India: Merger Control
Recent legislative developments
2011 ushered in a new key development in India’s recently introduced competition law, with the announcement that merger control was finally coming into effect. Specifically, in March 2011, the long-delayed merger control provisions of the Competition Act, 2002 (Competition Act), were finally ‘notified’ by the government of India, coming into effect on 1 June 2011 for qualifying transactions taking effect on or after that date.
Specifically, the government of India issued notifications on 4 March 2011 bringing into force the merger control provisions under sections 5, 6, 20, 29, 30 and 31 of the Competition Act, with effect from 1 June 2011. Sections 5 and 6 of the Competition Act require mandatory pre-notification to the Competition Commission of India (CCI) of transactions that involve a merger, amalgamation or acquisition of shares, voting rights, assets or control over the management or control over the assets and which meet certain jurisdictional thresholds discussed below (which are referred to in the Competition Act as combinations).
As part of the roll-out of merger control, the CCI also issued draft merger control regulations on 1 March 2011, which were subject to a public comment period that ended on 22 March 2011. It is widely understood that the draft regulations have not been well-received, with criticism ranging from concerns about the extent of information that the CCI is requiring for notified transactions to potentially serious issues with the CCI assert merger control jurisdiction over transactions that the Competition Act does not contemplate (see below). It is possible that the draft merger control regulations could be changed before being finalised, but there is no confirmation on this as of the date of writing (27 March 2011).
The CCI’s merger control powers under the Competition Act are wide-ranging, and will affect all domestic and international mergers and acquisitions of an enterprise based on a target test and either a parties test (acquirer and target on an aggregate basis); or a group test (the group to which the target or merged entity would belong post-completion), which meet or exceed the stipulated jurisdictional thresholds for assets or turnover both in India and worldwide.
The substantive test to be employed by the CCI to assess notifiable transactions is whether the combination causes or is likely to cause an appreciable adverse effect on competition in a relevant market in India (AAEC). For purposes of determining whether a combination would have, or is likely to have, an AAEC, the Competition Act provides for a non-exhaustive list of factors to be considered by the CCI:
- actual and potential level of competition through imports in the market;
- extent of barriers to entry into the market;
- level of combination in the market;
- degree of countervailing power in the market;
- likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
- extent of effective competition likely to sustain in a market;
- extent to which substitutes are available or are likely to be available in the in market;
- market share, in the relevant in market, of the persons or enterprise in a combination, individually and as a combination;
- likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
- nature and extent of vertical integration in the market;
- possibility of a failing business;
- nature and extent of innovation;
- relative advantage, by way of the contribution to the economic development, by any combination having or likely to have an AAEC; and
- whether the benefits of the combination outweigh the adverse impact of the combination, if any.
If the jurisdictional thresholds are met, section 5 of the Competition Act contemplates three types of transactions which require mandatory notification to and clearance by the CCI prior to completion:
- section 5(a): any transaction where control, shares, voting rights or assets are being acquired;
- section 5(b): an acquisition of control by a person over an enterprise when such person already has direct or indirect control over an 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; and
- section 5(c): a merger or amalgamation.
Importantly, the Competition Act provides that each of these three types of transactions must relate to the ‘acquisition of one or more enterprises’. ‘Enterprise’, as that term is defined under the Competition Act, would approximate the concept of a going concern.
Even though section 5 of the Competition Act is silent on the treatment of joint ventures, control of or acquisition of shares, voting rights or assets in existing joint ventures subject to the relevant thresholds being met would fall within the purview of section 5 of the Competition Act. It should be noted that acquisition by a joint venture of a target company, particularly a 50/50 joint venture, would necessitate threshold computation of both parents of the joint venture for the purpose of ‘group’ thresholds. Creation of new joint ventures, where the joint assets or turnover meet the applicable thresholds, currently do not appear to be covered under the Competition Act.
Notifications issued by the government of India1 (the Notifications)
The Notifications effect three significant changes to the merger control provisions of the Competition Act:
- They increase all jurisdictional thresholds currently set forth in the Competition Act by 50 per cent on the basis of the wholesale price index of the value of assets and turnover for the purposes of section 5 of the Competition Act. The table below states these thresholds as increased by the Notification.
