India: Merger Control
The merger control regime of India is relatively nascent and came into effect only on 1 June 2011. It seeks to regulate combinations that cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India, and the regulatory functions are exercised by the Competition Commission of India (CCI) in accordance with the provisions of the Competition Act, 2002 (the Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (Combination Regulations), as amended from time to time.
This article gives an outline of the merger control provisions in India and the manner in which they are implemented by the CCI.
Requirement of notification
Types of transactions
Any acquisition (of assets, control, shares or voting rights) of an enterprise or merger or amalgamation of an enterprise that exceeds the financial thresholds prescribed under section 5 of the Act amounts to a combination, and the same is reportable to the CCI, unless expressly exempted under the Combination Regulations or by the government of India notifications. The Act specifies two broad categories of transactions, which are as set out below.
This includes both direct and indirect acquisition of shares, assets or voting rights or control of an enterprise.
Mergers and amalgamations
This includes mergers or amalgamations of two or more enterprises. The Act provides no definition of a merger or an amalgamation; these terms are interpreted in accordance with the Companies Act, 2013 and general commercial usage.
With the view to exempt small transactions, the government of India, in a notification dated 4 March 2011, exempted the acquisition of an enterprise having assets not exceeding 2.5 billion rupees or a turnover not exceeding 7.5 billion rupees in India for a period of five years (Target Exemption). On 4 March 2016, the exemption was renewed for a period of five years, and the exemption thresholds were increased to assets not exceeding 3.5 billion rupees or turnover not exceeding 10 billion rupees in India.
On 27 March 2017, the scope of the exemption was revised to state that:
Where a portion of an enterprise or division or business is being acquired, taken control of, merged or amalgamated with another enterprise, the value of assets of the said portion or division or business and or attributable to it, shall be the relevant assets and turnover to be taken into account for the purpose of calculating the thresholds under section 5 of the Act.
As such, the scope of the Target Exemption now also applies to mergers and amalgamations of enterprises. Further, the term 'target', in asset acquisition, would mean the target asset or business being acquired, whereas in share acquisitions it would be the entity whose shares are being acquired.
The jurisdictional thresholds under section 5 reference both parties and groups in terms of both assets and turnover, and if any of these thresholds are exceeded in any case, the transaction is reportable to the CCI. The thresholds have been increased twice, in 2011 and 2016, and are currently as follows:
- the acquirer and the target jointly have either:
- in India, assets of over 20 billion rupees or turnover of over 60 billion rupees; or
- globally, assets of over US$1 billion, including at least 10 billion rupees in India, or turnover of over US$3 billion, including at least 30 billion rupees in India; or
- the acquirer's group and the target post-combination jointly have:
- in India, assets of over 80 billion rupees or turnover of over 240 billion rupees; or
- globally, assets of over US$4 billion, including at least 10 billion rupees in India, or turnover of over US$12 billion, including at least 30 billion rupees in India.
Relevant entities for calculating thresholds
The following entities are considered for calculating thresholds. If the transaction does not qualify for a target exemption:
- For an acquisition of assets, shares, voting rights or control, the value of assets and turnover of the acquirer (or acquirer group) and the target enterprise is to be taken into account.
- For an acquisition of control by a person over an enterprise when such person already has direct or indirect control over another enterprise competing with the target, the value of assets and turnover of the enterprise (or acquirer group to which the target enterprise would belong) over which control is being acquired, along with the enterprise over which the acquirer already has direct or indirect control, is to be taken into account.
- For mergers or amalgamations, the value of assets and turnover of the enterprise (or group) remaining after the merger or created as a result of the amalgamation is to be considered.
Meaning of 'control'
The term 'control' has been defined, albeit in a circular manner, in explanation (a) to section 5, to include controlling the affairs or the management by one or more enterprises. However, the CCI, through its recent amendments to the Combination Regulations, sets out a test for 'strategic acquisitions' or 'acquisitions not solely for investment' by adopting a lower threshold, and this could trigger notification requirements for transactions that do not confer any competitively relevant influence. The Combination Regulations state that an acquisition of less than 10 per cent of the total shares or voting rights of an enterprise would be notifiable, if it confers:
- any special rights (other than those exercised by an ordinary shareholder);
- a board seat (or ability/intention to appoint a board seat); or
- ability/intention to participate in the affairs and management of the entity whose shares are being acquired.
