Company Law CIA 3

LIST OF STATUTES

STATUTES

1. Companies Act, 2013

2. Competition Act, 2002
3. Security Exchange Board of India Act, 1996.
4. Income-tax Act, 1961
5. Foreign Exchange Management Act, 1999.

RULES

1. Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

2. Competition Commission of India (Procedure in regard to the transaction of business relating to
combinations) Regulations, 2011
3. SEBI (Substantial Acquisition of Shares and takeovers) Regulations, 2011
4. SEBI (Listing Obligations and Disclosure Requirements), 2015
5. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
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TABLE OF CASES

1. Central India Industries Limited v. CIT, (1975) 99 ITR 211

2. Competition Commission of India v. Bharti Airtel Limited and Other AIR 2019 SC 113
3. Consumer Online Foundation v. Tata Sky, CCI, Case No/02, 2009
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Chapter 1
Introduction
The Economic reforms of 1991 by the government drastically changed the growth of corporate sector
in India. The reforms liberalised corporate laws thereby opening up a smooth but long road for the
development of Indian corporate sector. These laws have encouraged different strategies for growth
and expansion of the business where mergers and acquisition (M&A) have become a norm. The M&A
is a path taken by business enterprises to refocus and expand their competition and market share.
Needless to say, expediency is an essential element in successful implementation of an M&A. The
growth in number and the need of simpler provisions to expedite the regulatory procedures made it
compelling to introduce new regime of corporate laws with respect to M&A. On this backdrop a
chapter on M&A was included with few important changes in the Companies Act, 2013 as against the
Companies Act, 1956.
The new regime also considered the potential of cross border mergers and did not hesitate to bring it
under the M&A regime for its promotion as well as regulation. Several concepts of new regulations
such as fast track mergers and minority buyout were adopted from the laws of other countries. The
Adjudicatory bodies under the Companies Act, 2013 are overburdened and the composition of those
bodies raises the question as to the ability of it decide the commercial and financial viability of a
given M&A plan. The Companies Act, 2014 also fails to explicitly mention the liabilities and
immunities of the directors of the companies in case of failure of an M&A plan thereby causing the
financial loss to the company. However, only the Companies Act, 2013 cannot make the visible
difference to the current difficulties faced by business enterprise in M&A. There is need for
amendments to competition law and other sectoral laws governing M&A.

1.1 Background
The eroding lines between national and international markets due to the globalization has led the
companies to undergo the process of restructuring of business through strategies such as mergers and
acquisition to ensure their growth in the competition. This race to tap into international market has
also forced the Indian companies to accept and embrace mergers and acquisition as best option
successfully expand their business throughout the world. Mergers and acquisitions vary from
acquisition of market share to restructuring of companies to face global competition. With the
liberalization of the economic and legal environment, the rapid growth of the global economy has led
commercial entities to restructure in a more profitable direction to sustain in global competition and
strengthen business to maximize shareholder value.1
Firms today need to be efficient as well as fast growing. It is critical for such business organizations to
have a dominant market position and at the same time be profitable, without which such organizations
believe that they would stop being competitive in the current global economy. Firms can choose to
grow incrementally by enhancing their sales, outputs or both. This kind of growth in a firm is known
as organic growth. However, this kind of growth, although core to a firm may have a high gestation

1
'Praveen Medikundam, Current Legal Issues In Mergers, Acquisitions And Take-Overs Of Indian Companies -
Goals for Corporate Law In The Millennium, Mondag, (FEB, 2019 10.20 AM).
 Company Law CIA 3

period and be considered as slow. The counterpart to organic growth is inorganic growth which can be
achieved through mergers, acquisition, alliances, and joint ventures etc.2
Inorganic growth strategy of Mergers and Acquisition (M&A) has become a critical strategic element
for driving business growth. This has increasingly become a dominant mode of growth for firms
seeking competitive advantage in a global market. There are many crucial elements for a business
choose M&A such as to explore a new market or geography, to increase the market shares in an
already established market or to overcome growing competition. Regardless of reasons, it is essential
to mention that in the 21st century global competition scenario. M&A is a necessary tool for
companies to expand their business and grow and can be differentiating factor for a successful
organization.

1.2 Statement of Problems

The expediency is a key for deriving full benefit out of the M&A transaction. In the absence of an
explicit definition for the word "mergers' amalgamation combination controversy arises as to the and
for certain business transaction among companies (such as transaction which is "solely made as
investment" from merger control regulation under CCI (Procedure in Regard to the Transaction of
Business Relating to Combinations) Regulations 2011. The failure of the Competition Act in clearly
stating the authority and jurisdiction of the CCI in relation to M&A among companies which are in
the sectors already governed by respective sectoral regulators creates confusion and also the
regulation by both the sectoral regulator and the CCI makes the M&A procedure cumbersome. As the
Competition Act, 2002 already mandates serving of notice to the CCI prior to the completion of M&A
transaction, the necessity of serving notice to the CCI again under the provision of the Companies
Act, 2013 prior to taking approval for M&A by NCLT makes the procedure time consuming and also
burdens the CCH with unnecessary additional task of replying to NCLT within 30 days from the date
of such notice. The extension of jurisdiction of NCLT and the NCLT to adjudicate the disputes under
the Competition Act, 2002 and Insolvency and Bankruptcy Code, 2016 has severely affected its
ability to decide the disputes within the reasonable time thereby leading to further delay in M&A.

