India: Merger Control
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The year 2011 has been a milestone year for antitrust law in India, with a series of significant developments paving the way towards shaping competition law and policy. Arguably the most noteworthy event was the introduction and implementation of the much anticipated merger control regime, which, after a series of false starts, brought into force the merger control provisions of the Competition Act, 2002 (as amended) (Competition Act). As the last of the BRIC1 countries to implement such a regime, there was substantial media coverage, both locally and internationally, on the implementation and effect of these provisions, which should be factored into the regulatory checklist of every global mergers and acquisitions deal with an Indian nexus.
Implementation of merger control provisions
On 4 March 2011, the Ministry of Corporate Affairs (MCA) officially announced in the Gazette of India a series of notifications (referred to herein as delegated legislation), one of which brought into force the merger-related sections 5, 6, 20, 29, 30 and 312 of the Competition Act, dealing with the regulation of ‘combinations’ (namely, the merger control provisions). Sections 5 and 6 are the operative provisions of the Competition Act. Section 5 sets out
certain thresholds and parameters for the parties and for the group regarding the acquisition of an enterprise or the merger and amalgamation of enterprises that will then trigger the filing requirements if the jurisdictional thresholds are met. Section 6 of the Competition Act prohibits combinations that cause or are likely to cause an appreciable adverse effect on competition (AAEC) within a relevant market in India and treats such transactions as void.
As a critical step to implementing the merger control regime, on 11 May 2011, the Competition Commission of India (Commission) (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) were announced, setting out the relevant notice forms, and details of the review process. The Combinations Regulations came into effect on 1 June 2011; these regulations coupled with the relevant provisions of the Competition Act (that were brought into force in March) completed the implementation of the merger control framework in India.
What is notifiable?
The Combinations Regulations cover transactions taking effect on or after 1 June 2011, involving the acquisition of an enterprise or the merger or amalgamation of enterprises that meet or exceed the relevant asset and turnover thresholds set out in section 5 of the Competition Act as revised by additional delegated legislation3.
Section 5 of the Competition Act sets out three types of transactions required to be notified before the Commission for pre-clearance, assuming the thresholds are met by the parties:
- section 5(a): any transaction where ‘control, shares, voting rights or assets’ are being acquired;
- section 5(b): transactions where two actual or potential competitors are involved as parties and one is acquiring direct or indirect control over the other; and
- section 5(c): a merger or amalgamation.
Merger control under the Competition Act requires that such combinations will now need clearance from the Commission prior to completion.
Applicable thresholds and exemptions
On 4 March 2011, the MCA raised the existing asset and turnover-based filing thresholds prescribed under section 5 of the Competition Act by 50 per cent4. These thresholds relate to either the acquirer and the target, or the group to which the target entity will belong post acquisition (namely, the acquirer’s group and in relation to joint control, both the acquirer and vendor group).
In addition to increasing the thresholds, additional MCA delegated legislation dated 4 March 2011 granted a de minimis target-based filing exemption, for a period of five years, exempting a transaction where the target enterprise has Indian assets of the value of less than 2.5 billion rupees5 or an Indian turnover of less than 7.5 billion rupees (Target Exemption).
The original version of the de minimis Target Exemption created some confusion as to whether these thresholds were limited to India or worldwide assets and turnover. Following several representations by various stakeholders (including representatives from the Indian industry and legal practitioners), the MCA issued a corrigendum dated 27 May 2011 to limit the same to Indian assets and turnover.
The jurisdictional thresholds involve reviewing both the Competition Act itself and the delegated legislation. For ease of reference, a simplified chart outlining the thresholds is set out in the table at the foot of the preceding page.
On 1 March 2011, the Commission released the draft Combination Regulations for public comments, which raised several concerns and was subject to widespread criticism. The MCA and the Commission thereafter engaged in detailed consultations with relevant Indian and international stakeholders prior to finalising the Combination Regulations in order to address many of their concerns.
The reforms included the simplifying of Form 1 and prescribing a list of transactions that would not ordinarily be notified, such as combinations taking place outside India with insignificant local nexus. Clarifications were also made on which ongoing transactions need to be notified after the regulations came into force (namely, after 1 June 2011). There was also a reform of the filing fee structure with the sliding scale of fees replaced with fixed rates of 50,000 rupees for Form I (short form) and 1 million rupees for Form II (long form).
