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Antitrust, merger and competition issues in India are presently governed by the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act), by the Companies Act 1956 and by the Securities & Exchange Board of India (Substantial Acquisition of Shares & Takeovers) Regulations 1997 (Takeover Code). A new statute called the Competition Act 2002 has been enacted but has not come into force in its entirety.
The MRTP Act
The MRTP Act was the first substantive legislation aimed at regulating free and unfettered trade. The MRTP Act regulates three types of trade practices, namely monopolistic and restrictive trade practices, and unfair trade practices that hamper competition in India or are prejudicial to the public interest.
The MRTP Commission has been established under the provisions of the MRTP Act to inquire into matters relating to monopolistic, restrictive and unfair trade practices. The MRTP Commission is a quasi-judicial tribunal and is constituted under the chairmanship of a retired judge either of the Supreme Court of India or the High Court. The MRTP Commission may have a minimum of two and a maximum of eight members, who are experts in law, administration, economics, accountancy, industry, commerce or public affairs. The director general of investigation and registration (DGIR) is appointed by the government to make investigations and maintain a register of agreements that are restrictive by nature. When inquiring into complaints under the MRTP Act, the DGIR assists the MRTP Commission.
The MRTP Commission may inquire into any restrictive or unfair trade practice upon receiving a complaint from any trade association or from any consumer or a registered consumers association, or upon a reference made to it by the central government or a state government, or upon an application made to it by the DGIR or ex officio. Monopolistic trade practices may be inquired into upon a reference from the central government, or upon an application made by the DGIR or ex officio.
For purposes of any inquiry under the MRTP Act, the MRTP Commission has the same powers as are vested in a civil court when trying a suit. The MRTP Commission may grant temporary injunctions, award compensation, initiate investigations to find out whether orders made by it have been complied with and punish for contempt.
The MRTP Act thus regulates three distinct areas, namely concentration of economic power, competition law and consumer protection.
The Companies Act
This Act regulates issues concerning transfer of shares along with mergers and amalgamations. These provisions relating to transfer of shares were originally a part of the MRTP Act and were incorporated in the Companies Act in 1991.
The Companies Act restricts acquisition of equity shares of a public company or a private company that is a subsidiary of a public company by certain classes of persons in excess of 25 per cent (including any previous share holding, if any) of the paid-up equity capital of the company. Acquisitions that exceed the threshold require prior approval of the central government.
In addition, the Companies Act restricts transfer of shares of a company by a body or bodies corporate under the same management that holds in aggregate 10 per cent or more of the nominal value of the subscribed equity share capital of the company. Transfers that exceed the threshold require notification to be given to the central government.
Moreover, the Companies Act restricts the transfer of shares of a foreign company, having an established place of business in India. Bodies corporate holding 10 per cent or more of the nominal value of the equity share capital of such companies require approval of the central government prior to transferring any shares in such companies to an Indian citizen or a body corporate incorporated in India.
The central government may direct that a transfer or acquisition should not be given effect to if it is satisfied that as a result of such transfer a change in the controlling interest of the company is likely to take place, and that such change would be prejudicial to the interest of the company or to the public interest.
The above restrictions relating to transfer of shares would apply only if the acquirer of the shares is a dominant undertaking, or would become one by virtue of the acquisition, or in case of transfer of shares, the transferor is a dominant undertaking. Dominance means a 25 per cent or more market share in the relevant market in the production, supply, distribution or control of the total goods that are produced, supplied, distributed or controlled in India or a substantial part thereof; or the provision or control of any services that are provided in India or any substantial part thereof.
These provisions do not apply to government companies, statutory corporations or financial institutions.
Failure to comply with the provisions may attract penalties, which may extend to imprisonment up to three years or a fine of approximately US$1,110, or both.
The Companies Act also governs matters relating to a compromise or arrangement between an Indian company and its creditors or shareholders, or an amalgamation of two or more Indian companies. Such a compromise or arrangement has to be sanctioned by a state High Court.
The Code provides for transparency relating to the acquisition of shares of listed companies. An acquirer securing shares or voting rights that would entitle it to 5 per cent or 15 per cent or more shares or voting rights in a target company is required to make certain disclosures or to make a public announcement.
Persons acquiring 5 per cent (together with shares or voting rights already held) or more of shares or voting rights of a company must disclose the aggregate of their shareholding or voting rights to the company. The Takeover Code requires every person who holds more than 15 per cent shares or voting rights in any company to make yearly disclosures to the company with respect to his holdings.
