India: Merger Control
The merger control regime of India is relatively nascent and came into effect only on 1 June 2011. It seeks to regulate ‘combinations’ that cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India and the regulatory functions are exercised by the Competition Commission of India (CCI) in accordance with the provisions of the Competition Act 2002 (the Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (the Combination Regulation), as amended from time to time.
This article gives an outline of the merger control provisions in India and the manner in which they are being implemented by the CCI.
Requirement of notification
Types of transactions
Any acquisition, merger or amalgamation that exceeds the financial thresholds prescribed under section 5 of the Act amounts to a ‘combination’, which is reportable to the CCI unless expressly exempted under the Combination Regulations or by the government by notification. The Act specifies two broad categories of transactions, as follows.
As per the provisions of the Act, these include both direct and indirect acquisition of: shares, assets or voting rights of an enterprise; or control of an enterprise.
Mergers and amalgamations
The Act provides no definition of a merger or an amalgamation; these terms are interpreted in accordance with their general commercial usage.
The jurisdictional thresholds under section 5 reference both parties and groups in terms of both assets and turnover, and if any of these thresholds are exceeded in any case, the transaction is reportable to the CCI. The thresholds have been liberalised twice, in 2011 and 2016, and are currently as follows:
- the acquirer and the target jointly have either:
- in India, assets of over 20 billion rupees or turnover of over 60 billion rupees; or
- globally, assets of over US$1 billion, including at least 10 billion rupees in India, or turnover of over US$3 billion, including at least 30 billion rupees in India; or
- the acquirer’s group and the target post-combination jointly have:
- in India, assets of over 80 billion rupees or turnover of over 240 billion rupees; or
- globally, assets of over US$4 billion, including at least 10 billion rupees in India, or turnover of over US$12 billion, including at least 30 billion rupees in India.
Relevant entities for calculating thresholds
The following entities are considered for calculating thresholds (as also recently clarified by the CCI in its FAQs):
- For an acquisition of assets, shares, voting rights or control, the value of assets and turnover of the acquirer (or acquirer group) and the target enterprise is to be taken into account. The CCI considers ‘target’ to be the enterprise housing the asset and not the asset itself.
- For an acquisition of control by a person over an enterprise when such person already has direct or indirect control over another enterprise competing with the target, the value of assets and turnover of the enterprise (or group to which the enterprise would belong) over which control has been acquired, along with the enterprise over which the acquirer already has direct or indirect control, is to be taken into account.
- For mergers or amalgamations, the value of assets and turnover of the enterprise (or group) remaining after the merger or created as a result of the amalgamation is to be considered.
With the view to exempt small transactions, the central government had, by notification dated 4 March 2011, exempted the acquisition of enterprises with assets not exceeding 2.5 billion rupees, or turnover not exceeding 7.5 billion rupees, for a period of five years. On 4 March 2016, this exemption was renewed for a period of another five years, and the exemption thresholds were increased to assets not exceeding 3.5 billion rupees or turnover not exceeding 10 billion rupees. The exemption is not available to mergers and amalgamations.
Meaning of ‘control’
The term ‘control’ has been defined, albeit in a circular manner, in explanation (a) to section 5, and includes controlling the affairs or the management by one or more enterprises. However, the Act does not specify the degree of influence that would trigger the requirement to notify a transaction. On the other hand, the CCI has been adopting an expansive interpretation for the term. Some of the rights that the CCI has considered amounting to control include appointment or removal of key managerial personnel, changing the number of directors on the board, approving, adopting or amending the annual budget and business plan or plans to enter a new line of business, the right to block special resolutions, alteration of charter documents and the appointment of auditors. Thus, the line between investment protection rights and ‘control’ as identified by the CCI has been blurred.