1.3 Research Question

1. What is the need and extent of Competition Act, 2002 to be construed harmoniously with the
Companies Act, 2013 to avoid multiplicity of procedures required prior to the approval of
M&A.?

2. Whether the Competition Act, 2002 must be amended to clarify explicitly the jurisdiction and
power of the CCI to avoid jurisdictional overlap between other sectoral regulators and CCI?

2
Rabi Minakshi, Mergers Acquisitions Corporate Restructuring - Strategies & Practices. 73 – 74
 Company Law CIA 3

1.4 Objectives

2. To critically analyse the provisions of Companies Act, 2013 and Competition Act 2002
concerned with regulation of M&A find out the loopholes and drawbacks.
3. To study the functions of Competition Commission of India and to determine its role
M&A.

3. To examine the role and functions of the NCLT and the NCLAT in completion of M&A
procedures.

4. To propose suggestion and recommendation to enact or amend rules and regulation that
favours M&A.

1.5 Research Methodology

This research methodology is descriptive in nature and is doctrinal. The research will be
based upon secondary sources that are bibliographic research. Various books, articles, reports
and judgments have been relied to know the working of mergers and acquisition in India.
 Company Law CIA 3

1.6 Scheme of the Study

A critical analysis of the laws regulating mergers and acquisition in India is presented in this
study which comprises of seven chapters and the outline of these seven chapters is as follows:

Chapter 1: Introduction

The basic objective of this study is to investigate and criticize the laws regulating mergers and
acquisition in India. The first chapter of the study introduces the background of mergers and
acquisition in India, Furthermore, it includes statement of the problem, the objectives of the
study, the methodology applied, and the importance of the study and lastly the scheme of
study and its presentation.

Chapter 2: Literature Review

The second chapter of the study is literature review. Fifteen Articles from renowned authors
have been reviewed in order to understand the effect of several laws on mergers and
acquisitions in India.

Chapter 3: Concepts of Mergers and Acquisitions

The third chapter of the study introduces various laws regulating cross border mergers and
acquisition in India. Moreover, it provides an insight into the recent trends and reason for
outbound mergers.

Chapter 4: Role of Competition Act in Shaping Merger Acquisition Deals

The fourth chapter deals with the critical analysis of the procedure governing the mergers and
acquisition in India. The chapter also includes elaborate study of Combination Regulation,
2011 which determines the jurisdiction of Competition Act

Chapter 5: CCI Vs. Sectoral Regulators: Issue of Jurisdiction

The fifth chapter in the study deals with the jurisdiction of CCI under the Competition Act,
2002

Chapter 6: Conclusion

In the light of the study undertaken and analysis made conclusions and suggestions are drawn
and this chapter deals with the and analysis made certain this chapter deals with the same.

\
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Chapter 2: Literature Review

1) ASSOCHAM. "Mergers and acquisitions in the new era of Companies Act, 2013",
February, 2017 (2.04 AM 20 July 2018)

2014https://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies
Act/$File/Assocham White paper Companies AcL.pdf

The author in this particular article talks about the recent changes brought by the Companies
Act, 2013 to the mergers and acquisition. Further, the article deals with the effects of CA,
2013 on M&A activities. The paper also highlights the contractual challenges,
employment issues, and taxation problems in mergers and acquisitions. The author provides
eligibility criteria of companies who can carry out M&A transaction. It also new modes of
M&A such as cross border mergers and mergers between unlisted and listed companies etc.

2) Arneet Kaur, Mergers and Acquisitions in the Indian Corporate World". Shodhganga,
(Mar 5, 2019). http://shodhganga.inflibnet.ac.in/handle/10603/103368

The author in this paper deals with overall aspect of mergers, amalgamation, acquisition and
takeovers. The paper provides the points for consideration as to important of M&A in current
market. The paper delves into different kinds of M&A like horizontal, vertical and
conglomerate mergers and also the pro and cons of such M&A. Then author highlights
rationale for merger control in an economy. The paper in detail discusses the provision of
Competition Act, 2002 dealing with M&A. The paper discusses the case laws relating to
M&A and the resulting benefit of such judgments.