In cases where the consolidated holding of the acquirer together with the persons acting in concert with it is 15 per cent or more but less than 75 per cent, the acquirer must make a public announcement before it acquires 5 per cent or more of the shares or voting rights of the target company in any financial year. Where the consolidated holding of shares or voting rights is equal to or more than 75 per cent, a public announcement is to be made before acquiring any further shares or voting rights in the target company.
The Securities Exchange Board of India also may investigate matters relating to substantial acquisition of shares and takeovers upon complaints from investors, intermediaries or any other person, or ex officio in the interest of the security market and investors, or to ascertain compliance with the Takeover Code. Certain penalties are also prescribed under the Code to ensure its compliance.
The Takeover Code does not apply to certain categories of transaction including: allotment pursuant to an application made to a public issue; allotment pursuant to an application made by a shareholder for rights issue; allotment to the underwriters pursuant to any underwriting agreement; inter se share transfers among groups, relatives, Indian promoters and foreign collaborators who are shareholders; acquisition by a registered stockbroker on behalf of clients, a registered market maker during the course of market making; by public financial institutions on their own account; by such institutions and banks as pledges; certain international financial institutions; acquisition of shares by way of transfer on succession or inheritance; acquisition of shares by government companies; and acquisition of shares in companies which shares are not listed on any stock exchange.
The Competition Act 2002 was enacted by India's parliament in December 2002 and received the assent of the president in January 2003. The Competition Act 2002 was amended by the Competition (Amendment) Act 2007. The Competition Act 2002, as amended (Competition Act) prohibits anti-competitive agreements, abuse of dominant position and regulates combinations. The Competition Act also promotes 'competition advocacy'.
The Competition Act provides that any anti-competitive agreement shall be void and prohibits an enterprise or a person from entering into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services that causes or is likely to cause an appreciable adverse effect on competition in India. Generally speaking, 'horizontal agreements' are covered under this provision. Horizontal agreements will be judged either by the 'rule of reason' test or will be per se illegal.
Agreements entered into between enterprises or associations of enterprises, or persons or associations of persons that directly or indirectly determine purchase or sale prices; limit or control production, supply, markets or technical development, investment or provision of services; directly or indirectly results in bid rigging or collusive bidding; shares the market or source of production by way of allocation of geographical area of markets or the type of goods or services or the number of customers in the market are presumed to have an adverse effect on competition and are considered to be per se illegal. There is a presumption that such agreements would have an appreciable adverse effect on competition. However, joint venture agreements are excluded from the category of anti-
competitive agreements if they increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Tie-in agreements, exclusive supply agreements, exclusive distribution agreements, refusal to deal, and resale price maintenance agreements causing or likely to cause an appreciable adverse effect on competition in India are considered anti-competitive. These are certain types of 'vertical agreements' that have been subjected to review by the Competition Commission of India (CCI). The provisions relating to anti-competitive agreements do not apply to agreements relating to protection of intellectual property rights and agreements for export of goods.
Abuse of dominant position
An enterprise is said to be dominant if it is able to operate independently of competitive forces prevailing in the relevant market or to affect its competitors and consumers or the relevant market. Abuse of dominant position by an enterprise or a group has been defined in the Competition Act to include directly or indirectly imposing unfair or discriminatory conditions, or prices, in purchase or sale of goods or services; restricting or limiting production of goods and services, or market, or limiting technical or scientific development relating to goods or services to the prejudice of consumers; indulging in practices resulting in denial of market access; or using dominance in one market to move into or protect other markets. Certain factors such as market share, size and resources of enterprise, size and importance of competitor, economic power of the enterprise, and so on, would have to be given due regard by the CCI while determining whether an enterprise enjoys a dominant position.
Regulation of combinations
The Competition Act seeks to regulate 'combinations' including acquisitions, mergers or amalgamations of enterprises. Notifications of combinations are mandatory. Acquisitions of one or more enterprises by one or more persons, or mergers or amalgamations of enterprises are combinations if they meet the jurisdictional thresholds based on assets and turnover.
Thresholds for parties having assets or turnover in India are different from parties that have assets or turnover within and outside India. The Competition Act prohibits enterprises from entering into combinations that cause or are likely to cause an appreciable adverse effect on competition within the relevant market in India. Various factors have been listed, which the CCI has to take into account to determine whether a combination will or is likely to have an appreciable adverse impact on competition in India.
