The wait has ended! India’s merger control regime has arrived with the Government giving effect to long-awaited merger control provisions under the Competition Act 2002. What are the salient features? To what extent will the M&A activity be impacted? What will be the role of CCI? Experts believe that the onus is now on the CCI to ensure a “smooth landing” of deals. Lex Witness Bureau investigates…
One of the key features of globalization of trade and commerce has been rapid increase in transnational mergers giving rise to global corporations. As the multinational corporations are aligning to meet the demands of this trend, so are the regulators so as to ensure that the market place remains competitive. The rationale being that the consumers whom the “antitrust” agencies are expected to protect, may be adversely affected by the decisions being made beyond their national borders. It is in this context that, the merger control provisions form a critical part of corporate activity in most economies. Today, antitrust enforcement with respect to mergers and acquisitions has spread well beyond the traditional areas of US and EU, with national bodies in Asia, South America, and elsewhere reviewing mergers, acquisitions and joint ventures to determine the likelihood of an anticompetitive effect.
Undoubtedly, merger control laws are a vital component of the Competition Law regime in most jurisdictions of the world. Over 60 nations have put in place regimes providing for merger control, wherein all major merger proposals are scrutinized by competition law authorities for preventing anti-competitive consequences of mergers/takeovers. The number of countries with merger control laws is expected to go up to 200 by the year 2025. Ultimately, every State has its own legal system for handling merger control. Although, some systems may vary vastly based on the current governmental regime, in practice, most merger control regimes are based on similar underlying principles. While in USA and UK, the substantive test is whether the merger substantially lessens competition; in European Union (EU) it is whether the merger significantly impedes effective competition. Thus, by using the “effects test”, nations review mergers oracquisitions involving enterprises with sizeable revenue or asset in their jurisdictions. Merger control came first in USA and EU, but, has since spread rapidly across the globe. In India, while it has been close to a decade since the enactment of Competition Act 2002, the provisions on merger control have been notified as recently as now. Needless to add, this is bound to affect the M&A scenario in India and that too significantly!
The Ministry of Corporate Affairs (MCA) has pursuant to Notification dated March 4, 2011 notified the provisions for regulation of combination, commonly known as “merger review provisions” under the Competition Act. With the enforcement of these sections, all mergers, amalgamations and/or acquisitions falling within the thresholds indicated in Section 5 of the Competition Act will require prior approval of the CCI. Four separate notifications relating to different aspects of merger control have been issued. The salient features of the notifications are as follows:
India’s merger control regime is enshrined in the Competition Act, 2002 (‘Competition Act’) which was amended in the year 2007 introducing significant changes to the competition law regime. Subsequently, the Competition Commission of India promulgated the Draft Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combination) Regulations 2011 (‘Draft CCI Regulations’) providing a framework for the regulation of combinations which include M&A transactions or amalgamations. The provisions pertaining to merger control under the Competition Act as well as the Draft CCI Regulations have now been brought into force. In essence, a transaction needs to satisfy two conditions before Section 6 of the Competition Act, i.e., regulation of combination, becomes applicable. Firstly, it must involve total assets or turnover. Secondly, it must have a territorial nexus with India. The CCI has wide ranging powers under Section 31 of the Competition Act in respect of combinations. ‘Combinations’ include mergers, amalgamations and acquisition of control, shares, voting rights, or assets. If the CCI is of the opinion that, the combination will have an appreciable adverse effect on competition, it can either prohibit the combination from coming into effect or it can order modifications to such combinations.
In my view, the coming into effect of the merger control provisions of the Competition Act, 2002 should not really impact the M&A activity. The Competition Commission has suggested the right approach and if the regulations need some modifications or are appropriately modified it would not have any impact on M&A activity. This has been happening globally and the scenario is no different in India. It is only that some mergers, amalgamations and asset acquisitions will need to be notified and get prior approval. This brings a lot of certainty in the entire process rather than wait for something to go wrong after the whole deal is done and somebody reviews and says that it is now anti-competitive under Section 3 of the Competition Act.