On 11 May 2011, the final version of the Combination Regulations6 was announced, which set out a detailed procedure for the implementation of the Indian merger control regime. Due to the above mentioned revisions, these Combination Regulations are a considerable improvement from the originally proposed draft by the Commission. However, it should be noted that several problems that are discussed below continue to persist.
One such problem is that though the Commission has provided a facility for informal non-binding pre-merger consultations on a no-names basis, it has taken a view that it will only give advice on procedural issues and not take a view on questions relating to the substantive interpretation of any provisions of the Competition Act or the Combination Regulations. Therefore, it remains to be seen how truly effective and beneficial the pre-merger consultation process will be.
‘Ordinarily exempt’ transactions
The Combination Regulations provide that certain transactions are ‘ordinarily’ not likely to cause an AAEC in India in respect of which a notice need not ‘normally’ be filed with the Commission. They are set out in schedule 1 of the Combinations Regulations. These transactions include:
- non-competitor transactions of not more than 15 per cent of the total shares or voting rights, acquisitions where the acquirer already holds above 50 per cent of the shares or voting rights in the target (unless the transfer shifts from joint to sole control) and the acquisition of assets not directly related to the business activities of the acquirer and made as an investment or in the ordinary course of business that does not lead to control of the target (except where the assets constitute the entire business in a particular location or for a particular product or service);
- the acquisition of shares pursuant to a bonus issue, stock splits, underwriting, stockbroking, intra-group acquisitions, amended or renewed tender offers; and
- the acquisition of current assets, stock-in-trade, raw materials, stores and spares and purely offshore transactions taking place outside India with ‘insignificant local nexus and effect’ to the market in India7, and are therefore unlikely to cause an AAEC in India.
Although not expressly included in schedule 1 (or the Combinations Regulations) there is nothing to suggest the inclusion of ‘greenfield’ joint ventures as section 5 of the Competition Act only covers the acquisition of an enterprise that is a ‘going concern’ engaged in business activity prior to or at the time of the acquisition. Practically speaking, it is unlikely that a newly formed joint venture would meet the de minimis target thresholds, and under strict interpretation of the provisions, the formation of joint ventures may not be notifiable.
Furthermore, the terms ‘ordinarily’ and ‘normally’ detract from the benefits arising from the inclusion of these filing exemptions as there is no certainty that such an exempted transaction, once completed, cannot be reviewed by the Commission.
Trigger event and notification procedure
Under the Competition Act, the trigger event for the notification of a proposed transaction to the Commission is within 30 calendar days of either the execution of an acquisition agreement or other binding document 8 to acquire in the case of an acquisition or acquiring of control, or the approval of a proposed merger or amalgamation by the Board of Directors of the enterprises concerned9.
The obligation to file a notification lies with the acquirer in the case of acquisitions and jointly by the parties involved in the case of a merger or an amalgamation. The parties may file either Form I (short form) or Form II (long form). The Combinations Regulations provide that Form I is the default option with parties, wherein the Commission is required to arrive at a prima facie decision on whether a proposed transaction raises competition concerns within a 30-day period.
The Combination Regulations provide that transactions are ‘ordinarily’ notifiable in Form I10. Such transactions include acquisitions resulting from a gift or inheritance, acquisitions by liquidators, administrators and receivers11, acquisitions of trustee companies, transactions where the parties are export oriented entities, transactions without any horizontal or vertical overlap or where there is a horizontal overlap of less than 15 per cent, or a vertical overlap of less than 25 per cent.
Parties have an option of submitting additional supporting documents with Form I or filing Form II and have the choice at their discretion to file Form II for more complex transactions. The Commission has noted in the Combination Regulations that it ‘will endeavour’ to complete its review of complex transactions in 180 days. Form II is extremely complex and lengthy and requires a detailed analysis of markets, overlaps, parties’ business, products, information on competitors, etc. The Commission has retained the discretion of requiring parties to file the information in Form II instead of Form I, where the Commission considers that the parties should have filed a Form II. Any additional time taken by the parties in filing Form II will be excluded from the merger review period. Therefore, it is vital that the parties select the right form, rather than incur additional time and expense and the possibility of a reset merger control review clock.
Penalties for not notifying
The consequences of a failure to notify a proposed combination are severe, as the Commission has the power to impose a penalty that may extend up to one per cent of the total turnover or the assets, whichever is higher, of the proposed combination,12 and also to ‘look back’ up to a period of one year, to inquire into and, if need be, unwind such a transaction. Additionally, the transaction (and presumably all acts in furtherance of the transaction) will be deemed void under Indian law if the transaction causes or is likely to cause an AAEC.