3) K.K. Sharma, "Interface Between Competition Commission of India And Sectoral

Regulators". CCI (10:03 PM 20/08/2018)
https://www.cci.gov.in/sites/default/files/speeches/interface.pdf?down
load=1

The author in this article highlights the history of competition law in India. The paper also
provides the difference between sectoral regulation and competition regulation. The author
pinpointed the loopholes in certain Sections under Competition Act, 2002 which causes
ambiguity over the jurisdiction of the Competition Commission of India. The author also
notes the sector wise overlap between the respective sectoral regulators and CCI such as the
Petroleum and Natural Gas Regulatory Board, the Electricity Regulators, the Airports
Economic Regulatory Authority, the Telecom Regulatory Authority of India.

4) Kamal Preet Kaur, "Merger Regime Under the company 2013", E-Newsline, 2014.

The author in the present article has described selective key changes in relation to mergers,
cross border mergers, arrangements and amalgamations. Further, the author aims to compare
these changes with the Companies Act 1956.’
 Company Law CIA 3

5) Premnath Rai & P. Srinivasan. "Mergers /and Acquisitions 2000: A Practical Insight to
Cross Border Mergers & Acquisition, Global Legal Group, 2008, Pp- 129-135.

The article discusses the mechanism for cross border merger and acquisition with reference to
all the laws regulating the same. The article several laws regulation mergers and acquisition in
India including the Companies Act 1956, FEMA 20, the Competition Act 2002, and such
others.

6) Abhinav Chandrachud, "The Emerging Market for Corporate Control in India: Assessing
(And Devising) Shark Repellents for India's Regulatory Environment”, Global Studies
Law Review, Volume 10, 2011, 187

This paper analyses whether the company's control market has a legitimate possibility to gain
a greater foothold in India, and whether invisible obstacles still hinder India's hostile
takeovers. This article further discusses the regulatory regime for cross-border mergers and
acquisitions in India and the issues and challenges involved.

7) PARIDIT PODDAR Sectoral Region Competition law, and Jurisdictional overlap Tracing
the Mont viable Solution in the Indian Context", lowercompetitionlaw.com

The author in this article establishes the role of CCT and the importance of Competition Act,
2002. The article mainly highlights the need for clarification in regard to the jurisdiction of
CCI to deaccelerate the disputes arising between CCI and other sectoral
Regulators.

8) MAJUMDAR ARJYA. "Regulatory Framework Governing Mergers and Acquisitions in

India". 2013 (23. FEB 2019 10.46 AM) https://ssrn.com/abstract-2553025

In the current article the author discusses about the current framework governing mergers and
acquisition in India. The author highlights the legislation including company law, competition
law and securities law. The authors also deal with the authorities.
 Company Law CIA 3

Chapter 3: Concepts of Mergers and Acquisitions

3.1 TERMINOLOGY AND SCOPE: MERGERS

The terms 'mergers' and 'acquisitions are often used to signify a similar effect of the business
restructuring. However, there are two different concepts in commercial world. The word merger
indicates bringing together two or more companies to incorporate a new company, but acquisition
denotes purchase of one company usually by another bigger and stronger company.
The Black's Law Dictionary has defined merger as, "Merger means the act or an instance of
combining or uniting. 4 Merger can also be defined as the consolidation of two or more entities,
wherein the shareholders of the offering entity are given the securities of newly formed entity in
exchange for their surrender of their shares in the former company. The merger may be defined as an
arrangement whereby the assets of two companies (merger may involve more than two companies)
become vested in, or under the control one company (which may or may not be the one among the
two original companies) which has as its shareholders all, or substantially all, the shareholders of one
or both of the merging companies exchanging their shares (either voluntarily or as the result of legal
operation) for shares in the other or third company The CA, 2013 nor any other Indian statutes define
the term merger. But, the CA, 2013 lays down a broad explanation to define what constitutes as an act
of merger. A merger is not just a process to consolidate the assets and liabilities of two companies into
one, but consolidation of such entity into one going concern. There are multiple objectives of mergers
such economies of scale, acquisition of technologies, to compete globally and to reduce gestation
period for the new company.
The Income Tax Act does however define the analogous term ‘amalgamation': the merger of one or
more companies with another company, or the merger of two or more companies to form one
company. The crucial condition for any merger to fall within the ambit of this Section are:
 The assets and liabilities of the amalgamating companies must form part of the amalgamated
company.
 Not less than 3/4th of the shareholders of the offering companies should be the shareholders
of the resulting company.
In Central India Industries Limited v. CIT, it was laid down that amalgamation is an arrangement
whereby the assets of two companies become vested in or, under the control of one company
(which may or may not be any one of the original two companies), which has as its shareholders
all, or substantially, all the shareholders of the two companies.

