India: Competition Bill 2022 signals potential changes to merger control regime

In summary

This article provides an overview of the Indian merger control regime with a focus on major developments in 2022 and the upcoming Competition (Amendment) Bill 2022.

Discussion points

• Enforcement trends on gun jumping
• Proposed amendments under the Competition (Amendment) Bill 2022
• Sweeping powers in regulating transactions
• Increasing prevalence of voluntary remedy discussions in Phase I

Referenced in this article

• Competition Act 2002
• Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011
• Competition (Amendment) Bill 2022
• Adani Green/SB Energy
• Tata Power/WESCO; Tata Power/SOUTHCO; and Tata Power/CESU
• Premji Invest/Future Retail
• Trian Partners/Invesco
• SABIC BV/Clariant
• Amazon.com NV Investment Holdings LLC v CCI & Ors

Introduction

The Indian merger control regime came into effect 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. The regulatory functions are exercised by the Competition Commission of India (CCI) in accordance with 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 (the Combination Regulations), as amended. On 5 August 2022, the Competition (Amendment) Bill 2022 (the Amendment Bill) was introduced in Parliament and was referred to the Parliamentary Standing Committee on Finance (the Committee) for its review. On 13 December 2022, the Committee issued its report with certain recommendations on the Amendment Bill. Key proposals are discussed below.

Features of regime

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 is reportable to the CCI, unless expressly exempted under the Combination Regulations or by notifications promulgated by the government.

Mandatory and suspensory

The Indian merger control regime is mandatory and suspensory in nature. A notifiable combination cannot be consummated without approval from the CCI. If the CCI does not issue its final order within 210 days of receiving a notice, the combination is deemed to be approved by the CCI. The Amendment Bill proposes a shorter timeline of 150 days for the CCI to issue its final order on a combination, although the Committee recommended against this proposal, noting the difficulties highlighted by the CCI and other stakeholders with such expedited timelines.

The Act penalises any failure of notification of a combination to the CCI or any part-consummation of a combination prior to CCI approval (gun jumping). The penalty for gun jumping is a fine that may reach up to 1 per cent of the total assets or turnover (whichever is higher) of the erring party in the preceding financial year.

Trigger for notification

A merger notification can be made to the CCI:

• in the case of a merger or amalgamation, after the approval of the merger or amalgamation by the board of directors of the parties to the transaction; or
• in the case of an acquisition, after the execution of any binding document relating to such an acquisition (trigger event).

Specifically, in relation to acquisition of listed companies pursuant to an open offer in terms of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations 2011, the public announcement made to the Securities and Exchange Board of India would be considered the trigger event.

Earlier, parties were obligated to notify a combination to the CCI within 30 days of a trigger event occurring. However, the timeline for reporting combinations has been relaxed until 2027 through a series of notifications^[1] and the relevant parties can notify combinations to the CCI at any point, provided that the transaction is consummated only post-CCI approval. In a welcome move, the Amendment Bill proposes to amend the Act to do away with the 30-day timeline altogether.

Obligation to notify

The obligation to notify the CCI depends on the structure of the combination. The Combination Regulations provide that, in the case of an acquisition, the obligation to notify the combination rests upon the acquirer. In a merger or an amalgamation, the transacting parties are required to notify the CCI jointly.

Interconnected transactions

In cases where the ultimate effect of a combination is achieved through a series of transactions or interconnected transactions, parties must notify all such transactions in a single notice to the CCI. If any one of such transactions is closed prior to or without obtaining CCI approval, it would amount to gun jumping. The CCI usually considers the subject matter of the transaction, commonality of parties or entities to the transaction, the timing and simultaneity of negotiation, and execution and consummation of the transactions to determine whether transactions are interconnected.

Meaning of ‘control’

An acquisition of control over an enterprise may be notifiable to the CCI subject to satisfaction of jurisdictional thresholds. In addition, the applicability of certain Schedule I exemptions (see below) also depends upon the interpretation of ‘control’. Accordingly, the determination of whether a transaction results in acquisition of control is fundamental to a merger control analysis. The term ‘control’ is defined in a circuitous manner under the Act to include ‘controlling the affairs or the management by one or more enterprises’.^[2]

The CCI recognises various degrees and forms of control such as controlling interest (de jure control), de facto control and material influence. The CCI previously assessed control as a matter of decisive influence but has now, through its decisional practice, moved to the standard of material influence, which is the lowest form of control. Material influence implies the presence of factors that give an acquirer the ability to influence the affairs and management of the target through shareholding, special rights, status and expertise of an acquirer, board representation, and structural or financial arrangements, among other factors.^[3] The Amendment Bill proposes to codify the CCI’s decisional practice for defining the term ‘control’ to mean an ability to exercise material influence over the management, affairs or strategic commercial decisions of a target. The Committee further recommends that the factors to assess material influence are clarified by the CCI through regulations.