Areas of concern
The Commission has travelled a significant distance between the draft and final versions of the Combination Regulations, in the process addressing many of the initial criticisms by stakeholders. The Commission’s efforts in setting up a two-stage merger review process has been commendable; however, as is generally the case with the launch of a new set of legislation, there will invariably be issues that need to be rectified that will help do away with the lack of clarity relating to certain provisions of the Combinations Regulations. Judging by the current pace of change, it may only be a matter time until these ambiguities are ironed out; however, due to the very nature of the legislation it maybe the case that some less than ideal aspects may continue into the foreseeable future.
Some of the key areas of concern that continue following the enactment of the Merger Control provisions are as follows:
- section 5 of the Competition Act stipulates that there needs to be an ‘acquisition of one or more enterprises13 by one or more persons or merger or amalgamation of enterprises’ to trigger an obligation to notify a combination under section 6 of the Competition Act, provided the thresholds prescribed have been met. Unfortunately, it is inferred from the Combinations Regulations that the Competition Act covers any acquisition, regardless of whether an ‘enterprise’ is being acquired (or merged or amalgamated). On this basis it may be indicative from the relevant provisions of the Combinations Regulations that corporate reorganisations and the acquisition of non-controlling minority interests would also trigger a notification requirement that are not acquisitions of an enterprise;
- further, if a part of an enterprise is being sold (such as a unit or a division) there is no clarity in the Combinations Regulations as to whether the assets or the turnover of the whole enterprise and not just the unit or a division being sold must be used. Section 5 of the Competition Act seems clear that only an acquisition of an enterprise is covered. However, it appears that the Commission is taking a view that the assets and turnover of the whole enterprise that is selling the unit or division in question must be taken into account. To an extent that a view is ultimately taken by the Commission on this question, it would appear that, in the context of an asset acquisition, the assets must amount to an enterprise, and that the enterprise being acquired is a target, to which the applicable thresholds apply;
- there has also been no guidance offered by the Commission on rules on the calculation of turnover and assets. Though the Commission has specified that there is no need to restate the financial statements of the parties if they are prepared in line with Indian GAAP, US GAAP or International Financial Reporting Standards; and
- another important point to be drawn from the Combinations Regulations is that in terms of the transactions that are notifiable the bar has in fact been set rather low and some such transactions may not raise any substantive competition law issues. This is in stark contrast to most other jurisdictions where the bar is generally a change in control. Therefore this may lead to a scenario where most Combinations transactions are unlikely to have an AAEC. For example, transactions involving the acquisition of shares or voting rights between 15 per cent and 50 per cent, without the acquisition of control, currently could require notification, even though they would not raise substantive competition law concerns.
Merger control decisions
The Commission has cleared a few merger filings to date,14 most of which pertain to transactions that were extremely simple and did not raise any substantive competition law concerns.
The Commission passed its first decision relating to combinations on 26 July 2011 within a period of 18 days from the date of filing, approving the acquisition by Reliance Industries Limited and Reliance Industrial Infrastructure Limited, of a 74 per cent equity stake in the joint venture companies Bharti AXA Life Insurance Company Limited and Bharti AXA General Insurance Company Limited.15 Since acquirers or the acquired enterprises did not operate in interchangeable or substitutable products the Commission concluded that there was no substantial or horizontal overlap in the proposed transaction. On the existence of a vertical relationship between Bharti AXA Life Insurance Company and a subsidiary of Reliance Industries Limited in relation to insurance brokerage, the Commission concluded that there was no significant vertical relationship that could pose competitive constraints in life and general insurance business.16 The Commission also stated that the exercise at a later date of an option granted through this agreement was not part of the determination of the Commission at this time.
The Commission gave its second approval in relation to the acquisition of UTV Software Communications by Walt Disney (Southeast Asia) Private Limited.17 The proposed combination related to the media and entertainment industry and the business of motion pictures, broadcasting, interactive media and character merchandising was examined. The Commission found insignificant overlap in the first three of these markets. The Commission observed that as there are a large number of market players in the business of motion pictures in India with relatively low barriers to entry, the prevalence of intense competition means that there is less likelihood of any coordinated or exclusionary behaviour.