Acquisition
An 'acquisition' or 'takeover' is the purchase of a controlling stake or assets & liabilities of a target
company by a person or another company. The takeover may occur through different ways i.e. it can
be a friendly takeover by entering into agreements between the offeror and the target company and
also it can be hostile leading to purchase of majority shares by the offeror in open market.
The Black's Law Dictionary defines the word Acquisition as the act of becoming the owner of certain
property or the act by which one acquires or procures the property in anything. The Section 2 (a) of
the Competition Act, 2002 defines the word acquisition as follows:
Acquisition means directly or indirectly, acquiring or agreeing to acquire-
a) Shares, voting rights or assets of any enterprise; or
b) Control over management or control over assets of any enterprise.
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According to Regulation 2 (1)(b) of SEBI Substantial Acquisition of Shares and Takeovers, 2011
(SAST) an acquisition means, directly or indirectly, acquiring or agreeing to acquire shares or voting
rights in, or control over, a target company.
In A.R. Dahiya vs SEBI". the Supreme Court held that under the "definition the term 'acquisition
means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control
over, a target company. This definition clarifies that an acquisition takes place the moment acquirer
decides to or agrees to acquire, irrespective of the time when the transfer stands completed in all
respects. The definition explicates that the actual transfer need not be contemporaneous with the
intended transfer and can be in future."
The Acquisitions may be by occur by way of acquisition of shares, voting rights, assets of the
company or by taking control of the management or the assets of the company. The control place very
important role in understanding takeover or acquisition. The control so required is de facto control
and not merely de jure control.
The SEBI SAST Regulation provides that 'Control' includes the right to appoint majority of the
directors or to control the management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements or in any other manner:
Provided that a director or officer of a target company shall not be considered to be in control over
such target company, merely by virtue of holding such position:
In the case of Ashwin K. Doshi vs. Securities and Exchange Board of India, the Security Appellate
Tribunal provided that the nature of control is identified with:
I. the right to appoint majority directors or
II. exercise control over the management or policy decision.
The control need not be exercised directly. It could be exercised indirectly also
When the acquirer acquires the whole or substantially whole assets of the company, such a transfer is
called as a 'slump sale under the Income Tax Act, 1961. The Income Tax Act defines slump sale as a
"transfer of one or more undertakings as a result of the sale for a lump sum consideration without
values being assigned to the individual assets and liabilities in such sales". In cases of slump sales
numbers of tax exemption and benefits are given which makes such transaction very beneficial and
feasible.
3.1.1 MAJOR TYPES OF M&A TRANSACTIONS
There are different types of mergers and acquisition which may not be treated differently by corporate
laws, however the Competition Act. 2002 takes into consideration the mode and effect of different
kinds of mergers. The types of mergers are:

1. Horizontal Mergers

It is also called as a 'horizontal integration'. This merger occurs between entities engaged in
competitive business, which are at the same stage of the business process. Horizontal mergers have
taken the company a step toward monopoly by eliminating competitors and building stronger
influence in the market.
The other benefit of this form of consolidation is the advantage of economies of scale, which reduces
unhealthy competition. These forms of consolidation are subject to strict scrutiny by the Competition
Commission.
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One of the most definitive examples of horizontal integration was Facebook's acquisition of Instagram
in 2012 for a reported $1 billion. Both Facebook and Instagram operated in the same industry (social
media) and shared similar production stages in their photo-sharing services. Facebook sought to
strengthen its position in the social sharing space and saw the acquisition of Instagram as an
opportunity to grow its market share, reduce competition, and gain access to new audiences. Facebook
realized all of these through its acquisition. Instagram is now owned by Facebook but still operates
independently as its own social media platform.
Tata Steel is one of the biggest ever Indian's steel company and the Corus is Europe's second largest
steel company. In 2007, Tata Steel's takeover European steel major Corus for the price of $12.02
billion, making the Indian company, the world's fifth-largest steel producer. Tata Sponge iron, which
was a low-cost steel producer in the fast-developing region of the world and Corus, which was a high-
value product manufacturer in the region of the world demanding value products. The acquisition was
intended to give Tata steel access to the European markets and to achieve potential synergies in the
areas of manufacturing, procurement. R&D logistics, and back office operations.

2. Vertical Merger

Vertical merger means the combination of two entities in the industry or at different stages.
Production process. For example, the merger of companies engaged in construction business with the
companies that engage in brick or steel production will lead to vertical integration. The company will
benefit from lower transaction costs and a synchronized demand and supply. In addition, vertical
integration helps companies achieve greater independence, self- sufficiency, and ensure the supply
and/or export of products or services and increase efficiency.
The Hindalco Novelis merger marks one of the biggest mergers in the aluminium industry. Hindalco
industries Ltd. is an aluminium manufacturing company and is a subsidiary of the Aditya Birla Group
and Novelis is the world leader in aluminium rolling, producing an estimated 19. percent of the
world's flat-rolled aluminium products. The Hindalco Company entered into an agreement to acquire
the Canadian company Novelis for $6 billion, making the combined entity the world's largest rolled
aluminium Novelis operates as a subsidiary of Hindalco.