The Competition Act has now introduced the concept of territorial nexus or domestic nexus in relation to foreign mergers. Territorial nexus means minimum presence in the Indian market of the any two globally merging companies. The minimum threshold requirement for determining territorial nexus is assets worth 5 billion rupees in India or turnover worth 15 billion rupees of the combined entities. As per the draft Competition Commission of India (Combination) regulations, each of at least two of the parties to the combination must have assets of 2 billion rupees or turnover of 6 billion rupees in India.
It will be mandatory for qualifying transactions to notify the CCI within 30 days of executing the merger and acquisition disclosing the details of the proposed combination of a merger or an acquisition, if the said merger or acquisition falls within the threshold limits. As per the draft Competition Commission of India (Combination) regulations, triggering events are the date of execution of any agreement or documents for acquisition of shares or control or the last date of approval of the proposed merger or amalgamation by the board of directors of the enterprise concerned. In case of an acquisition or acquisition of control, the acquirer is required to file the notice. In case of a merger or an amalgamation, all the persons or enterprises to the combination or to the proposed merger or amalgamation are required to jointly file the notice. Where the CCI acts suo moto, the party to whom the notice has been issued must file. A combination that, in the opinion of the CCI has or is likely to have an appreciable adverse effect on competition in India, must publish the details of the combination.
The CCI will be required to give its decision on the transaction within a maximum period of 210 days, failing which the combination is deemed to be approved. However, as per the draft Competition Commision of India (Combination) regulations, the CCI may form a prima facie opinion as to the existence of appreciable effect on competition within 30 days of receipt of notice, if the notice is in form 1; and within 60 days of receipt of notice, if the notice is in form 2. Thus, CCI will not be required to wait for the entire period of 210 days in a situation when it is prima facie of the view that a combination does not have an appreciable effect on competition.
The Competition Act also provides for imposition of hefty penalties if there is a failure to comply with the directions and orders of the CCI and for non-furnishing of information on combinations. Entities that fail to notify a qualifying combination to the CCI could face penalties which may extend to 1 per cent of the total turnover or the assets of the combination, whichever is higher. The Competition Act also empowers the CCI to impose fine that may extend up to 100,000 rupees, subject to a maximum of 100 million rupees for each day of non-compliance with the directions or orders issued by the CCI. Further, if the orders or directions of CCI are not complied with or there is a failure to pay the fine imposed, the CCI is empowered to impose imprisonment for a term extending up to three years or fine extending up to 250 million rupees.
The CCI may give its opinion on a reference by the central government and a state government on possible effects of any policy (including review of laws related to competition) formulated by the government on competition. It would also have the powers to promote competition advocacy and create awareness and impart training about competition advocacy.
Competition Commission of India
The Competition Act seeks to ensure fair competition in India through the CCI, which is to consist of a chairperson, and not less than two and not more than six members. They are to be full-time members and need to be persons of ability, integrity and standing, who have special knowledge of and at least 15 years of professional experience in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs or competition matters, including competition law and policy, which, in the opinion of the central government, may be useful to the CCI. The central government may also appoint a director-general and other advisers and consultants to assist the CCI in inquiries.
The CCI would have the authority to inquire suo moto, on information or on a reference made by the central government, the state government or statutory authorities. The CCI would also have the power to investigate agreements, combinations or abuse of dominant position outside India that have an effect on competition in India.
If after an inquiry the CCI finds that the provisions of the Competition Act are being contravened, it may direct that the agreement or abuse of dominant position or combinations should not be given effect or shall be discontinued as the case may be, or it may impose penalties, award compensation, or direct an amendment to an agreement or combination, or make recommendations to the central government.
The Competition Act also provides for establishment of a three member quasi-judicial body, the Competition Appellate Tribunal, to hear and dispose of appeals against any directions or orders passed by the CCI. The appeals from Competition Appellate Tribunal will lie to the Supreme Court.
It is expected that the Competition Act will be fully enforced within the first half of 2009. The central government has appointed Mr Dhanendra Kumar, a former officer of the Indian Administrative Services and a former executive director of the World Bank as the chairperson of the CCI. Appointment of other members of the CCI is also under process. Draft regulations on various issues, including combination and imposition of lesser penalty, have been framed and will be finalised on the appointment of the other members of the CCI.
Once other members of the CCI are appointed and other regulatory frameworks are in place, the Competition Act would become fully enforced and the CCI would become functional. When fully enforced, the Competition Act would repeal the MRTP Act and the MRTP Commission will be dissolved. However, the MRTP Commission will continue to exercise jurisdiction and powers for a period of two years from the date of commencement of the Competition Act in respect to complaints received by it before the commencement of the Competition Act.