Combinations that are normally not reportable
A strict interpretation of the merger provisions of the Act would have led to large numbers of filings of transactions that are routine or unlikely to have any significance from the competition standpoint. Consequently, the CCI, through its merger control regulations, notified that certain transactions are ‘ordinarily’ not likely to cause an AAEC in the relevant market in India and, therefore, need not ‘normally’ be notified to the CCI. In practice, this is generally understood to mean that no notification is required for such transactions. These transactions include:
- An acquisition of less than 25 per cent of shares or voting rights of an enterprise solely as an investment or in the ordinary course of business, not leading to change in control. There is limited guidance on the meaning of ‘ordinary course of business’ or ‘solely as an investment’. The CCI considers ‘solely as an investment’ to refer to ‘passive investments’ as opposed to ‘strategic investments’ with an ‘intention of participating in the formulation, determination or direction of the basic business decisions of the target’. An amendment to the Combination Regulations in 2016 clarified that the term ‘solely as an investment’ means any acquisition resulting in less than 10 per cent of the total shares or voting rights of an enterprise, provided the acquirer after acquisition has the ability to exercise only such rights that are exercisable by ordinary shareholders and does not have any board representation or any intention to participate in the affairs or management of the target company.
Interestingly, the CCI has found that acquisitions of shares or voting rights even below 25 per cent that give rise to horizontal overlaps or vertical relationships may raise competition concern and would not to be regarded ‘solely as an investment’ or ‘an acquisition in the ordinary course of business’. Consequently, the application of this exemption has been diluted as the parties may have to file a notification in such cases.
- Until the amendment of the Combination Regulations in 2016, the acquisition of shares or voting rights of no more than 5 per cent in a financial year where the acquirer or its group already held 25 per cent (but less than 50 per cent) or more shares or voting rights (except where the transaction resulted in change of control), was exempt from the requirement to file a notification; post amendment, the limit of 5 per cent has been omitted, thereby widening the scope of the exemption as all share acquisitions between 25 per cent and 50 per cent (except where the transaction resulted in change of control) are now exempt.
- Acquisition of assets not directly related to the business activity of the acquirer but solely as an investment or in ordinary course of business, not leading to control, except where the assets being acquired represent substantial business operations in a particular location or for a particular product or service of the enterprise of which assets are being acquired, irrespective of whether such assets are organised as a separate legal entity or not.
- Amended or renewed tender offers already filed with the CCI by the party making the offer.1
- Acquisition of stock-in trade, raw materials, stores and spares, and other similar current assets in ordinary course of business.
- Acquisition of shares or voting rights pursuant to a bonus issue or stock splits or consolidation of face value of shares or buy-back of shares or subscription to rights issue of shares (except where the transaction results in acquisition of control).
- Acquisition of shares or voting rights by a securities underwriter or registered broker of a stock exchange in the ordinary course of business.
- Acquisition of shares or voting rights where the acquirer already has 50 per cent or more shares or voting rights in the target (except where the transaction results in transfer from joint control to sole control).
- Intra-group acquisition of shares or voting rights or assets by one person or enterprise of another person or enterprise within the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part of the same group.
- Intra-group merger and amalgamation where either (i) one of the enterprises has more than 50 per cent shares or voting rights of the other enterprise, or (ii) more than 50 per cent shares or voting rights in each of such enterprises are held by enterprises within the same group. However, this exemption does not apply to those intra-group mergers or amalgamations wherein there is a change from joint control to sole control.
- Acquisition of shares, control, voting rights or assets by a purchaser approved by the CCI in accordance with an order for divestment.
It must be noted that the Combinations Regulations have been worded in a manner such that the above are not absolute exemptions; ie, even where the transaction falls within the above categories, it may have to be notified if it causes or is likely to cause an AAEC in any market in India.
Exemptions pursuant to government notifications
Under section 54 of the Competition Act, the government has the power to exclude certain combinations from the requirement of a notification. Currently, mergers and takeovers of loss-making and failing banks (in respect of which the government has issued a notification under section 45 of the Banking Regulation Act 1949) are exempted from the purview of the CCI. This has been done presumably to enable speedy remedial action to prevent a bank failure.
