On the completion of one year of existence of merger control regime, Lex Witness bureau analyzes and evaluates the journey of Competition Commission of India in administering the merger control regime in India.
The urge to grow is embedded in the DNA of humanity. The only thing needed to take it to its fruition is the ability to sustain it by remaining focused. Same holds true for India’s quest for a more powerful economy. Any economy which is in the initial years of scaling greater economic heights needs a competition regulator and the Govt. did well by bringing into force, the Competition Act, 2002, thereby bringing Competition Commission of India (CCI) into existence. And later on in 2009 the combination regulations (hereinafter “merger control regime”) were also enforced from June 2011. The ushering in of the merger control regime notified exactly one year ago had generated anapprehensive debate about these regulations. So on the completion of one year of the Witness is analyzing and evaluating the journey of CCI in administering the merger control regime in this last one year.
There is no doubt that the merger regime in India is at its nascent stage and there are still unexplored areas which are required to be addressed in future. Some of these areas may pertain to assessment involving joint ventures enterprises, regulation of combinations involving enterprises dealing in differentiated products and also understanding and devising a theory of competitive harm, characterising the Indian economy and business. But the commission is confident to successfully meet all these challenges for which it is investing appropriately in capacity building of its staff and creating linkages with various institutions to draw on their expertise at the time of requirement.
n the process of the assessment of the combination notices, the CCI has through its decisions has also laid down certain important principles which would become the guiding principles to the stakeholders for better understanding of the issues involved in the combinations and at the same time would help the CCI to effectively regulate the combinations as per the provisions contained in the Act and the Combination Regulations. For example, in one of its recent decisions, the CCI has held that subscription to optionally convertible debentures that would enable the acquirer to exercise decisive influence over the management and affairs a company would amount to acquisition of control. In another case, in which the notice under Section 6(2) of the Act was given to the Commission not only belatedly but was also given after the combination had already taken effect i.e. after the acquisition of shares, the Commission approved the said combination under sub-section (1) of Section 31 of the Act, however, the Commission in its order strongly emphasised that any person or enterprise, who or which proposes to enter into a combination, has to mandatorily give a notice to the Commission under sub-section (2) of Section 6 of the Act, prior to entering into a combination.
The defining feature of our merger control regime has been very aptly described in an article by Alasdair Balfour and Tobias Caspary titled “BRIC Merger Control – The New Regulatory Frontier” wherein they state it to “a mandatory pre-merger control regime requiring transactions that meet relevant thresholds to be notified to, and approved by, the local competition authority prior to closing.”
Like any change the regime was received with a mix of optimism and greatapprehensions. The list of misgivings was almost endless. They centred mainly around Duration and procedure of the review period with transparency and efficiency of the review process being at its core. The retention of the time period of 210 days in the Act was not considered conducive for M&A activity in the country.
Besides, definition of the “group” also caused a lot of heart burn as many feared that intra-group mergers amongst others with no significant effect on the market were unnecessarily being brought within the purview of CCI. Apart from that notification thresholds and Assets/turnover criteria, its impact on cross-border transactions with insignificant local nexus and effect on Indian market were also been a cause for worry. The next set of apprehensions were about Jurisdictional conflicts with other regulators, need for harmonizing the regime with the SEBI Takeover Code.
As per CCI In the period 1st June, 2011 to 15th June, 2012, the CCI has received sixtyone notices under sub-section (2) of Section 6 of the Competition Act, 2012 (Act). Out of these sixty one notices, the CCI has given its final decision on fifty four notices till 15th June, 2012 and seven notices were being examined by the CCI in terms of the provisions of the Act. In addition to the above, the CCI, till 15th June, 2012, has received three filings under sub-section (5) of Section 6 of the Act in Form III, all of which have been noted by the CCI.
All the said notices filed under Section 6(2) of the Act on which the Commission has given its final decision were cleared by the Commission in a period of 30 days as stipulated under Regulation 19 of the Implementing Combination Regulations, 2011. However, the average time taken for final decision on the notice(s) has been around 20 days excluding the time taken by the parties to the combination in removing the defect(s) or furnishing additional information, as provided in Regulations 5, 14 and 19 of the Combination Regulations. All the seven cases which are under examination in the Commission are also within the stipulated period of 30 days to form the prima facie view on the case.
From the above it can be observed that the time taken by the commission in reviewing the cases is very short and in line with the best global practice. It is quite contrary to the apprehensions expressed by some of the stakeholders that the time taken will be 210 days which will impact the businesses adversely and will impose exorbitant regulatory cost due to delayed decision making on business.
No suo moto action has been taken by the Commission against any combination so far.
No enterprise has so far been fined by the Commission for violation of the combination regulations despite the cases in which notices were filed belatedly since Commission was of the view that these errors were on account of non understanding of the provision of the act in full at the very first year of implementationand not with an intention to evade the law.
So far the limited exercises recently carried out by the CCI re mergers/combinations have been fairly straightforward and simple. The timelines have been adhered to. However, the real challenges will arise in the case of complex mergers, that are subject to objections from third parties, or the Government itself, and require detailed investigation as to the anticompetitive effect of the same. I am still not sure whether the CCI is now fully equipped to deal with a series of such Merger investigations, if they happen to land together. These require a large set of efficient and skilled manpower to meet the tight timelines.
However, as things stand, the economic outlook is such that there doesnt seem to be any big ticket merger happening very soon. So we will need to wait and watch for the first big challenge and see how efficiently CCI passes that test.
