiry into the question of the existence of an AAEC, which could ultimately lead to the combination being approved, modified or blocked. Under the Act, combinations include the acquisition of control, shares, voting rights or assets by a person or enterprise from another enterprise, the acquiring of control by an enterprise of another engaged in identical business, or a merger or amalgamation between or among enterprises. Only those combinations where the total value of assets or turnover of the combining parties, or the group (two or more enterprises which are in a position to exert control over the voting rights, board members or other affairs of the other enterprise) to which combining parties belong, exceeds the threshold prescribed, are regulated by the Act. The threshold is dependent upon the status of the combining parties, namely: (i) operations of combining parties confined to India; (ii) operations of combining parties in India or outside; (iii) combining parties belonging to a group.2
Operations In India Individual parties Total value of assets more than INR 1,500 crores (approx. USD 333 million) or turnover more than INR 4,500 crores (approx. USD 998 million). Aggregate value of assets more than USD 750 million (including at least assets of INR 750 crores (approx. USD 165 million)) or turnover of USD 2.25 billion (including at least turnover of INR 2,250 crores (approx. USD 499 million) in India) Group Total value of assets more than INR 6,000 crores (approx. USD 1.3 billion) or turnover more than INR 18,000 crores (approx. USD 3.9 billion).

within one year of such combination having taken effect. Further, no transaction shall be completed until it is approved or 210 days have expired from the date of filing of valid notice. In order to determine whether a combination has, or is likely to cause AAEC in the relevant market in India, the CCI shall have due regard to all or any of the factors prescribed in the Act, namely market size, market share, list of competitors, nature and extent of barriers to entry, demand and supply dynamics and other details of the market in which combining parties operate and are engaged. Any acquisition by a specified financial institution is not combination but the investing institution has to notify such acquisition within seven days to the CCI. On 1 March, 2011, the CCI released a revised draft of the Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations, (the Draft Regulations). These Draft Regulations essentially set out the procedure governing inquiries into notifiable transactions and the key highlights thereof are as under:

1. Filing of Notice
The Draft Regulations envisage three types of forms for the notification of mergers, amalgamations or acquisitions to the CCI. Form I is a short-form merger notification and covers the following transactions3 :

In India and outside India

Aggregate value of assets more than USD 3 billion (including at least assets of INR 750 crores (approx. USD 165 million)) or turnover of USD 9 billion (including at least turnover of INR 2,250 crores (approx. USD 499 million) in India)

An acquisition of not more than 15 percent of shares or voting solely for an investment purpose or in the ordinary course of business, not leading to a control of the enterprise An acquisition where the acquirer is already in control of the enterprise An acquisition of assets where the assets of the parties are not directly related to the business activities of the party acquiring or made solely as an investment or in the ordinary course of business An acquisition or acquiring control or merger or amalgamation where not more than one party to the combination has assets or turnover in India exceeding INR 250 crores (approx USD 55 million) or INR 750 crores (approx. USD 165 million), respectively4 An acquisition taking place within the group. Form II is a detailed merger notification for transactions that are neither covered in Schedule 1 of the Draft Regulations nor set out in Section 6(5) of the Act.
3. These transactions are listed in Schedule 1 of the Draft Regulations. They were exempted in the draft regulations of 2008. 4. In cases where the target entity has assets less than INR 250 crores (USD 55 million) or turnover less than INR 750 crores (USD 165 million), the transaction will not require a notification, and, as such, no clearance is needed.

The value of assets is as shown in the audited books of account of the enterprise in the year immediately preceding the financial year in which the date of proposed merger falls. The value of assets will need recast only when depreciation or intangible assets are not accounted for in the audited accounts. Likewise, the value of turnover shall include value of sale of goods or services. Failure to notify the CCI of the proposed merger or acquisition attracts a penalty and, the CCI, may suo motu institute an inquiry
2. On 4th March, the Government of India has notified (a) enhancement of assets/turnover limits by 50% for enterprise/group; (b) exemption ( for a period of 5 years) for transactions, if the target has assets less than INR 250 crores (US $ 55 million) or turnover less than INR 750 crores (US $ 265 million); and (c) exemption (for a period of 5 years) for a group, if the group exercises less than 50% of voting rights in the target.