The CCI, in its decisional practices, has held that the ability to block special resolutions amounts to 'negative control', which amounts to control for the purposes of the Act. In particular, the CCI would consider the ability to veto any or all of the following items as confering control:
- business plans;
- annual operating plan (including the annual budget plan);
- commencing a new line of activity;
- discontinuing any existing line of activity or business;
- appointment of key managerial personnel and their compensation; and
- alteration of charter documents and so on.
Combinations that are normally not reportable
Pursuant to the Combination Regulations, certain transactions, even if they fall within the definition of a combination, need not normally be notified as they are ordinarily not likely to cause an AAEC in the relevant market in India. In practice, this is generally understood to mean that no notification is required for such transactions. These transactions include:
- An acquisition of less than 25 per cent of the shares or voting rights of an enterprise solely as an investment or in the ordinary course of business, not leading to change in control. There is limited guidance on the meaning of 'ordinary course of business'. An amendment to the Combination Regulations in 2016 clarified that the term 'solely as an investment' means any acquisition resulting in less than 10 per cent of the total shares or voting rights of an enterprise, provided the acquirer, after acquisition, has the ability to exercise only such rights that are exercisable by ordinary shareholders, and does not have any special rights and board representation or any intention to participate in the affairs or management of the target company.
Interestingly, the CCI has found that acquisitions of shares or voting rights even below 25 per cent that give rise to horizontal overlaps or vertical relationships between the acquirer and the target may raise competition concerns and would not be regarded 'solely as an investment' or 'an acquisition in the ordinary course of business'. Consequently, the application of this exemption has been significantly diluted as parties may have to file a notification in many cases. The CCI has been interpreting the definition of 'solely as an investment' very strictly, which further limits the scope of the exemption.
- The acquisition of any additional shares or voting rights where the acquirer or its group already holds 25 per cent or more (but less than 50 per cent) shares or voting rights, as long as such acquisition does not result in the acquirer holding 50 per cent or more of the shares or voting rights, and does not result in the acquisition of sole or joint control of the target (ie, as long as it does not result in a change in the quality of control).
- Acquisition of shares or voting rights where the acquirer already has 50 per cent or more shares or voting rights in the target (except where the transaction results in the transfer from joint control to sole control).
- Acquisition of assets not directly related to the business activity of the acquirer or solely as an investment or in the ordinary course of business, not leading to control, except where the assets being acquired represent substantial business operations in a particular location or for a particular product or service of the enterprise of which assets are being acquired, irrespective of whether such assets are organised as a separate legal entity or not.
- Amended or renewed tender offers already filed with the CCI by the party making the offer.
- Acquisition of stock-in trade, raw materials, stores and spares, and other similar current assets in the ordinary course of business.
- Acquisition of shares or voting rights pursuant to a bonus issue, stock splits, consolidation of face value of shares, buy-back of shares or subscription to rights issue of shares (except where the transaction results in acquisition of control).
- Acquisition of shares or voting rights by a securities underwriter or registered broker of a stock exchange in the ordinary course of business.
- Intra-group acquisition of shares, voting rights or assets by one person or enterprise of another person or enterprise within the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part of the same group.
- Intra-group merger and amalgamation where either one of the enterprises has more than 50 per cent shares or voting rights of the other enterprise, or more than 50 per cent shares or voting rights in each of such enterprises are held by enterprises within the same group. However, this exemption does not apply to those intra-group mergers or amalgamations wherein there is a change from joint control to sole control.
- Acquisition of shares, control, voting rights or assets by a purchaser approved by the CCI in accordance with an order for divestment.
It must be noted that the Combination Regulations have been worded in a manner such that the above are not absolute exemptions (ie, even where the transaction falls within the above categories, it may have to be notified if it causes or is likely to cause an AAEC in any market in India). In any event, the aforesaid exemptions need to be assessed on a case-by-case basis.
Exemptions pursuant to government notifications
Under section 54 of the Competition Act, the government has the power to exclude certain combinations from the requirement of a notification. Currently, the following combinations have been exempted from the purview of the CCI by way of notifications:
- mergers and takeovers of loss-making and failing banks (in respect of which the government has issued a notification under section 45 of the Banking Regulation Act 1949) – this has been done presumably to enable speedy remedial action to prevent the failure of a bank;
- mergers and amalgamations of Regional Rural Banks ordered by the government and (in respect of which the central government has issued a notification under sub-section (1) of section 23A of the Regional Rural Banks Act, 1976) – this has been done to expedite the consolidation of such banks in light of the stress that the banking sector is under;
- all cases of reconstitution, transfer of the whole or any part thereof and amalgamation of nationalised banks, under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 for a period of 10 years (effective from 30 August 2017); and
- mergers and amalgamations of the Central Public Sector Enterprises (CPSEs) operating in the Oil and Gas Sectors under the Petroleum Act, 1934 and the rules made thereunder or under the Oilfields (Regulation and Development) Act, 1948 and the rules made thereunder, along with their wholly or partly owned subsidiaries operating in the oil and gas sectors for a year of five years (effective from 22 November 2017).