Financial thresholds and de minimis exemption

The Act sets out eight financial thresholds (based on assets and turnover) that consist of tests on an enterprise level and on a group level. However, in 2017, the government introduced a de minimis exemption that exempts from notification transactions where the target has assets of less than 3.5 billion rupees in India or turnover of less than 10 billion rupees in India.^[4] The government has extended the validity of the de minimis exemption for a period of another five years until March 2027.^[5]

Even if the financial thresholds are exceeded, a transaction can also benefit from any of the exemptions set out under Schedule 1 of the Combination Regulations.

In addition, the Amendment Bill proposes the introduction of deal value thresholds that require notification of transactions with a deal size in excess of 20 billion rupees. However, this is subject to one of the parties having substantial business operations in India (local nexus test), the determination of which will be based on regulations to be issued by the CCI. The proposal aims to ensure that competitively sensitive transactions that fall below the financial thresholds do not escape CCI scrutiny. The Committee recommends that the deal value thresholds and the local nexus test are revisited every year by the CCI. Separately, the Committee also recommends that certain digital companies with a significant presence in India should be mandated to inform the CCI of all their transactions, irrespective of the jurisdictional or deal value thresholds.^[6]

Exemptions

Schedule 1 exemptions

The Combination Regulations exempt certain transactions, even if they fall within the definition of ‘a combination’, from notification to the CCI as they are ordinarily not likely to cause an AAEC in the relevant market in India.

Minority shareholder acquisitions (Item 1 exemption)

Item 1 of Schedule 1 exempts from notification an acquisition that:

• does not entitle the acquirer to hold 25 per cent or more of the total shares (or voting rights) of a target;
• does not lead to an acquisition of control of the target; and
• is done solely as an investment or in the ordinary course of business.

A 2016 amendment to the Combination Regulations clarified that an acquisition of less than 10 per cent shares or voting rights shall be deemed to be solely an investment if the acquirer:

• has the ability to exercise only such rights that are exercisable by ordinary shareholders of the target;
• is not a member on the board of directors of the target and does not have the right or intention to nominate a board director; and
• does not intend to participate in the affairs or management of the target.

The CCI interprets the Item 1 exemption very strictly and, through its decisional practice, has narrowed down the conditions in which the Item 1 exemption would be applicable.

Exemption for acquisition of additional shares or voting rights

The following types of acquisitions whereby the acquirer increases its existing shareholding in the target are exempt from notification to the CCI, provided that there is no change of control of the target:

• where an acquirer or its group that already has 25 per cent shareholding in a target acquires an additional shareholding not exceeding 50 per cent in the target; and
• where an acquirer or its group holds 50 per cent in the target and acquires additional shares in the target.

Intra-group transactions

Acquisitions or mergers and amalgamations where the parties belong to the same group and the target is not jointly controlled by enterprises outside the same group are exempt.

Other Schedule 1 exemptions

Several other types of transactions are also exempt under Schedule 1 of the Combination Regulations, such as:

• 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;
• 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 not leading to control;
• acquisition of shares or voting rights by a securities underwriter or registered broker of a stock exchange in the ordinary course of business; and
• acquisition by a purchaser approved by the CCI in accordance with an order for divestment.

Exemptions pursuant to government notifications

The government has specifically excluded combinations involving loss-making and failing banks (valid until 10 March 2025)^[7] and nationalised banks (valid until 29 August 2027)^[8] from CCI’s merger review process.

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. 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 transfers its assets to a joint venture company, the formation of a joint venture is treated as a notifiable combination provided that the financial thresholds are met.

Types of notification forms

The Combination Regulations specify three types of forms for filing. Form I (or short-form) is typically used for filing merger notification to the CCI. However, Form II (or long-form) is recommended in cases where the parties to the notification are:

• competitors and have a combined market share exceeding 15 per cent; or
• vertically related and their individual or combined market shares exceed 25 per cent.

On 31 March 2022, the CCI notified a revised and simplified version of Form II that came into effect on 1 May 2022. The revised Form II was streamlined to reduce duplication of information requirements and its structure aligned with the recently revised Form I. This is aimed to reduce the time and effort required to move from Form I to Form II in the case of any invalidation or re-filing of a notification. The CCI also intends to issue a guidance note to elaborate upon the queries in the revised form.