Specific rules applicable to combinations
In an effort apparently to prevent smart structuring of transactions with the view to avoid filing a notification, the CCI in March 2013 introduced Regulation 5(9) of the Combination Regulations, also referred to as the ‘attribution rule’, which catches transactions involving transfer of assets by one enterprise to a second enterprise to enable the second enterprise to implement an acquisition, merger or amalgamation with a third enterprise. In such a situation, the value of assets and turnover of the first enterprise is added to the value of assets and turnover of the second enterprise for carrying out the jurisdictional analysis. As a result, even when an acquisition, or merger or amalgamation, is being carried through a shell company, it may be caught in the CCI jurisdiction. With a similar intent, the CCI introduced another addition to the Combination Regulations on 28 March 2014, which requires that filing of a notice be determined with respect to the substance of the transaction (also referred to as the ‘substance test’) and any structure that has the effect of avoiding a notice be disregarded. These provisions have reportedly been the basis of several filings to the CCI.
Treatment of joint ventures
Section 5 of the Act covers only acquisitions, mergers and amalgamations, without making any specific mention of joint ventures. A joint venture would, therefore, be covered under one of these types depending on how the joint venture is formed (ie, through acquisition, or merger or amalgamation).
Generally speaking, greenfield joint ventures are not notifiable, whereas brownfield joint ventures may require notification if the financial thresholds are met. The CCI has recently, in its FAQs, clarified that if one or more enterprises transfer their assets to a joint venture company, then the formation of a joint venture is treated as a notifiable combination, provided that jurisdictional thresholds are met after applying the rule of attribution.
The Act, in section 20(4), has listed the following factors, and the CCI is required to consider all or any of these when analysing the effect on competition:
- market shares of the parties and competitors;
- sources of actual and potential competition (including imports);
- whether a vigorous competitor would be removed by the combination;
- whether the target is a failing firm;
- vertical integration in the market;
- extent of entry barriers into the market;
- significance of innovation;
- the combination’s contribution to economic development; and
- whether the benefits of the combination outweigh the adverse impact.
The CCI can, under regulation 34 of the Combinations Regulations, also consult any other agency or statutory authority in relation to the combination under scrutiny.
Timeline for reporting a transaction
India is one of the few jurisdictions that imposes a deadline for reporting the transaction to the CCI, this being 30 calendar days from the execution of any agreement or other document for acquisition of control, or the approval of the proposal relating to a merger or amalgamation by the board of directors of the enterprises concerned.
Under the Combination Regulations, an ‘other document’ should be binding and convey an agreement or decision to carry out the relevant transaction. The amendments to the Combination Regulations in 2016 narrowed the meaning of the term ‘other documents’ in the context of public M&A to a public announcement for the acquisition of shares, voting rights or control (as defined in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011. This has resulted in greater clarity, as earlier even a letter to a statutory authority for obtaining foreign investment approval would be sufficient to trigger the timeline for the notification. In cases of hostile acquisitions, the ‘other document’ is any document executed by the acquiring enterprise, by whatever name called, conveying a decision to acquire control, shares or voting rights.
The CCI has 30 working days to form a prima facie opinion in Phase I on the existence of any AAEC in the relevant market. This time does not include the time taken by the parties to provide additional information and clarifications. The CCI can also stop the clock during Phase I for an additional 15 working days to seek comments from third parties. During this phase, parties can propose modifications to the combination so as to address any concern that the CCI may have. In such a case, an additional period of 15 calendar days is available with the CCI for forming its prima facie opinion.
If the prima facie opinion is that the proposed combination is likely to cause an AAEC in any relevant market in India, the CCI issues a notice under section 29 of the Act, requiring the parties to explain within 30 days how the combination would not adversely affect the market. If the response of the parties is not found to be satisfactory, the CCI initiates a detailed Phase II investigation.