3. Conglomerate Mergers
A conglomerate merger is a consolidation of business of two entities which are carries out its
activities in completely unrelated business activities. A conglomerate merger has the same goals as
most other mergers, the company wants to reduce market risk and hopes to use successful synergies to
increase market share. Pure conglomerate mergers involve companies that have no common ground,
while mixed mergers involve companies seeking product expansion or market expansion.
Reliance Industries Limited (RIL) is an Indian Conglomerate holding company headquartered in
Mumbai, India. Reliance is the most profitable company in India, the second-largest publicly traded
company in India by market capitalization. Reliance Petroleum Limited was set up by Reliance
Industries Limited (RIL), one of India's largest private sector companies based in Ahmedabad.
Currently, Reliance Industries taking over Reliance Petroleum Limited (RPL) for the price of 8500
crores or $1.6 billion.
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3.2 THE JOURNEY OF MERGERS AND ACQUISITION IN INDIA

The post-independence though there were many negotiation agreements to conclude a merger and
acquisition only few arrangements have passed the test of time and were successful. The 'license raj'
also limited the power of the companies to extend their market share by mergers and acquisition
without going through long time consuming and cumbersome procedures. The cross borders mergers
were absolutely not allowed to protect the domestic companies. Since, the govern restricting
monopoly in the market it implemented the Restrictive Trade Practises Act, 1969 to curtail the big
family business creating monopoly by suppressing all the minor players. This was reason for lack of
development in mergers and acquisition before 1900 The government policies such as nationalisation
of Insurance Companies 1956 followed by nationalization of Banks in 1969, the capital gains tax
exemption given to amalgamating companies through Finance Bill, 1967 and allowing mergers of
sick companies with profitable companies allowed some growth for mergers and amalgamation.
However, the government still was against the horizontal mergers which in its opinion was harmful
for the economy.
The 1991 was year of liberalization of economy marked by the change of government policies. The
governed removed the restrictive provision under MRTP Act, 1969 relating to licensing for expansion
of enterprises, amalgamation and takeovers of business enterprise and acquisition foreign technology
and investment were removed. This measure was taken after the conclusion that such provision
harmed the market and hampered the development of companies in order to achieve international
competition. The Foreign Exchange Regulation Act, 1993 was amended to reverse the role of
government from restricting foreign investment to the one of encouraging such investment. The
domestic companies were allowed to associate with international companies to form joint venture to
conduct business both in domestic and global market. 16 This led to the development of sectors like
hospitality, banking, telecom, information technology, retail and entertainment.

The period between 1990 to After the change of policy in 1991, the Indian marker bases in
development of mergers and acquisition of the companies. The Period between 1990 to 1995 may be
called as an era of consolidation many Indian companies merged together to form humongous
conglomerate and it also witnessed huge amount of foreign investment being flown into India due to
sudden changes in government policies and economic reforms. The second phase being the era of
foreign acquisition from 1995 - 2002 where the foreign players started to seek Indian entities to grow
in Indian Market. Lastly, an era of venturing abroad from 2002 to 2009 where Indian companies
started forming joint ventures with foreign players not only participate in Indian market but also in
foreign market.
The recent trend of merger and acquisition portrays the importance of mergers and acquisition not
only as method of business restructuring but also as a method of competing at international level
through consolidation in 21st century. A large number of recent mergers and acquisitions by Indian
companies are in service sectors such as banking, telecommunication and technology. The
liberalization of policy allowed these sectors extensively indulge in cross border mergers.

3.3 THE REASON AND CHALLENGES FOR MERGERS AND ACQUISITION

There may be varied reasons for one to undergo mergers and acquisition but the agenda of inorganic
growth is the objective that stands over all the above. This objective of business solidification is
boosted by ongoing governments efforts to improve case of doing business in India. However,
regulation and compliance of law governing these procedures are time consuming thereby taking
away a substantial part of the commercial viability of mergers and acquisition project.
 Company Law CIA 3

The inorganic growth being the top priority the other reasons for mergers and acquisition are:
I. To enhance independence of production and service by backward or forward integration
through vertical mergers and acquisition.
II. The companies being attracted to the availability of assets at lower costs due to distressed
sales.
III. The regulation governing competition in the market mandating the sale of business to reduce
monopoly in the market.
IV. The technology sector is one of the rising business in the world leading to consolidation of
business to target global audiences.
V. The enactment of Insolvency laws, is forcing the sale of non-core assets to reduce the debt
burden to avoid undergoing insolvency proceedings.

The increase in the number of mergers and acquisition has led to many changes in taxing and
corporate laws. Though the laws are trying to evolve to ease the procedure of mergers and acquisition
there lies several challenges ahead, such as:

I. The amendments to the laws have not been very helpful due to the multiplicity of laws
applicable to a single transaction thereby creating confusion in compliance.