G&K Baby Care Private Limited and Danone Asia Pacific Holdings Private Limited, jointly notified the Commission of the proposed acquisition by G&K of the nutrition business of Wockhardt Limited and the contract manufacturing business of Carol Info Services Limited on slump sale basis and the acquisition by Danone of certain intellectual properties by way of sale and assignment by Wockhardt EU Operations (Swiss) AG.18 The combination concerned the nutraceutical sector in India that made up less than 1 per cent of the global nutraceutical sector. The Commission concluded that due to Wockhardt Groups market share being less than 7 per cent in both the nutritional and baby-food business combined with the fact that Danone is not actively engaged in any business segments that are proposed to be acquired, there is no horizontal or vertical overlap between the parties. The Commission approved the combination stating that it was unlikely to have an AAEC in India.
The Commission approved the acquisition of the laminates division of Bombay Burmah Trading Corporation Limited by Aica Kyogo Company Limited through its wholly owned subsidiary, Aica Laminates India Private Limited.19 The Commission observed that the surfacing and decorative business in India is highly competitive and fragmented due to the large number of players, and observed that the proposed combination is not likely to have an AAEC.
The Commission also examined a notification by NHK Automotive, a newly formed entity that does not have business operations in India and NHK Springs, a subsidiary of NHK Japan operating in India through a joint venture with Jamuna Auto Industries, regarding the proposed acquisition of BCL Springs, a division of the Bombay Burmah Trading Corporation Limited. The Commission concluded that the acquirers and Bombay Burmah Trading Corporation Limited are not involved in the manufacture of identical and substitutable products differentiated on the basis of production process and end-use. Therefore the Commission concluded that the proposed combination is not likely to adversely affect competition.20 These two decisions seem to indicate that the Commission is of the view that the a unit or division of an enterprise is not a separate enterprise in itself.
In the first case, where the Commission had to deal with a merger between actual competitors, Nippon Steel Corporation (NSC) and Sumitomo Metal Industries Limited (SMI) notified a worldwide merger to the Commission. The Commission cleared the merger, finding that there was no appreciable adverse effect on competition in India, as there were several other manufacturers of all the products that were manufactured by NSC and SMI in India. The Commission also came to the conclusion that there was no need to define relevant markets as the competitive assessment would not change substantially even if the markets were not defined. The Commission also stated that the incremental change in market shares in the potential relevant markets as a result of the merger were minimal, as one of NSC or SMI had a much larger market share than the other in each of the potential markets where there was an overlap.21
The Commission has had several cases regarding intra-group transactions, and it has cleared four such cases. In its order approving the merger of Alstom Holdings (India) Limited, a non-deposit taking non-banking financial company, into its group company, Alstom Projects India Limited, a company engaged in the power and transport segment, the Commission observed that as the companies were part of the Alstom group and would continue to be under the same management subsequent to the implementation of the scheme of amalgamation, the merger is not likely to have an AAEC in India.22
The Commission then examined the notification of a scheme of amalgamation filed by Siemens VAI Metals Technologies, Morgan Construction Company India Private Limited and Siemens Limited, all part of the Siemens Aktiengeselleschaft (Siemens AG) group.23 A similar situation arose later when Akzo Nobel India Limited, Akzo Nobel Chemicals India Limited, Akzo Nobel Car Refinishes India Private Limited, all part of the Akzo Nobel NV, Netherlands (Akzo Nobel Group), jointly filed a notification regarding a proposed merger of the four entities.24 In both these cases, the Commission, approved the combination, noting that since the parties were operating in different markets and since there was no change in the ultimate control of any of the parties, the amalgamation would not have any appreciable adverse effect on competition.
Most recently, in its decision approving a merger between Tata Chemicals Limited (TCL) and Wyoming 1 (Mauritius) Private Limited (Wyoming), the Commission finally broke its silence about certain ambiguities arising out of the Combination Regulations and in particular, regarding the (non-)availability of the intra-group ‘exemption’ under clause 8 of schedule 1 of the Combination Regulations in the context of intra-group reorganisations effected by way of mergers and amalgamations rather than acquisitions.
The Commission clarified: that a parent and a subsidiary company were two separate ‘enterprises’, and could not be treated as a single entity in order to avoid notifying such a merger; the exemption available to intra-group acquisitions did not extend to mergers and amalgamations; and no argument regarding insufficient local nexus (under clause 10 of schedule 1 of the Combination Regulations) could be made when one of the parties was in India and the thresholds in section 5, which included thresholds in India, were met.25
The TCL decision lays to rest, at least for the moment, several questions regarding the interpretation of the Combination Regulations as well as the Competition Act, even though the resolution arrived at by the Commission may not provide much comfort to multinational entities. Whilst it remains to be seen whether the positions adopted by the Commission in the TCL decision are challenged and/or modified in due course, India is now a unique jurisdiction which requires the notification of intra-group transactions on the basis of an artificial distinction drawn due to the mode in which such transactions are given effect.