- There is an exemption from merger control notification to the CCI, for an initial period of five years, if the target enterprise whose control, shares, voting rights or assets are being acquired has assets worth less than 2.5 billion rupees or a turnover of less than 7.5 billion rupee, irrespective of thresholds being exceeded under section 5 of the Competition Act. Although the Notification is silent on whether the target thresholds are computed on a worldwide basis, it would appear that the test refers to a worldwide basis rather than an India-based test.
- There is an exemption, for an initial period of five years, from computation of thresholds for assets or turnover, for those entities where the ‘Group’ has less than 50 per cent of the voting rights in such entities. This is significant for large undertakings which have cross-holdings in multiple companies beyond 26 per cent but less than 50 per cent as such affiliate companies’ assets or turnover will not be used for computation of thresholds of the Group. However, the exemption under the Notification only applies in respect of voting rights. For the purposes of computing the assets or turnover of the Group, entities in which more than 50 per cent of the board of directors are appointed by another enterprise or where the management or affairs of such enterprise is controlled by another enterprise would continue to be included to compute the assets or turnover thresholds for the Group.
Indian merger control in practice
In order to qualify as a combination, the transaction at issue must:
- relate to an ‘acquisition of one or more enterprises’;
- be one of the three types of transactions listed in Sections 5(a), (b), or (c) (see above); and
- meet the jurisdictional thresholds in the table below.
The jurisdictional thresholds, which are set forth in the table below, essentially involve a two-step analysis:
- the target’s worldwide turnover or assets; and
- the aggregate worldwide and Indian turnover or assets for either the parties or the post-completion group (ie, the acquirer group including the target).
The reference period is generally the entity’s last completed financial year.
FOR THE PARTIES (COMBINED)
FOR THE GROUP (COMBINED)
15 billion rupees
60 billion rupees
45 billion rupees
180 billion rupees
INCLUDING IN INDIA
7.5 billion rupees
7.5 billion rupees
22.5 billion rupees
22.5 billion rupees
FOR THE TARGET (INDIVIDUALLY)
2.5 billion rupees
7.5 billion rupees
The Draft Combination Regulations (the Draft Regulations)2
The Draft Regulations, which were subject to a public comment period ending 22 March 2011, contemplate that parties to a proposed combination will provide notice to the CCI by way of Form I (a short form notification, which has been commonly referred to as a ‘fast track’ notification), Form II (long form notification), or Form III.
In case of an acquisition, the acquirer is required to file the notice and in case of a merger or an amalgamation, the parties to the merger or amalgamation are required to jointly file the notice. Because of the public consultation regarding the Draft Regulations, it is possible that the Draft Regulations and the Forms may change.
The Draft Regulations, at Schedule 1, specify certain transactions for which parties can file a short form notification through Form I:
- acquisitions of shares or voting rights, solely for investment purposes or in the ordinary course of business, of not more than 15 per cent of the total shares or voting rights of the target company, directly or indirectly or in accordance with the execution of any document including a shareholders’ agreement or articles of association, not leading to control;
- acquisition of shares or voting rights where the acquirer is already in control of the target;
- acquisition of assets where the assets are not directly related to the business activities of the acquirer or made solely as an investment or in the ordinary course of business, not leading to control of the target, except where the assets being acquired represent the entire business in a particular location or for a particular product or service of the target;
- intra-group acquisitions (eg, purely internal reorganisations);
- acquisition of stock-in-trade, raw materials, stores and spares in the ordinary course of business;
- acquisition of shares or voting rights pursuant to bonus issue or sub-division of shares;
- an acquisition or acquiring of control or merger or amalgamation where not more than one party to the combination has assets of more than 2.5 billion rupees or turnover of 7.5 billion rupees, in India;
- amended or renewed tender offer where notice has been filed by the party making such offer; and
- acquisition of shares or voting rights by a person acting as a securities underwriter, in the ordinary course of business and in the process of underwriting.
There are certain transactions in the above list which, based on the plain wording of the Competition Act, should have been excluded entirely (see below) from the ambit of merger control, such as internal reorganisations, acquisition of shares or voting rights by underwriters, stock-in-trade, raw materials, stores and spares in the ordinary course of business and where the acquirer is already in control.
All other categories of combinations which are not covered under Form I are required to be notified to the CCI in Form II (long form).