II. Though the mergers and acquisition have become the norms for expansion in 21 century the
proxy firms are advising shareholders to oppose such strategies in basis of emotion rather
than fundamental of business. These shareholders activism is proving to be time consuming
due the requirement of court interfere in such circumstances.

III. After the Vodafone tax controversy, the Indian tax authorities have been successful in
discouraging the foreign investment. Also, the advance ruling and tax rates are being very
high are not completely conducive for the growth of mergers and acquisition.

IV. The laws governing foreign investment still imposes a large-scale restriction on the usage of
such fund and the time limit for holding stake in the target company which are not very
healthy for an investors point of view.

Irrespective of several issues being faced by the investors in India, it is one of the most favoured
nation which continues to provide lucrative investment opportunities. Except few conglomerates other
companies may be victim to acquisition or is under pressure to move for mergers to extend their
business, the recent acquisition of flipkart by Walmart is an example of increasing inbound mergers in
domestic companies with high potential. The other business requirement coupled with government
policies such as make in India is guaranteeing the increasing in inbound mergers.
 Company Law CIA 3

Chapter 4: Role of Competition Act in Shaping Merger Acquisition Deals

Introduction

As a general rule, competition laws are premised upon the economic principle that competition is
desirable in a free market. Competition laws seek to prevent businesses from engaging in practice that
are harmful to competition and consumer welfare.
Before 1988, country witnessed very few and unsuccessful number of M&A deals and most of them
were friendly acquisition or horizontal acquisition. The main reason behind the country attracting few
M&A deals was the limitation and regulations imposed by the Monopoly and Restrictive Trade
Practices Act (MTRP Act), 1969, which was the very first act dealing with competition and unfair
trade practices. As per the act, in order to get approval for any M&A deal, the company has to go
through various strict regulatory procedures which were often.
4.1 The scope of Competition Act, 2002
Anti - Competitive Agreements
The CCI recognizes to types of agreements which it considers may anti-competitive elements i.e.
horizontal agreement and vertical agreement. Horizontal agreements are those which are entered into
by two business entities which engage at the same stage of manufacturing. The vertical agreements
are those which are entered into in order to create anti - competitive effects in the chain of business
process. Any agreement irrespective of vertical or horizontal which creates or tends to create AAEC
on Indian competition is void as per the CA, 2002.
Horizontal Agreements
(i) determining purchase/sale prices, or
(ii) restricting or controlling production supply, marketing, technology development, investment or
provision of services, or
(iii) sharing market or production sources or providing services through the allocation of geographic
areas/goods or the type of service or the number of customers in the market, or
(iv) lead to bidding/collusive bidding, presumed to have AAEC.

On the other hand, vertical agreements, such as

i. tie-in arrangements,
ii. exclusive supply; or
iii. distribution agreements, etc., are anti-competitive only if they cause or are likely to cause
an appreciable adverse effect on competition in India.

Abuse of Dominant Position

If an entity can operate without any regard to the competitive forced in the economy or it effects the
consumers in the market unfairly and with no option for them choose alternative then it is termed as
abuse of dominance in India. The CA, 2002 prohibits an activity by entity which amounts to abuse of
dominance and not dominance per se unlike MRTP Act, 1956. The abuse of dominance includes act
such as:
 Company Law CIA 3

i. Unreasonable or unequal imposition of condition or prices on consumers or

ii. predatory pricing,
iii. limiting or restricting production provision of goods/services. technical or scientific
development, indulging in practices resulting in denial of market access etc.