In addition, Form III, unlike Forms I and II, is a type of post-completion notification to the CCI for transactions involving share subscriptions, financing facilities or acquisitions by public financial institutions, foreign institutional investors, banks or venture capital funds. The Amendment Bill seeks to exempt these transactions from notification requirements altogether.

Green Channel Route

The Green Channel Route of automatic approval was introduced in India in 2019 to ease compliance burdens for certain transactions where the acquirer group has no horizontal overlap, vertical relationship or complementary relationship with the target’s business. The transaction is deemed approved by the CCI upon receipt of the acknowledgement of notification. However, if the CCI is of the opinion that the transaction does not qualify for the Green Channel Route, it may declare such an approval as void ab initio and direct parties to re-file the notification (subject to hearing the parties). The Green Channel Route has been a huge success and, in 2022, a total of 25 combinations were deemed approved through the Green Channel Route. Indeed, recently the CCI even allowed a transaction involving minor vertical relationships to avail of the Green Channel Route, displaying its commitment to aiding the ease of doing business in India.^[9]

Undertaking pre-filing consultations with the CCI case team in relation to a proposed Green Channel filing is recommended as it reduces risks of the CCI rescinding its notice and allows parties to confirm the availability of the Green Channel Route to certain transactions.

Review period

Phase I

The CCI is obligated to form a prima facie opinion on whether a combination would cause an AAEC within 30 working days of the filing. 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.

If the CCI forms a prima facie view that the combination is likely to cause an AAEC in any relevant market in India, the CCI will issue a show cause notice, requiring the parties to explain within 30 calendar days why the combination would not adversely affect the market. During this phase, parties can propose voluntary modifications to the 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 to the CCI for forming its prima facie opinion. If the response submitted by the parties is not found to be satisfactory, the CCI initiates a detailed Phase II investigation.

The CCI typically clears non-problematic Phase I investigations within four to six weeks of notification and most combinations receive CCI approval within Phase I of the review process itself. Indeed, we have been witnessing a trend for the CCI to clear even competitively sensitive combinations in Phase I itself, with parties offering convincing voluntary modifications to avoid protracted review timelines.

Phase II

The Phase II review process involves a detailed investigation by the CCI where it is obligated to approach third parties for their views on the combination. Parties are also obligated to publicise the details of the combination to invite public comments. Overall, the CCI has a period of 210 calendar days from the date of notification to pass a final order on the combination. However, an additional 60 working days may be available to negotiate remedies. This period also excludes any clock stops to account for the time taken by the parties to furnish the CCI with information. It may therefore take longer than 210 calendar days to clear a Phase II investigation. For example, five out of the eight transactions that have undergone Phase II investigations received the approval of the CCI after more than 300 days had passed since the filing of their notifications.^[10]

Developments in 2022

Uncompromising stance on gun-jumping violations

In 2022, the CCI issued 11 gun-jumping decisions, highlighting the full breath of its experience accumulated over the past decade. The CCI found the following conduct problematic:

• premature consolidation through potential exchange of information between parties (despite clean team arrangements);^[11]
• failure to notify on account of (contended) exclusivity of jurisdiction of specialised sectoral regulators;^[12]
• part-consummation by placing acquired shares of the target enterprise (through an open-market purchase) in escrow;^[13]
• failure to notify an initial tranche of a transaction due to an incorrect assessment of jurisdictional thresholds;^[14]
• failure to notify due to erroneous application of the Item 1 exemption; and
• failure to notify due to incorrect turnover computation by preclusion of subsidiaries of the target enterprise.^[15]

In March 2022, the CCI imposed a penalty of 500,000 rupees in Adani Green/SB Energy for violation of standstill obligations. While reviewing the transaction, the CCI noted that a clause in the transaction documents allowed parties to exchange information and for the acquirer to provide non-binding input to the target. The CCI noted that the clause resulted in the combination to have come into effect prior to CCI approval. The CCI clarified that such an assessment is based on the inherence proportionality test along with a review of the efficacy of safeguards put in place to avoid any anticompetitive effect. The CCI held that the clause permitted more cooperation than was required to monitor and preserve the economic value of the target. It rejected the contention that the envisaged clean team arrangements acted as adequate safeguards against the information exchange concerns. The CCI also opined that the possibility of competition distortions (without any adequate safeguards) is enough to constitute a gun-jumping violation and the intent of the parties is immaterial to such a determination.