The Draft Regulations provide that the obligation to pay the filing fee is on the party notifying a proposed combination and, in the event of a joint notification, the liability to pay the filing fee is joint and several. The filing fees proposed by the Draft Regulations for:
- acquisitions less than 5 billion rupees in value is 1 million rupees;
- acquisitions between 5 billion and 15 billion rupees is 2 million rupees;
- acquisitions above 15 billion rupees is 4 million rupees; and
- a merger or amalgamation or acquiring of control over an enterprise, the filing fee is 4 million rupees.
Pre-Notification consultations and decision-making process
The Draft Regulations provide for informal verbal pre-merger consultation with the CCI. However, any views expressed by the CCI are non-binding. The parties to a proposed combination are bound by standstill obligations (ie, may not complete the notified transaction until clearance is received from the CCI).
The Draft Regulations contemplate two phases of review:
- Phase I: Prima facie decision by the CCI on whether a combination is likely to cause or has caused an AAEC to be made within a period of 30 (calendar) days from the receipt of a notice on Form I or II which is free from all defect. The time frame of 30 (calendar) days does not include the time taken by parties to provide any information or clarifications that the CCI requires. The CCI can clear the transaction at this phase or refer it on to a more complete examination (see below).
- Phase I and Phase II: Final decision by the CCI under the Competition Act is to be passed within 210 (calendar) days from the receipt of a complete notice. The Draft Regulations provide that the CCI shall not include the time taken by parties to provide any information or clarifications that the CCI requires. The Competition Act does provide that if the CCI does not pass an order or issue a direction within 210 (calendar) days, the combination is deemed to be approved.
Confidentiality of the proceedings
The CCI is required to preserve the confidentiality of the notification under section 57 of the Competition Act and Regulation 35 of the CCI (General Regulations), 2009. However, the Draft Regulations provide that the CCI or its director general may share information in relation to a proposed combination with other regulatory authorities with whom the CCI has a memorandum of understanding or an agreement for exchange of information, after obtaining consent from the parties to the proposed transaction.
Exemptions from mandatory pre-notification
The Competition Act exempts from the requirement of mandatory pre-notification (ie, notification prior to completion) any share subscription or financing facility or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement. However, the Competition Act imposes a requirement for such transactions to be notified to the CCI within seven (calendar) days of the acquisition (ie, after completion), including the details of control, the circumstances for exercise of such control and the consequences of default arising out of such loan agreement or investment agreement.3
Treatment of ancillary restrictions; impact of CCI clearance decisions with respect to other provisions of the Competition Act The Competition Act is silent on the treatment of necessary ancillary restraints such as non-compete clauses which form a routine part of combinations. Further, it is not evident if clearance under merger control would imply an exemption under other sections of the Competition Act, particularly sections 3 and 4 of the Competition Act, which, respectively, deal with anti-competitive agreements and abuse of dominant positions.
Frequently asked questions
What is meant by merger control coming into effect on 1 June 2011 What happens to transactions that have not completed by that date? The Draft Regulations provide that sections 5 and 6 shall not apply to transactions that have ‘taken effect’ prior to 1 June 2010. This implies that transactions that have been signed but have not reached completion by 1 June 2011 will be subject to the merger notification requirement. For example, in relation to mergers and amalgamations through a scheme of arrangement approved by the civil courts in India, the transaction will only be considered to have taken effect once the final order is filed with the registrar of companies. As a result, where the final order has not been filed with the registrar of companies, parties to the merger or amalgamation will be required to obtain the CCI’s clearance before such filing with the registrar of companies. Similarly, in the case of a mandatory tender offer, unless the offer has closed, shares under the offer as well as private arrangement have been transferred to the acquirer, by 1 June 2011, the transaction cannot be consummated unless clearance is obtained from the CCI.
It is therefore recommended that parties consider inserting Indian merger control conditions precedent and covenants in transaction documents for transactions qualifying as combinations.
Does the CCI have the power to investigate combinations on its own initiative?
Yes, the CCI has the power to investigate any combination on its own initiative, but it cannot do so later than one year from the date the combination has come into effect.
Is the merger filing process voluntary or compulsory?