4.2 THE IMPACT OF COMPETITION ACT, 2002 ON MERGERS AND ACQUISITION

4.2.1 The Meaning and Scope of 'Combination

The Section 5 of the Competition Act, deals with regulation of combination in India. It provides as
follows:
Section 5 in the Competition Act, 2002
5. Combination. The acquisition of one or more enterprises by one or more persons or merger or
amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if I
(a) any acquisition where –
(i) the parties to the whose control, share parties to the acquisition, being the acquirer and the
enterprise, control. shares, voting rights or assets have been acquired or are being acquired jointly
have - either, in India, the assets of the value of more than rupees one thousand crore or turnover more
than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million
US dollars or turnover of more than fifteen hundred million US dollars; or
(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired
or are being acquired, would belong after the acquisition, jointly have or would jointly have -
(A) either in India, the assets of the value of more than rupees four thousand crore or turnover of more
than rupees twelve thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars
or turnover of more than six billion US dollars; or
(b) acquiring of control by a person over an enterprise when such person has already direct or indirect
control over another enterprise engaged in production, distribution or trading of a similar or identical
or substitutable goods or provision of a similar or identical or substitutable service, if
(i) the enterprise over which control has been acquired along with the enterprise over which the
acquirer already has direct or indirect control jointly have
(A) either in India, the assets of the value of more than rupees one thousand crore or turnover of more
than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more two billion US dollars or
turnover of more than six billion US dollars: or
(c) any merger or amalgamation in which -
(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as
the case may be, have
(A) either in India, the assets of the value of more than rupees one thousand crore or turnover of more
than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million
US dollars or turnover of more than fifteen hundred million US dollars; or
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(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result
of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or
would have -
(A) either in India, the assets of the value of more than rupees four thousand crore or turnover of more
than rupees twelve thousand crore; or
(B) in India or outside India or outside India, the assets of the value of more than two billion U.S
Dollars or turnover of more than six billion US dollars.
For the purposes of this section - control" includes controlling the affairs or management by
(i) one or more enterprises, either jointly or singly, over another enterprise or group:
(ii) one or more groups, either jointly or singly, over another group or enterprise;
(b) "group" means two or more enterprises which, directly or indirectly, are in a position to-
(i) exercise twenty-six per cent. or more of the voting rights in the other enterprise; or
(ii) appoint more than fifty per cent of the members of the board of directors in the other enterprise; or
(iii) control the management or affairs of the other enterprise;
(c) the value of assets shall be determined by taking the book value of the assets as shown, in the
audited books of account of the enterprise, in the financial year immediately preceding the financial
year in which the date of proposed merger falls, as reduced by any depreciation, and the value of
assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use,
collective mark, registered proprietor, registered trade mark, registered user, homonymous
geographical indication, geographical indications, design or layout-design or similar other commercial
rights, if any, referred to in sub-section (5) of section 3.
The crucial regulation governing combination in India is the Combination Regulations. The CCI also
enjoys under the Section 32 of CA, 2002 an extra territorial jurisdiction. Accordingly, any
combination occurring outside the borders of India, if such combination bears any effect on the
competition in India or satisfies the condition provided under the combination regulation. Such
transaction can be reviewed and governed by the CCI.
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Chapter 5: CCI Vs. Sectoral Regulators: Issue of Jurisdiction

The CCI is regulatory body established under CA, 2002, through an amendment in 2007. The CCI
came into effect to exercise its duties under CA, 2002 in the year 2009. The CCI replaces the MRTP
Commission as body that regulates the competition in the market unlike command control.
The CCI is body corporate and possess the right to enter into any contract and sue and be sued in its
own name.
The CCI consists of one chairman and minimum two and up to six members. The crucial and
important duty of the CCI is to regulate the competition in the market and remove any transaction or
activity causing adverse effect on the competition in India. It is also the responsibility of the CCI to
protect the consumer by causing free and fair trade in the market. The commission is obligated to give
its opinion on the competition issues if the same is wanted by any other statutory body or the
government. The CCI must also undertake activities to create awareness among the people about the
fair competition in the market.
It's essential for an economy to have fair competition in the for the overall growth of the all the player
involved in business. Therefore, the CC by regulating anti-competitive agree curbing dominance in
the market ensure the development of well as consumer interest.

5.1 THE PRO-ACTIVE ROLE OF CCI UNDED COMPETITION ACT, 2002

The liberalization of Indian markets required a nodal agency unlike MRTP commission to regulate the
market by not thwarting the growth of the economy. It was essential to allow foreign players enter
into market but not take away the business of Indian companies. Since, the dominance was not per se
harmful, a body was required to ensure such dominance is not abused. After thoughtful process a
body to govern competition was established namely CCI. The competition regulators not only Indian
in every jurisdiction plays a crucial role. The working of the economy as ease of entering the market
can be determined by evaluating the performance of given competition regulator. The CCI is a body
entrusted to carry out the enforcement of the CA, 2002.
Statutory duties of Competition Commission
According to Section 18 of the Competition Act, 2002 "it shall be the duty of the Competition
Commission of India to eliminate practices having adverse effect on competition, promote and sustain
competition, protect the interests of consumers and ensure freedom of trade carried on by other
participants, in markets in India".

Power of the competition commission

The general powers of the CCI are:
 It can formulate its own procedure.
 In carrying out enquiries against any anti-competitive activities the commission can call for
expert advice.
 The CCI is not bound by any procedural law, in carrying out its function it must follow
principle natural justice along with the rules and regulation under CA, 2002
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5.1.1. Power of Competition Commission in regards to Combination Under the Competition

The Section 6 of CA, 2002 is very that no entities hall enters into such agreement which results in
creation of combination which may adverse effect on the competition in the market. The competition
commission is therefore required to investigate any such combination to determine the consequences
formation of a given combination on the market.
In order to initiate the proceedings or to get approval as already discussed in the previous chapter it is
necessary for the entity to serve notice to the CCI. However, in case of default by the entities in
serving the notice within the specified time, it becomes the responsibility of the CCI to detect such
failure and penalize such activities.