Specific rules applicable to combinations
In an effort to prevent smart structuring of transactions to avoid filing a notification, the CCI introduced an anti-avoidance provision to the Combination Regulations stating that the requirement to notify will be determined with respect to the substance of the transaction (also referred to as the 'substance test') and any corporate structure that has the effect of avoiding a notice will be disregarded. This provision has reportedly been the basis of several filings to the CCI.
Treatment of joint ventures
There is no explicit guidance in the Act or the Combination Regulations relating to joint ventures. Section 5 of the Act covers only acquisitions, mergers and amalgamations, without making any specific mention of joint ventures. A joint venture would, therefore, have to be covered under one of these transactions depending on how the joint venture is formed (ie, through acquisition, or merger or amalgamation).
Generally speaking, and absent any transfer of assets to the joint venture by the parents, greenfield joint ventures are not notifiable, whereas brownfield joint ventures may require notification if financial thresholds are met. The CCI has clarified that if one or more enterprises transfer their assets to a joint venture company, then the formation of a joint venture is treated as a notifiable combination, provided that financial thresholds are met.
The Act, under section 20(4), has listed the following factors, and the CCI is required to consider all or any of these when analysing the effect on competition:
- market shares of the parties and competitors;
- sources of actual and potential competition (including imports);
- whether a vigorous competitor would be removed by the combination;
- whether the target is a failing firm;
- vertical integration in the market;
- extent of entry barriers into the market;
- significance of innovation;
- the combination's contribution to economic development; and
- whether the benefits of the combination outweigh the adverse impact.
The CCI can also, under regulation 34 of the Combination Regulations, consult any other agency or statutory authority in relation to the combination under scrutiny.
Timeline for reporting a transaction
By way of its notification dated 29 June 2017, the government has exempted parties from notifying a transaction to the CCI within 30 calendar days from the execution of any agreement or other document for acquisition, or the approval of the proposal relating to a merger or amalgamation by the board of directors of the enterprises concerned. Therefore, a notification can now be submitted to the CCI at any time after the trigger event, as long as the CCI approval is received prior to consummation of the transaction.
Under the Combination Regulations, an 'other document' should be binding and convey an agreement or decision to carry out the relevant transaction. The amendments to the Combination Regulations in 2016 narrowed the meaning of the term 'other documents' in the context of public M&A to a public announcement for the acquisition of shares, voting rights or control (as defined in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011). This has resulted in greater clarity, as earlier, even a letter to a statutory authority for obtaining foreign investment approval would be sufficient to trigger the timeline for the notification. In cases of hostile acquisitions, the 'other document' is any document executed by the acquiring enterprise, by whatever name, conveying a decision to acquire control, shares or voting rights of a target.
The CCI has 30 working days from the date of the notification to form a prima facie opinion (in Phase I) on the existence of any AAEC in the relevant market. This does not include the time taken by the parties to provide additional information and clarifications. The CCI can also stop the clock during Phase I for an additional 15 working days to seek comments from third parties. During this phase, parties can propose modifications to a combination so as to address any concern that the CCI may have. In such a case, an additional period of 15 working days is available with the CCI for forming its prima facie opinion.
If the CCI forms a prima facie view that the proposed combination is likely to cause an AAEC in any relevant market in India, the CCI will issue a notice under section 29 of the Act, requiring the parties to explain within 30 calendar days on how the combination would not adversely affect the market. If the response submitted by the parties is not found to be satisfactory, the CCI initiates a detailed Phase II investigation.
If the CCI does not pass a final order within 210 calendar days from the date of notification, the combination is deemed to be approved. However, there has been some perceived ambiguity in the manner of computation of the 210-day period, particularly whether the 'clock-stops' during the review process are to be excluded while counting the period of 210 days, given that there was no categorical mention of such exclusion in the Act or the Combination Regulations. Vide its amendment in 2018, the CCI has clarified that the period of 210 calendar days is extendable based on the number of times a request for information is issued by the CCI and the time taken by parties to respond.