I think, there are two things at this particular stage when we speak about the role of the Competition Commission with respect to ensuring smooth handling of M&A deals. Firstly, the regulations need a bit of thought process and be written in a draft form. Secondly, if the mindset of the Competition Commission is correct although the time frame is 30 days, then, they can facilitate a smooth flow of transactions. A lot would depend on how the rules get finalized. You have the filing and time frame of 30 days before the “trigger event”. The “trigger event” is defined as the signing of any agreement which says acquiring an enterprise or intent for an acquisition and then the “other document” which is much wider than the agreement. The problem is of the “other document” and how does that work if it is a MoU or LOI.
Talking about ambiguities in the merger control regime, there are several which need to be looked into. One ambiguity is definition of “other document” as it is very vague. The other one would be that the transaction will take effect w.e.f. 1st June. Now, what happens to transactions that have been actually signed one year ago and otherwise due for close in 1st week of June?
“Big Indian conglomerates will now have to wait for the mandatory 180 day period in order to be able to acquire even a small entity which lacks significant presence in the market.”
For the merger control provisions to be triggered, a combination has to satisfy the ‘assets’ and ‘turnover’ thresholds. In other words, the Competition Act takes a threshold of assets and turnover as the judging criterion for a combination to be covered under the Act. The thresholds for the enterprises directly involved in a transaction are:
Transactions must be notified if: (i) the value of the assets of the enterprises involved in the transaction exceeds USD 750 million, including at least Rs. 750 crores (approximately USD 166 million) in India or (ii) the turnover of the enterprises involved in the transaction exceeds USD 2,250 million, including at least Rs. 2,250 crores (approximately USD 499 million) in India.
The thresholds for the corporate groups to which the merged entity directly involved in a transaction belongs are:After endless wait Sections 5 and 6 of the Competition Act have been notified. It is a welcome move. If India wants to be on the global centre-stage of the industrial development, it has to conform to global standards of anti-trust regulations also. The Indian industry has become extremely matured and has been able to deal with the anti-trust regulations under different jurisdictions. India Inc. has already entered Canada, US, UK and Europe and complied with such regulations and there is no different view vis-à-vis complying with domestic anti-trust regulations. The Competition Commission has notified very high thresholds, much higher than the International standards. They have also given aggressive timelines within which the proposal can be actually approved and there is absolutely no reason why the industry should not welcome this whole-heartedly. One of the important things in which the Competition Commission has to infuse the confidence of industry is the infrastructure to be able to deal with the deluge of filings; the kind of competent people who understand what is filing, their ability to review the entire material that is filed, and the kind of statistics they need to rely upon to determine market dominance and market share. Additionally, the Competition Commission has to send a strong message that a significant amount of confidentiality will be maintained in the filings with no leakages. There would be a number of people who want to know what his competitor has filed and under no circumstances there should be a leakage of such information.
In my view, there are two ways of looking at the adverse effect of the Commission’s notification on the industry. The first would be domestic consolidation, and the second would be cross-border consolidation. I don’t have any reason to worry for cross-border consolidation as people are familiar with anti-trust regulations elsewhere. But, so far as the domestic consolidation is concerned, the Act actually has a group concept which means that the consolidation happens within the limits, out of which Rs. 250 crores is asset-based and Rs. 750 crores in turnover, and there is absolutely no reason why it should come on the radar since it is an exempted transaction. So, it is a matter of trying to deal with the underlying spirit of competition ultimately in order to make sure that the consumer is not harmed by any consolidation of combination and there is a premerger consultation process available where people can actually go and have confidential discussions and generally have the proposal vetted. For instance, if I go ahead with this combination is it going to run into rough weather? Or should I present a case which is a downgraded one and below the radar limit? In my opinion, out of a number of things that we can do, one such thing would be to create a healthy dialogue between the Competition Commission and the Industry. In times to come, the Competition Commission will be seen as an agency which will facilitate growth as opposed to impeding the growth.