The CCI is also required to give its nod or deny any M&A activities within 210 days from the date
receipt of notice. If it fails to give any within 210 days it is considered to be a deemed as acceptance
for transaction.
In determining the anti-competitive effect or adverse effect on competition, it is important determine
the relevant market for which the effect such transaction will be covered. The Section 2 (r) of CA,
2002 provides that relevant market means "the market which may be determined by the Commission
with reference to the relevant product market or the relevant geographic market or with reference to
both the markets." Therefore, it is the duty of the CCI find out the concerned geographical and
product market after analysing the transaction being entered.
Apart from reviewing the M&A activities being carried out in India, the CCI has power to review
transaction being carried outside India if such activities can cause adverse effect on the competition in
India. Hence, any global transaction having implication on Indian market must take prior approval of
the CCI.
Procedure to determination of Appreciable Adverse Effect on Competition
The AAEC is an important factor in approving a M&A transaction between two entities. The CCI take
into account many factors to determine the AAEC. The Section 20 (4) of the CA, 2002 provides the
factors which must be considered while determining the AAEC.
Some of the factors are:
 The actual competition that prevails in the market through imports in the market.
 The availability of the substitutes in the market
 Degree of countervailing power in the market
 The market share of the enterprises entering into combination in the relevant market.
 Likelihood that competition will eliminate competitors from the market and reduce
competition.
Investigation of Combinations
After the receipt notice as per Section 6 of CA, 2013, the CCI must form Prima facie opinion on the
transaction being carried out as to such has AAEC on Indian competition. If it satisfied that the
situation is not good terms with the fair competition then it can issue a bow cause notice summoning
the entities to answer as to why an investigation must not be conducted to determine the nature and
effect of the transaction. After the receipt of such notice, the entities are obligated to reply within 30
days.
On the basis of the report by the director general or on the ground of replies given by the parties the
CCI may ask the parties to publish information relating to the combination. Subsequently, the CCI
may call for any objection from any party interested. The party concerned may provide a written
objection to the CCI within 15 days from the date of the publishing of the information.
 Company Law CIA 3

5.2. Analysis of Competition Commission of India v. Bharti Airtel Limited and Others.
The question of resolving the tussle of jurisdiction came before Supreme Court in the case of
Competition Commission of India v. Bharti Airtel Limited and Others.
The Reliance Jio in the current case complained of anti-competitive agreement by Vodafone and
Airtel. After the investigation the CCI issued a notice to the parties. This was challenged by the
parties before the High Court.
The High Court allowed the appeal and held that the CC has no jurisdiction in said matter.
Subsequently CCI approached the Supreme Court against the order of the High Court.
The crucial issue in the case was whether the CCI has jurisdiction entertain a matter in the cases
where it comes under ambit TRAI but involves competition related subject.
The Supreme Court after analysing the objective of the Act held that the decision of the Supreme
Court statues and upheld the decision of High Court of Bombay. In addition, the Supreme Court held
as follows: "The matter on hand is related to the telecom sector which is monitored under the TRAI
Act. In the first instance, TRAI shall be allowed to deal with and decide the "jurisdictional aspects" as
it is more competent to handle it. When the final determination is done by TRAI and there are findings
that show that the party is involved in anti-competitive practices, the jurisdiction of the CCI can be
activated to look into the said matter in accordance with the relevant provisions of the Act. Going by
this way, a balance will be maintained between TRAI and the CCI."
"If the CCI is allowed to interfere at the time when TRAI is seized of the matter, there is a possibility
that the authorities, namely TRAI and the CCI subscribe to a contradictory view. Thus, it is
imperative to avoid having a concurrent jurisdiction.
The jurisdiction of the CCI is not ousted completely, it is a matter of supremacy as to which authority
should exercise jurisdiction first. If an agreement has an adverse effect on the competition within the
relevant market of the country, the CCI will exercise its jurisdiction, as it is a tailor-made authority to
deal with such issues. The jurisdiction to deal with such issues should not be disputed at any point of
time."
The prima facie reading of the judgment leads to the opinion that the SC has struck a balance between
the exercise of jurisdiction between CCI and TRAI. However, the clear analyses of the judgment
provide that the it creates more ambiguities then solving it.
The SC stated that the TRAI will be the foremost authority to determine the matter in dispute and CCI
will can claim jurisdiction only after TRAI completes its investigation in telecommunication industry.
This secondary jurisdiction of CCI is in violation of Section 21 of CA, 2002 since, the Section 21
allows the statutory authority to refer the matter to CCI pending investigation before them, if they are
of the opinion that the matter in hand violates the provision of CA Act, 2002.
The judgment without any clarification holds that the jurisdictional fact must be decided by the TRAI
and the same is binding on the parties and also the CCI. CCI without the power to determine a
jurisdictional fact will be deduced an authority without any power.
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Chapter 6: Conclusion