If the CCI does not pass a final order within 210 calendar days from the date of notification, the combination is deemed to be approved. In practice, the CCI has cleared almost all the transactions in Phase I. Further, there has been no instance of a transaction being blocked by the CCI to date. However, there have been 12 cases where the CCI has granted clearance subject to conditions (both structural and behavioural), including three cases where the CCI ordered divestment of certain assets.
Types of form
The Combination Regulations contain the following types of Forms to be used for filing:
- Form I or the ‘short form’ – This is ordinarily used for making merger notifications to the CCI. The filing fee for Form I is 1.5 million rupees.
- Form II or the ‘long form’ – This is a more detailed format and may be used for the filing if: (i) the parties are competitors and the combined market share post-merger exceeds 15 per cent; or (ii) the parties are engaged in vertically related business activities and their individual or combined market shares exceed 25 per cent in their respective markets. The filing fee for Form II is 5 million rupees.
- Form III – Acquisitions, share subscription or financing facilities entered into by public financial institutions, registered foreign institutional investors, banks or registered venture capital funds, pursuant to a covenant in a loan agreement or an investment agreement are notified in Form III. Unlike the other two forms, these transactions do not need to be pre-notified to the CCI, and the acquirer in such cases can notify the CCI within seven calendar days of completion.
According to the Combination Regulations, it is the responsibility of the acquirer to notify an acquisition or a hostile takeover. In case of a merger or amalgamation, a joint notice is required to be filed by the parties; this is usually also the requirement for a joint venture.
Delay or failure to report a transaction
Failure to notify a transaction within the prescribed time period can result in a fine under section 43(A) that may extend to 1 per cent of the worldwide turnover or assets of the combination, whichever is higher. The fine is imposed on the party responsible for the filing.
The penalties have varied from case to case, with the highest penalty to date of 50 million rupees, which was imposed on General Electric for failure to notify its acquisition of Alstom’s India assets within 30 days from the date of making an public announcement.
The merger control regime in India is suspensory in nature and any violation of the same amounts to gun jumping. Though there is no specific provision relating to gun jumping under the Act or the Combination Regulations, in practice, the CCI treats it as a failure to notify a combination.
The first gun-jumping penalty of 10 million rupees was imposed on Etihad for implementing certain parts of the transaction prior to CCI clearance in relation to its acquisition of stake in Jet Airways. In a recent case, the CCI found that even pre-payment of consideration, irrespective of the nature of the payment (ie, whether refundable or not), amounts to part consummation of the transaction. Further, the CCI has taken a clear stance that global completion would not be permitted pending local clearance.
The merger control regime in India has evolved substantially in 2016, with the CCI making amendments to bring greater clarity to the filing processes. However, the onerous requirement on parties to provide substantial information has only increased pursuant to the revision in the format of the Forms in 2016. In some respects there has been a tightening of the provisions, for example, with the CCI’s wide interpretation of control in merger cases.
Indian law has been criticised for being one of the few jurisdictions in the world that set a prescribed timeline for filing. As the regime is mandatory as well as suspensory, the deadline of 30 days from the signing of the binding agreement has been onerous on the parties, and in global transactions, India becomes one of the first jurisdictions where the filing must be undertaken. Critics feel that this serves no real purpose, and dealing with cases of delayed filing exerts unnecessary burden on the CCI and its limited resources. It is believed that the CCI is considering changing this requirement, but this would need an amendment to the Act, which is time-consuming.
There is also a need for greater clarity and guidance in relation to the substantive analysis adopted by the CCI, especially in divestment cases. It has been seen that the CCI does not engage with parties adequately in divestment cases, as a result of which the remedies arrived at may not be optimal or commercially viable. To address this, the CCI may also consider market testing of the proposed modifications, as is done in some older jurisdictions.
- Provided that the intimation of change has been duly made to the CCI under Regulation 16 of the Combination Regulations.