In March 2022, the CCI also imposed a cumulative penalty of 1.5 million rupees on Tata Power in three decisions for its failure to notify its acquisitions of shareholding in three electricity supply companies. Tata Power contented that its acquisitions were undertaken under the exclusive domain of the Indian Electricity Act 2003 and, accordingly, the CCI did not have jurisdiction to review the transactions. The CCI, however, rejected these contentions, noting that as a market regulator its jurisdiction extends to all sectors of the economy (whether or not regulated by sector-specific laws). The CCI considered compliance with condensed statutory timelines per sector-specific regulations (such as under the Indian Electricity Act 2003 in this case) as a mitigating factor while determining the amount of the penalty.

In July 2022, the CCI held SABIC International BV responsible for gun-jumping violations for two consecutive acquisitions of a shareholding in Clariant AG. While assessing the notification of SABIC’s acquisition of a 6.51 per cent shareholding in Clariant through open-market purchases held in escrow, the CCI noted that it had violated its standstill obligations by utilising the escrow mechanism. SABIC contended that the additional shares held in escrow were devoid of voting rights and were to be released to SABIC only upon the receipt of merger clearance by the CCI. The CCI, however, observed that such mechanisms have been held to violate standstill obligations by the CCI and confirmed by the Supreme Court of India in the past.^[16] Noting that SABIC was eventually going to be vested with the legal and beneficial ownership of the escrow shares, the CCI held that its merger approval should have been obtained before SABIC acquired the shares through the escrow mechanism. Taking account of a number of mitigating factors (such as no bad-faith intentions to evade compliance, voluntary notification of the transaction to the CCI and cooperation with the CCI), a token penalty of only 500,000 rupees was imposed on SABIC by the CCI. Interestingly, the Amendment Bill proposes an exemption of transactions involving stock market purchases from the standstill obligations under the Act. However, the acquirer would be required to file a notice within a prescribed time and must not exercise any ownership or beneficial rights or interest in the securities (including dividend and voting rights).

The CCI’s decisional practice as well as its strict and robust enforcement in cases of gun-jumping violations in 2022 show its growth as a maturing regulator. Its 11 gun-jumping orders in 2022 are more than those imposed in the previous three years combined. The highest penalty imposed was 10 million rupees on a party that failed to notify a transaction to the CCI despite receiving all the relevant information and clarifications to confirm the requirement to notify from the CCI itself.^[17]

Increased clarity on applicability of Item 1 exemptions

The CCI has, in the past year, also clarified the contours of the Item 1 exemption in three gun-jumping decisions.^[18] In SABIC BV/Clariant,^[19] the CCI imposed a penalty of 4 million rupees on SABIC for not notifying a transaction involving an acquisition of a 24.99 per cent shareholding in Clariant along with the right to nominate directors to Clariant’s board of directors. In PI Premji Invest/Future Retail, the CCI imposed a penalty of 2 million rupees on PI Opportunities Fund and Pioneer Investments Fund (collectively, Premji Invest) for not notifying a transaction involving an acquisition of a 6.03 per cent shareholding in Future Retail Limited (FRL) and the acceptance of FRL’s invitation to appoint board members to its board of directors. Similarly, in Trian Partners/Trian Fund, the CCI imposed a penalty of 2 million rupees on Trian Partners AM Holdco Ltd and Trian Fund Management LP for not notifying a transaction wherein Trian Fund Management acquired a 9.9 per cent shareholding in Invesco Limited and, shortly thereafter, accepted Invesco’s invitation to appoint board members to its board of directors. In all three instances, the CCI dismissed the parties’ submissions that their transactions should benefit from the Item 1 exemption. Some important takeaways from the decisions are set out below.

Right to nominate directors

Representation on the board of directors of the target (even if such representation is minor) would disqualify the application of the Item 1 exemption as it would grant access to competitively sensitive information to the acquirer, which may lead to coordinated outcomes in the market. Acquirers must notify the CCI ex ante if there is an intention to participate in management or to have board representation at the time of entering into certain transaction agreements. If a board seat or management participation is a subsequent, unrelated development, acquirers must seek and await CCI approval prior to giving effect to such developments. Parties therefore cannot structure their transactions separating the acquisition of shares and acquisition of rights or board seats and benefit from the Item 1 exemption.

Ordinary course of business

To assess whether a transaction involving acquisition of shares is in the ordinary course of business, the CCI would assess aspects such as frequency, duration, holding and intent of the transactions of the acquirer. In addition, only revenue transactions (not capital transactions) would be considered to be in the ordinary course of business. Investments, by their very nature, would be considered as capital transactions and therefore cannot be considered to be in the ordinary course of business. Accordingly, if an acquirer contends that its transaction is solely an investment, by implication, it cannot be in the ordinary course of business.