It is pertinent to note that the thresholds provide for a de minimis exception. In other words, a transaction need not be notified where the value of one party’s assets does not exceed Rs. 250 crores or where its turnover does not exceed Rs. 750 crores. However, the Draft CCI Regulations do not expressly state whether this exception applies only to Indian assets/turnover or also to nonIndian assets/turnover. Expectedly, the thresholds are designed to catch highprofile transactions that will impact the economy. But experts are quick to point out that there are some unanswered questions. For starters, neither the Competition Act nor the Draft CCI Regulations define the exact scope of reportable concentrations which are subject to the merger control regime. Further, not only is the concept of “control” uncertain, the rules on “group” transactions are also ambiguous. More importantly, it is argued that the threshold limits are unrealistic. In other words, many transactions not otherwise affecting competition will now require CCI’s approval solely on the ground that one of the parties involved is “big enough” to meet the thresholds. Simply stated, big Indian conglomerates will now have to wait for the mandatory 180 day period in order to be able to acquire even a small entity which lacks significant presence in the market.
At the heart of the merger control provisions lies the requirement of prenotification. Under the originally enacted Competition Act, the reporting of a combination was optional. But, the Act now mandates that a proposed combination has to be notified to the Competition Commission of India (CCI) within 30 days of approval by the Board of Directors of the enterprises concerned in case of a merger or amalgamation and execution of any agreement or other document for other acquisitions. Any combination which causes an “appreciable adverse effect” on competition within the relevant market in the country will be void. The question whether a combination is required to be notified depends on the ‘asset’ or ‘turnover’ tests/thresholds discussed above. It is critical to note that the Competition Act is not limited to domestic combinations and domestic enterprises. The notification requirement will be applicable to any overseas combination if the threshold set out in terms of assets or turnover in India is met, irrespective of the size of the transaction or its impact in India. There are, however, certain combinations which have been exempted. Interestingly, although the Draft CCI Regulations provide for a consultation by the parties prior to entering into a combination, such consultations will be informal and verbal and shall neither be binding on the CCI nor shall it create any obligation on its part!
“The Draft CCI Regulations stipulate that CCI will form its prima facie opinion within 30 days of filing of the notice for the proposed merger clearance and CCI will “endeavour” to pass a final order within 180 days of filing of merger notification.”
The Competition Act provides a long gestation period as a combination cannot take effect until a fixed number of days have passed from the date of notice to the CCI or the date of the order, whichever is earlier. Predictably for India Inc., the chief concern is that this may lengthen the time required to complete the combination and that the long gestation period would make M&As in India an extremely long and drawn out process, even killing a deal! Do the CCI Regulations address this concern of the industry? The Draft CCI Regulations stipulate that CCI will form its prima facie opinion within 30 days of filing of the notice for the proposed merger clearance and CCI will “endeavour” to pass a final order within 180 days of filing of merger notification. However, the major concern of the industry that the parties cannot practically move ahead with a transaction till a conclusive order is passed or the time limit of 210 days lapses, remains!
Reportedly, CCI has clarified that only larger acquisitions would come within the purview of the Competition Act, which would not be too many and that it is hoped that 90% to 95% transactions would be cleared within a period of 30 days, only 5% to 7% would go in for detailed scrutiny which would be cleared within 180 days. Thus, in effect smaller mergers and acquisitions which are necessary for the growth of the economy and the corporatesector are outside the purview of the merger control regime. In this context, CCI would need to assure both the industry as well as the consumers that it will be adopting a pragmatic and rational approach aimed at facilitating growth of industry rather than hindering the industrial growth or fresh investments into industry. Will the merger control regime mean legal certainty for the economy resulting in induction of fresh investments into the Indian economy? Perhaps it will, but only time will tell.