All transactions involving the acquisition of one or more enterprises where the parties/group exceed the jurisdictional thresholds (see above) must be notified to the CCI and receive clearance prior to completion. There is no concept under the Competition Act of a voluntary notification (eg, transactions not meeting the jurisdictional thresholds cannot be notified to the CCI).
At what stage is the merger filing requirement triggered?
The filing party must file a notification with the CCI within 30 (calendar) days of:
- mergers or amalgamations: approval of the proposed merger or amalgamation by the Board of Directors of the enterprises concerned;
- acquisitions: execution of any agreement or other document for acquisition or acquiring of control.
The Draft Regulations have attempted to clarify that the other document referred to above shall mean any document, by whatever name called, purporting to convey the intention to acquire control, shares, voting rights or assets.
Are pre-notification discussions with the CCI possible on a no names basis?
While the Draft Regulations have introduced confidential pre-merger consultation with the CCI on the specific request of the parties to the proposed transaction, they do not provide for a pre-notification consultation on a ‘no names’ basis as the request must be written signed by the requesting party.
What are the penalties for a failure to notify a transaction?
The CCI has the power to impose a penalty which may extend up to 1 per cent of the total turnover or the assets, whichever is higher, of the proposed combination. In addition, the transaction (and presumably all acts in furtherance of the transaction) is void as matter of Indian law.
What are the possible outcomes of the CCI’s merger review process?
The CCI may either allow the combination; or require the parties to the combination to make structural or non-structural (behavioural) changes by way of modifications; or prohibit the combination outright.
Is it possible to challenge the decision of the CCI?
Yes, the decision of the CCI may be taken in appeal before the Competition Appellate Tribunal. An appeal has to be filed within 60 days of receipt of the decision of the CCI.
Are transactions that are not notifiable under the merger control regime immune from the Competition Act?
Non-notifiable transactions could be challenged under other sections of the Competition Act (ie, section 3, dealing with anti-competitive agreements, or section 4, dealing with abuse of dominance).
Are transactions that take place outside of India caught?
Yes, it is possible for foreign-to-foreign transactions to be caught under the Competition Act’s merger control provisions, as the parties/group test are in the aggregate and the target test does not require target turnover or assets to be measured solely with reference to India. For example, if a multinational company with a large turnover/asset presence in India acquires a target with large worldwide turnover or assets, but none in India, it is indeed possible for such a transaction to be covered by the merger control provisions of the Competition Act.
The way forward
Acquisition of one or more enterprises’: Are the draft regulations firmly based on the Competition Act?
The CCI, through the Draft Regulations, has taken the position that the acquisition of, for example, a single share in an enterprise, would be notifiable if the jurisdictional thresholds are met. While the Draft Regulations state that such notifications are to be on a shorter form (ie, Form I), this does not address the fundamental legal issue of whether the CCI actually has merger control jurisdiction over such transactions, particularly given the fact that the statute only covers an ‘acquisition of one or more enterprises.’
The Competition Act, through the use of the words ‘acquisition of one or more enterprises’ as the qualification to all of section 5, seems quite clear on the point that the acquisition of anything not amounting to an enterprise is not notifiable. The irony of the CCI’s position can be seen when looking at section 5(b), which deals with acquisition of competitors, which is of greater competition significance than an acquisition of an unrelated enterprise (all other things being equal). Section 5(b) is triggered only when control is acquired; by contrast, section (5)(a), which covers non-competitor acquisitions, has been read by the CCI to cover as little as the acquisition of a single share or an asset. From a pure competition law and policy perspective, there is an incongruity with this approach.
It would appear that the CCI is basically taking the position that any acquisition where the thresholds are met is covered by the merger control provisions by the Competition Act. However, such a reading fails to take account of the plain wording of section 5 of the Competition Act. Thus, many of the transactions (eg, pure asset acquisitions, acquisitions of stock-in-trade, acquisitions of one share or such other de minimis amount that do not amount to the acquisition of an enterprise) which the CCI seems to be asserting merger control jurisdiction over may not even be covered. Although the CCI has attempted to ‘fast track’ these transactions listed in Schedule 1 of the Draft Regulations, the critical issue remains whether it has merger control jurisdiction at all.
It remains to be seen how the CCI finalises the Draft Regulations, which will be a real test of how merger control law and process will ultimately evolve in India.
3Section 6 (5) of the Competition Act.