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Form III deals with notification of transactions pertaining to acquisitions by a public financial institution, foreign institutional investor, bank or venture capital fund referred to in Section 6(5) of the Act and do not require prior mandatory approval of the CCI, but details of which are required to be filed with the CCI without any accompanying fee;

22,000); more than INR 500 crores (approx. USD 111 million) but less than INR 1000 crores (approx USD 222 million); and more than INR 1000 crores (approx USD 222 million). INR 20 Lakhs (approx. USD 44,000);

2. Responsibility of filing
In cases of acquisition, the responsibility of filing with the CCI devolves upon the acquirer In cases of mergers or amalgamations, the merging parties are expected to file a joint notification

INR 40 Lakhs (approx. USD 89,000).

6. Confidentiality
The Draft Regulations allow notifying parties to request for confidentiality of any documents submitted during investigation. Such confidentiality requests are to be considered in terms of the procedure laid down in Regulation 35 of the Competition Commission of India (General) Regulations, 20095 . The consistent consultative approach of the CCI merits commendation. It has invited comments/suggestions on the Draft Regulations by the third week of March, 2011. The Draft demonstrates CCIs sincere and serious attempt to put a timebound swift merger control regime in place in India. However, in order to ensure that the procedural law serves the needs of businesses, the following are the concerns which need to be addressed by the CCI before notifying these Regulations, namely: 1. Pruning of Schedule I Schedule 1 lists out certain transactions which have either no competition or minimal competition concerns. The list interalia includes (a) acquisition of raw material in the ordinary course of business, (b) acquisition of bonus shares, and (c) restructuring within the same group. Requiring filing and waiting for prior clearance before consummation of such transaction is impractical or of no utility and needs to be reviewed. 2. Unnecessary burdensomeness of Forms (a) Form I (short form) is required to be used for those transactions which are covered in Schedule 1. However, the short form requires the following enclosures: (i) due diligence reports; (ii) documents leading to agreement/ decision/approval; (iii) constitutional documents of parties; (iv) description of main products; and (v) copies of notification filed with other competition authorities. Due diligence reports/documents relating to decision of
5. Regulation 35 of the Competition Commission of India (General) Regulations, 2009 provides for document(s) to be treated as confidential if the disclosure of such document(s) will lead to the disclosure of trade secrets or destruction or appreciable diminution of the commercial value of any information or reasonably expected to cause serious injury. A request to keep document(s) as confidential is required to be made in writing to either the CCI or the Director-General. The CCI or the Director-General, if satisfied, may order that the document(s) be kept confidential.

3. Informal consultation
The Draft Regulations provide for informal consultations (only to the extent of ascertaining whether a transaction is notifiable or not) and allows enterprises to file a request for pre-notification confidential consultation with the CCI. The informal views expressed by the CCI at such consultations shall not be binding.

4. Time-lines
The Draft Regulations envisage that the CCI shall form a prima facie (at first look) opinion as to whether a combination has or is likely to have appreciable adverse effect on competition within the relevant market in India within 30 days of receipt of a valid notice (excluding any additional time taken by the parties to file any additional information) In order to assuage a key concern of the trade and industry, the Draft Regulation states that the CCI will endeavor to pass an order or issue directions within 180 days of a valid notification (though the law contemplates a maximum 210 day period). This 180 days period excludes any additional time (over the time stipulated) taken by the parties to file any additional information.