Even though the threshold limits under Section 5 have been increased by 50%, the one big problem that I foresee is that of time. The CCI has 210 days to review a combination, which can potentially delay closings, especially for listed companies who also have to comply with the provisions of SEBI’s Takeover Code and make an open offer. Even though, the CCI has to provide a prima facie opinion on the combination within 30 days, parties still cannot move ahead with the transaction till a conclusive order is passed or the time limit of 210 days lapses. Also, a company may have high value assets but might be undertaking a strategic acquisition to say, simply increase its shareholding. Even in this “relatively” straight forward transaction, the investment will have to be routed through the CCI against a very high fee. In some instances, the fee for approaching the CCI is close to US$ 50,000. So, I am of the opinion that the time and the money spent with the CCI will henceforth play a crucial role for companies to assess and plan their future M&A strategies.
Based on my experience with the CCI, the office of the DirectorGeneral is efficient and thorough. Like I stated above, the statutory framework of Sections 5 and 6 has loopholes. Once this is remedied, the implementation by the CCI will hopefully not be a major cause of concern. India is still at a nascent stage with respect to its competition laws and in the past one year, the CCI has done well in investigation and passing orders for anti-competitive agreements and abuse of dominant position. Plus, the CCI has increased the value of assets and turnover under Section 5 by 50% and has given exemptions to (i) “groups” exercising less than 50% voting rights in other enterprises and (ii) enterprises whose control, shares, voting rights or assets being acquired has assets of less than INR 2500 million or turnover less than INR 7500 million, from the ambit of Section 5 for a period of five years. In light of this, I would be comfortable with the implementation in one stage itself once present concerns with the draft combination regulations are addressed. Needless to say, the effectiveness of the provision and its implementation can only be better assessed when it comes into force.
There can be situations when service oriented companies that do not have large assets/turnover escape the threshold limits provided under Section 5 but still have a substantial market share to impact “competition.” So, any merger or acquisition involving them can potentially have an anti-competitive effect and may only be regulated post the completion of the combination. Clearly, only an assets/turnover criterion is insufficient for promoting a “competitive market”. But, like most other Indian legislations, the text of the law will be improved in due course with practical experiences of the CCI and precedents set by courts.
Undoubtedly, the notification of the merger control provisions has ushered in a new era for M&A control in India. Though, it is still early to ascertain how effective or efficient this new regime would be, it is certainly a long-awaited move. Ever since its inception, CCI has been proactively carrying out the task of “competition advocacy”. However, now it faces a tough task ahead. Let us take a quick look at some of the challenges facing the CCI.
“The pre-notification requirement will very obviously lead to bulk of notification applications being filed with the CCI. Is the CCI well-equipped to handle and dispose of such applications efficiently?”
First and foremost, the pre-notification requirement will very obviously lead to bulk of notification applications being filed with the CCI. Is the CCI well-equipped to handle and dispose of such applications efficiently? If the answer is in the negative, the delay could have a cascading effect and impinge on the ability of the parties to ‘close the deal’ on time. Secondly and no less importantly, the expression “any agreement or other document for effecting the combination” is ambiguous. Since the common perception is that, a MOU or even a Letter of Intent will qualify as an ‘agreement’, it may trigger merger filings thereby adding up the costs at a stage when it is uncertain whether the transaction will fructify!
The Competition Act now provides for a waiting period for review of 180 days which can stretch upto 210 days, during which the merger cannot be fructified and within which the CCI is required to pass its order. Industry watchers say that this waiting period is longer than that established in most jurisdictions and may prove burdensome since for any M&A transaction timing is of the essence! This period is also applicable in case of crossborder transactions outside India where one of the contracting parties has a substantial presence in India. Thus, this waiting period is mandatory for a foreign company with assets of more than USD 500 million that has a subsidiary/joint venture in India with a substantial investment (above USD 125 million) to notify the CCI before acquiring a company outside India. It is being argued and rightly so, that this requirement based on combined value only where there is no economic consequence in India is somewhat limiting as this would subject the transacting parties to the merger review thereby making them incur substantial costs attached to the notification process. Besides, this waiting period may even dissuade foreign investors from investing in India.