If the first half of the year focused on several legislative developments relating to the implementation of the merger control regime in India, the latter half was followed by a series of enforcement decisions by the Commission, imposing heavy penalties on the infringing parties, especially in abuse of dominance cases, such as the much publicised matter involving DLF Limited, one of India’s largest real estate developers. Significant development has also taken place with the unveiling of the Draft National Competition Policy for India to assist government departments in undertaking a competition impact assessment of their legislative and executive actions.
Furthermore, pursuant to the repeal of the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 the MCA issued a clarification on the applicability of provisions of sections 108A to 108-I of the Companies Act, declaring them to be redundant and having no legal force. These sections were inserted in the Companies Act in 1991, through the MRTP (Amendment) Act of 1991 and pertain to the restriction on transfer of shares and powers of the central government to disallow transfer in certain cases in connection with requirements under the MRTP Act, 1969.
It is the Commission’s role to assess the impact of each case on its merits and then consider the impact that it has on competition. However, none of the merger control decisions that have been arrived at so far have resulted in any substantive legal issues, which have made the role of the Commission much easier. The true test of the Commission will only arise when complex and substantive legal issues are brought before them. Whilst it should be commended that, although straightforward, the Commission has appeared to correctly analyse most of the decisions made to date, and managed to arrive at the clearances ahead of the time limits set in the Combinations Regulations, the extremely technical and legalistic interpretation of the Combination Regulations is a cause for concern for the stakeholders involved, as several transactions that would otherwise not require a clearance, now have to be notified to the Commission, as Indian jurisprudence is developing contrary to established global competition law principles.
*The authors would like to thank their colleague Alexander (Nirosh) Perera for his valuable input and suggestions.
- Brazil, Russia, India, and China.
2Sections 5, 6, 20, 29, 30 and 31 of the Competition Act were notified by Notification SO 479(E) dated 4 March 2011.
3The relevant asset and turnover thresholds set out under section 5 of the Competition Act were enhanced by 50 per cent by Notification SO 480(E) dated 4 March 2011.
4Notification SO 480(E) dated 4 March 2011.
5Notification SO 482(E) dated 4 March 2011 and amended by Corrigendum SO 1218(E) dated 27 May 2011.
7Regulation 4 read with schedule I of the Combination Regulations.
8Other document in clause b of subsection 2 of section 6 of the Act shall mean any binding document conveying an agreement or decision to acquire control, shares, voting rights. In the event of a hostile acquisition ‘other document’ shall mean any document executed by the acquirer conveying a decision to acquire. Where such a document has not been executed but the intention to acquire is communicated to the government or statutory authority, the date of such a communication shall be deemed to be the date of acquisition of the other document for acquisition.
9Section 6(2) of the Competition Act.
10Regulation 5 of the Combination Regulations.
11Such acquisitions will be through any scheme approved under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or under the Sick Industrial Companies (Special Provisions) Act, 1985 or any other form or re-enactment of the law.
12Section 43A of the Competition Act was notified by Notification SO 1230(E) dated 30 May 2011.
13An enterprise is defined in section 2(h) of the Competition Act as ‘a person or a department of government which has been engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of acquisition or control or articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries[…]’.
14As of 7 December 2011 (the date of writing), there have been six merger control decisions issued by the Commission.
15Combination Registration No. C-2011/07/01, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/RILOrder270711.pdf.
16The parties subsequently announced that they would be aborting the transaction.
17Combination Registration No. C-2011/08/02, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/WaltCombOrder250811.pdf.
18Combination Registration No. C-2011/08/03, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/G&KOrder15092011.pdf.
19Combination Registration No. C-2011/09/04, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/AICAOrder300911.pdf.
20Combination Registration No.C-2011/10/06, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/NHKAutomotiveBBTCLOrder4Nov2011.pdf.
21Combination Registration No. C-2011/10/07, http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/SMI27Dec2011.pdf
22Combination Registration No.C-2011/10/05, http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/AHIL_APIL_Order24Oct11.pdf.
23Combination Registration No. C-2011/11/09; http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/SiemensVAIMorganSiemensLimited13Dec2011.pdf.
24Combination Registration No. C-2011/12/11, http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/ANIndia28Dec2011.pdf.
25Combination Registration No. C-2011/12/12, http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/TCL28Dec2011.pdf.