In practice, the CCI clears almost all transactions in Phase I. Further, there has been no instance of a transaction being blocked by the CCI to date; however, there have been several cases where the CCI granted clearance subject to conditions (both structural and behavioural), including Sun/Ranbaxy, Holcim/Lafarge, PVR/DUL, Abbott/St Jude, ChemChina/Syngenta, Dow/Dupont, FMC/DuPont, Agrium/Potash Corp, Bayer/Monsanto and Linde/Praxair.
Types of form
The Combination Regulations contain the following types of forms to be used for filing.
Form I or the 'short form'
This is ordinarily used for filing merger notifications to the CCI. The filing fee for Form I is 1.5 million rupees.
Form II or the 'long form'
This is a more detailed format and could be used by parties for the filing if:
- the parties are competitors and the combined market share post-merger exceeds 15 per
- the parties are engaged in vertically related business activities and their individual market share exceeds 25 per cent in either of their respective markets.
The filing fee for Form II is 5 million rupees.
Acquisitions, share subscription or financing facilities entered into by public financial institutions, registered foreign institutional investors, banks or registered venture capital funds, pursuant to a covenant in a loan agreement or an investment agreement are to be intimated in Form III. Unlike the other two forms, these transactions need not be pre-notified to the CCI, and the acquirer in such cases could intimate the CCI within seven calendar days of completion.
According to the Combination Regulations, it is the responsibility of the acquirer to notify an acquisition or a hostile takeover. In case of a merger or amalgamation, a joint notice is required to be filed by the parties; this is usually also the requirement for a joint venture.
Withdrawal and refilling of notice
Previously, in cases where changes made to a notice (post filing) were likely to substantially affect the assessment of the transaction, the CCI had the liberty to invalidate the notice. Recently, in the CCI's amendment to the Combination Regulations in 2018, in case a proposed transaction undergoes a significant change, the parties can withdraw the previous notice and refile a fresh notice. The introduction of this provision provides flexibility to the parties to decide whether to 'withdraw and refile' or simply notify the CCI of any change to the notice. However, the final decision on whether to allow the refiling rests with the CCI. Also, in the case of withdrawal and refiling, the fee already paid in respect of such notice will be adjusted against the fee payable for the new notice, provided a new notice is given within three months from the date of withdrawal. Furthermore, in case of re-filling a fresh notice, the merger clock will be reset.
The merger control regime in India is suspensory and any violation of the same amounts to gun jumping. Though there is no specific provision relating to gun jumping under the Act or the Combination Regulations; in practice, the CCI treats gun jumping as a failure to notify a combination or a part of a combination or delay in notifying. This can result in a fine under section 43(A) of the Act that may extend to 1 per cent of the worldwide turnover or assets of the combination, whichever is higher. The fine is imposed on the party responsible for the filing. However, in practice, the CCI, in most of the cases, has imposed penalties ranging from 5 million to 10 million rupees. The CCI has also found that even pre-payment of consideration, irrespective of the nature of the payment (ie, whether refundable or not) amounts to part consummation of the transaction. The CCI has further clarified that pre-payment of consideration by an acquirer to a target may lead to a reduction of independence between the parties or may reduce parties' incentives to compete, and therefore amount to gun jumping.
Penalties imposed by the CCI were previously appealed before the (erstwhile) Competition Appellate Tribunal (COMPAT) and the Supreme Court in three cases. The Supreme Court upheld the CCI's decisions in all three appeals.
In the case of acquisitions, the liability to pay the fine rests with the acquirer; whereas, in case of mergers or amalgamations, the liability would fall on both parties to the combination.
The merger control regime in India has evolved substantially over the past year, with the CCI making amendments to bring greater clarity and simplify the filing processes. It seeks to align its procedures closer to international best practices.
The CCI, while analysing merger control cases, has become more sophisticated. This is evident from the fact that the CCI endeavours to clear 'non-problematic' transactions in an expedited manner; whereas it closely scrutinises and analyses the complicated ones.
There is, however, a need for greater clarity and guidance in relation to the substantive analysis adopted by the CCI, especially in divestment cases. There has been criticism that the CCI does not engage with parties adequately in divestment cases, as a result of which the remedies arrived at may not be commercially viable. To address this, the CCI may also consider market testing of the proposed modifications, as is done in some other jurisdictions.