5. Fees payable to the CCI upon notification

TYPE OF TRANSACTION Merger or amalgamation or acquiring of control over an enterprise Acquisition of shares, voting rights or assets of an enterprise, where value of the transaction is: less than INR 500 crores (approx. USD 111 million); INR 10 Lakhs (approx. USD FEES PAYABLE INR 40 Lakhs (approx. USD 89,000)

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Mergers & Acquisitions Screening on the Anvil under the Indian Competition Act 2002

transaction are unrelated to competition in markets. Companies need to provide only corporate registration number or similar identification number. The segment reporting in the annual report contains details of main products/businesses. The practical difficulties in attaching copies of notifications filed in other jurisdictions are that the timelines of filing are different and that translation burden is substantial. Moreover, since market structure in each country is different, these copies may serve little purpose in competition analysis in Indian market. Instead of copies, the filing party may be required to indicate jurisdictions where notification is required to be filed. (b) Form II also requires information/documents which do not seem to strike balance between its need for competition analysis and burden on the firms filing the notice. Section 11 of Form II inter-alia requires viable scale analysis, mapping of distribution facilities. information of future plans of competitors etc. These may be dispensed at the initial filing phase and should at best be called upon when the Authority takes up full fledged investigation. Given that 90 percent of total transactions triggering filing obligation globally are non-problematic, requiring detailed information in the initial notice being burdensome needs to be relooked. (c) Form III is to be filed by Investment institutions where the purpose is not to take control of the investee company. The investing company is required to intimate and is not required to seek prior approval of the CCI before making an investment. Requiring such company to furnish details of relevant product market, relevant geographical market of the relevant market of investee company is overly broad and unnecessary. 3. Combinations taking effect prior to June 01, 2011 (a) The Draft Regulations state that if a transaction has taken effect prior to 1 June 2011, the provisions of the Draft Regulations shall not apply. This could mean that transactions that have not been completed prior to 1 June 2011 are otherwise covered and will require to be notified notwithstanding the fact that the trigger event took place prior to 1 June 2011. (b) As the Draft Regulations are still in draft form, it is hoped that the CCI will use the time between now and 1 June 2011 to consider the suggestions it receives and iron out several grey areas before notifying the Combination Regulations. In the interest of providing clarity to trade and industry, the CCI could adopt an approach where only those transactions that are signed after 1 June 2011 are required to be notified to it. 4. Lack of clarity on de minimis provision The Government has, for a period of five years, exempted

those combinations where the target enterprise whose control, shares, voting rights or assets are being acquired has assets of not more than INR 250 crores or turnover of not more than INR 750 crores. The grey area is as to whether these thresholds are worldwide or in India. As per the International Competition Network (ICN) Recommendation, the de minimus provision should have local nexus only. 5.Time lines The Draft Regulations envisage that the CCI shall form a prima facie opinion as to existence or likely existence of AAEC within 30 days. It would be advisable to provide clearly that in case the parties are not informed or are called upon to furnish additional information after 30 days of filing of valid notice, the proposed transaction shall be deemed to have been approved. 6.Informal Consultation The Draft Regulations provide for non binding pre notification informal and confidential consultation. However, on the lines of Securities and Exchange Board of India (Informal Guidance) Scheme, 2003, the regulation needs to provide that though CCI is not bound with informal consultation but the consultation between the party and the designated authority will be binding. 7. Other Concerns (a) To suspend operation of Sections 108A to 108H of the Companies Act, 1956 (until deletion of these provisions from the said Act) as its continuation would amount to dual regulation on the same subject and by two different authorities. (b) There is need to exclude some components from turnover such as subsidy, aid, taxes as this will bring convergence with merger regulation by European Commission. (c) It needs to be explicitly clarified as to whether a public sector undertaking will be treated on standalone basis or as a group. In case of central public sector undertakings, all or a majority of shares are held in the name of a President, and in case of State undertaking, these are held in the name of the Governor. The resultant effect is that every acquisition relating to a private enterprise by any central or state undertaking will trigger the threshold.

Key take away

The need is to swiftly permit such mergers/acquisitions which are beneficial to the economy and to prohibit only those which are anti competitive. This requires a delicate balancing act. Getting the correct balance between prohibition and permission is important as an overly restrictive approach can prevent beneficial mergers from going ahead, entrench existing inefficient market structure, limit incentives for new investment whilst an overly permissive approach to merger control could establish and entrench monopolies.