The continuing challenges
In my opinion, by and large, the merger control regime in India has done exceedingly well and has been able to remove the apprehensions and misgiving which were initially bothering the corporate world. Regulation of Mergers & Acquisitions under the Competition Act is an ex-ante process which requires the regulator toaccess the likelihood of proposed transaction having adverse effect on competition in the relevant market in the current market situation. This is a highly complex economic assessment and involves extensive use of econometric techniques such as merger stimulation etc. Therefore, to continuously augment the professional capability and expertise in terms of economic assessment of substantial issues likely to emerge, say, for example in horizontal mergers and acquisition having “unilateral effects” on competition in the relevant market or how to assess “coordinated effects” etc. is the foremost challenge for the CCI. Besides evaluating the theories of harm, finding of evidence in support thereof to justify blockage of such mergers and acquisition would be the challenge for the DG. As stated above, CCI has not yet tested a real challenging case of such horizontal merger or acquisition.
As far as industry is concerned, “decoding” the complex questions framed in the various clauses of Form II i.e. the Long Form, is a continuing challenge not only for the in-house counsels but also for the external lawyers!
In addition, there are some doubts on certain fundamental issues like valuation of asset and turnover, concept of control in a jointly held company etc. besides the grey area of treatment of joint ventures is still not clear.
Therefore, how to face the above basic issues, particularly to the Joint Ventures, is a challenge both to the Commission and the Industry. The premerger consultation process initiated by the CCI on its own has been quite useful to the parties so far to remove such doubts.
Overcoming the challenges
“Firstly, the pre-merger consultation process needs to be strengthened and publicized. Secondly, there should be more interactions between the Commission and the Industry say through the Chambers e.g. FICCI, ASSOCHAM etc. to further develop confidence of the corporate in the regulatory regime. Thirdly, CCI may consider engaging outside experts to frame guidelines on contentious issues such as valuation of asset, turnover and control in the light of experience acquired so far.
Mr. Man Mohan Sharma on the question of as to how the merger control regime in India has fared in terms of time, cost and their combined effect on the competitiveness of the domestic and foreign corporate responded that till now most of the filings in CCI have been of Form I i.e. of innocuous cases of intra – group consolidations, wherein there are no possibilities of adverse effect on competition. Most of these cases were covered under Schedule I of the Merger Regulations, 2011. Such cases form over 95% of the total cases filed before CCI during the last one year and they have been cleared by the Commission in the record time of less than 30 days, which is appreciable. These timely approvals have sent the right signals to the Corporate, both domestic and foreign that at least in “procedural filings”, CCI has come up to the expectations of the Corporate world.
Mr. Sharma further states that as far as the cost of filing is concerned, after the recent changes made in February 2012 in Merger Regulations, the Commission has fairly rationalized the fee structure keeping in view the size of the transactions covered. The fast approvals of such combinations which did not have any substantive competition issues must have also contributed to the competitiveness of concerned parties in terms of going forward with the proposed transaction. Even in the limited cases of mergers and acquisition which had substantial issues, CCI has exhibited a professional competence.
Challenges in terms of multi-jurisdictional filings
The two main challenges at a practical level are those countries where the jurisdictional test is either unclear or capture transactions which clearly raise no effect in the country concerned. Second, the timetable for a clearance decision, particularly for transactions that objectively raise no competition concerns. If I was pushed to identify a third issue, it would be those countries whose competition authorities are concerned about issues that are not strictly competition law issues (e.g. retention of employees; national champions being protected...).
Commendable work, yet concerns remain
In relation to India, in terms of efficiency, the procedure and documentation is reasonably straightforward. However, there remains technically a concern on the timetable within which transactions are dealt with that raise no issues. Yet, I recognise that in practice the CCI appears to be following a timetable for phase one investigations that is consistent with the international norm, for which the CCI is to be commended. In terms of efficacy, this has two elements I suggest. First, jurisdiction, where the legislation and implementing regulations are unclear for certain transactions. For example, on its face the turnover of the target and the seller is to be taken into account for jurisdiction purposes. This is clearly counter-intuitive and inconsistent with the practice in other jurisdictions. Second, in relation to substance, the CCI merger decisions leave practitioners and thus European corporations with some confidence that the CCI is both commercially savvy and legally consistent with international norms. Of course, that may be optimistic as perhaps no substantive merger issues have sufficiently arisen to test the CCI’s substantive assessment credentials.
The Competition Commission of India (CCI) in a commendable manner has amended the Combination Regulations on 23rdFebruary, 2012 based on the experience gained through nearly nine months of implementation. The changes have been made to achieve the objectives that the transactions which are ordinarily not like to raise adverse competitive concern should not be required to be filled but at the same time gaps in regulatory architecture should be overcome. Some of the major amendments made to the Combination Regulations, in the words of CCI are :
During my interactions with many experts in the field it emerged that the CCI has done a commendable job despite its constraints in administering the merger control regime in the country. It has not only dispelled doubts but has also been quick in responding to the emerging situation. This approach of CCI is evident in its quick amendments to the regulations. Despite this some still reckon challenges of serious nature as expressed by Alasdair Balfour and Tobias Caspary maintain that “…However, concerns remain that the CCI may not have sufficient resources to meet the mounting caseload, in particular if de minimis exemptions for filing expire, which may lead to longer reviews and timetable uncertainty for transaction parties “ But to that it can be said that CCI would be able to handle the situation reasonably well as it gains in experience and confidence in the times to come.
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