The impact of the notification of Sections 5 & 6 of the Competition Act will be wideranging and all big-ticket merger activity will need to factor in the merger control process into their transaction timelines. While we understand that the CCI is committed to approving most mergers within a 30-day period, there is certainly a possibility that some sensitive, high-value mergers will be investigated further and consequently companies will not only have to factor in the timelines, but will also need to consider whether their mergers or acquisitions could have a market-distorting effect at the time of deciding to merge.
The CCI is expected to clear most routine M&A deals within a short time period of 30 days and it is hoped that the CCI will only require further investigation into M&As where there is a strong likelihood that the transaction may have adverse effects on competitive conditions. In other words, one expects the CCI to play the role of a facilitator of M&A deals which do not have the potential to distort market conditions, and a regulator wherever the market could suffer as a result of a merger or an acquisition.
While the Draft Merger Regulations are a marked improvement over earlier drafts of the document, there are some areas which continue to be of concern. For instance, it is unclear why certain routine combinations should be subject to the notification requirement at all and why the CCI has prescribed a shorter Form I notification process for such routine mergers, instead of exempting them from the pre-merger notification process altogether. Another significant issue is that of timelines. While the Draft Regulations indicate that the CCI shall “endeavour” to come to a final decision within 180 days, the statutory time limit continues to remain 210 days and consequently the 180 day limit is largely aspirational.
The Draft CCI Regulations prescribe certain exhaustive forms for notifying the CCI. But, there is no clarity about how the information disclosed in these forms maybe classified as confidential. Once the information is disclosed, competitors can follow significant M&A transactions which are underway jeopardizing their successful closing. In addition to this, the fees payable are enormous as the notice has to be accompanied by a fee of USD 50,000, which may go upto USD 100,000 in certain cases. Further, once CCI issues a show-cause notice (if it is of a prima facie opinion that the combination is likely to cause an appreciable adverse effect on competition) a fee of USD 40,000 is to be filed along with the response to the notice. Consequently, concern has been raised about the filing fees and the need to revise the same.
The threshold of assets and turnover as the judging criterion for a combination to be covered under the Act may prove to be problematic in certain industries, particularly capital-intensive ones, where even an inconsequential merger may come within the purview of the Act. In other words, the threshold criterion could prove to be a stumbling block because once an enterprise/group grows to a size of the prescribed limits, then all combinations, big and small, will be covered by the Draft CCI Regulations.
“The threshold of assets and turnover as the judging criterion for a combination to be covered under the Act may prove to be problematic in certain industries, particularly capital-intensive ones, where even an inconsequential merger may come within the purview of the Act.”
The coming into effect of the merger control provisions has significantly changed the legal environment of Indian M&A scenario. Indeed, much has been articulated about the potential negative impact on M&A activity in India. It is, therefore, only fair to examine and evaluate the practical challenges facing the merger control regime. The need of the hour is to prevent sluggish implementation and to ensure that the rising entrepreneurship of corporate India is not stifled. Indian corporates have been exceptionally active in the past few years, particularly in the year gone by, as far as the merger activity is concerned, which in turn has been the driver of the country’s economic growth. Quite obviously, maintaining this momentum will call for striking the right balance between proper regulation and over-regulation. Above all, it needs to be recognized by India Inc. that combinations are “economic enhancing trade practices” and so they have to be encouraged so as to ensure benefit to the ultimate consumers. Of course, there is a downside too when a combination turns into dominance and is later abused. Since abuse of dominance is prohibited, every acquiring entity will have to ensure that it is compliant with Competition Law even after the combination has fructified and that it remains so!
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