Interestingly, in Trian Partners/Trian Fund, the CCI detected the non-notified transaction while reviewing the Green Channel filing made by Trian for acquisition of additional shareholding in Invesco. This demonstrates that, while transactions under the Green Channel are deemed approved upon notification to the CCI, the CCI still scrutinises such transactions and may initiate proceedings in the case of any gun-jumping concerns. The CCI therefore maintains a delicate balance of promoting the ease of doing business while also preserving its enforcement priority regarding gun jumping.

Expansive powers of the CCI to examine notifiable transactions

The Act bestows expansive powers on the CCI to closely track and examine merger and acquisition activity. For instance, the CCI has the ability to look back and enquire into transactions that have not been notified for up to one year from the date on which they took effect.^[20] When the CCI comes across such a transaction, it typically sends a notice to the parties seeking an explanation for non-notification. If the parties are unable to provide acceptable justifications, the CCI directs the parties to file the merger notification and simultaneously initiates gun-jumping proceedings.

The decisional practice in 2022 also indicated that, in essence, the CCI can scrutinise transactions that have been completed or closed much earlier (beyond the one-year time period). In August 2022, the CCI imposed a penalty of 3 million rupees on Global Infrastructure Partners Private Limited (GIP) for its failure to notify an acquisition that was closed and consummated over four years earlier in July 2018.^[21] On close examination, the CCI noted that, while assessing notifying requirements in 2018, GIP did not include financials of the controlled portfolio entities held by target infrastructure funds. This position was clarified by the CCI through a 2021 decision.^[22] When GIP reassessed the requirement to notify after receiving a show-cause notice from the CCI, the transaction did not qualify for the de minimis exemption. Although the CCI could not direct parties to notify the transaction (due to the statutory limitation of one year), it nonetheless initiated gun-jumping proceedings and imposed a fine for failure to notify. The CCI’s ruling in GIP/IDFCA Alternatives therefore clarifies that, for the purposes of thresholds assessment, the value of assets and turnover of the controlled portfolio entities are also required to be consolidated along with the target enterprise to assess whether a transaction would trigger a merger notification to the CCI.

In December 2021, the CCI also demonstrated its expansive powers when it suspended the approval it had granted in 2019 to Amazon’s acquisition of a 49 per cent shareholding of Future Coupons Private Limited.^[23] The CCI noted that Amazon did not notify all the interconnected steps of its composite transaction and concealed material facts, including its strategic intent behind the transaction. The CCI directed Amazon to re-notify this transaction and held that, until the decision on the revised notification was granted, the approval provided by the CCI for the already notified steps will remain in abeyance. In June 2022, the National Company Law Appellate Tribunal (NCLAT) upheld the CCI’s order and recognised its inherent power to suspend a merger approval on the grounds of suppressed facts and misstatements or misrepresentations.^[24] The NCLAT also upheld the unprecedented penalty of 2 billion rupees, which was imposed on Amazon for failure to notify the complete transaction. The NCLAT, however, reduced the penalty for omission to submit material facts by half (from 20 million to 10 million rupees). To date, the matter is pending before the Supreme Court of India for final adjudication.

Increasing familiarity with competitively significant transactions

In 2022, the CCI demonstrated its increasing maturity by clearing competitively sensitive transactions in Phase I itself by accepting voluntary remedies offered by parties.

In October 2022, the CCI conditionally approved the merger between Zee and Sony, two leading broadcasting houses in India. The CCI observed high levels of overlap between various segments of the parties’ businesses, and noted that the resultant entity would be the largest broadcasting house in India and an indispensable partner to downstream players. Accordingly, the CCI issued a notice to the parties directing them to show cause as to why the CCI should not proceed to a Phase II investigation. The parties addressed the CCI’s concerns by voluntarily offering divestitures of three television channels belonging to Zee’s portfolio. The CCI was satisfied with the voluntary remedies (with the condition that the channels must not be acquired by other leading players in the market) and approved the transaction without an in-depth review process.

In both instances, the notifying parties were able to address the concerns of the CCI by providing adequate voluntary remedies in Phase I of the investigation itself. This can understandably be equally attractive to both the parties and the CCI. Parties can benefit from shortened deal timelines by identifying potential concerns and providing an appropriate remedy package to the CCI at an early stage of the investigation. The CCI would also welcome engagement with parties offering suitable commitments, thereby preserving its precious time and resources.

Notes