The Competition Act, 2002 came into force in a phased manner with the Competition Commission of India (CCI) being constituted in 2008, the provisions regulating anti-competitive agreements and abuse of dominance coming into effect on May 20, 2009 and the provisions relating to merger control, that is, Sections 5 and 6 of the Act and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”) coming into effect on June 1, 2011. Significant amendments were brought about to the Combination Regulations in February, partly in response to concerns of the industry.
Sections 5 and 6 are the operative provisions of the Act dealing with merger control, whereby (a) any acquisition of control, shares, voting rights, or assets; (b) any acquisition of control over a competing enterprise; and (c) mergers or amalgamations (“combinations”) which cross certain prescribed thresholds and do not qualify for an exemption need prior approval from the CCI. The Ministry of Corporate Affairs has provided for an exemption to acquisitions where the target does not have assets exceeding Rs 250 crore or turnover exceeding Rs 750 crore in India (“target exemption”).
The February amendments have introduced Regulation 5(9) to the Combination Regulations, which effectively dilutes the target exemption and provides that if as part of a series of steps in a proposed transaction, particular assets of an enterprise are moved to another enterprise (that is, a separate legal entity), which is then acquired by a third party, the entire assets and turnover of the selling enterprise (from which these assets and turnover were hived off) will also be considered when calculating thresholds for the purposes of Section 5 of the Act.
This principle of aggregation will now apply to any transferor company’s assets and turnover in entirety (even if only a single asset were to be transferred to a special purpose vehicle or SPV into which an investment is being made) and the assets and turnover of the SPV, both of which would constitute the target enterprise.
ADVERSE IMPACT
A combination which results in an appreciable adverse effect on competition (AAEC) in the relevant market in India is void.
Some of the factors the CCI has considered in its orders to determine AAEC include the market shares of parties, the structure, characteristics, maturity and likelihood of growth of the relevant market, the number of competitors and level of concentration in the relevant market, barriers to entry (including regulatory barriers) and the regulation of the sector.
The CCI is required to pass a prima facie order within 30 days of having received a notification and can either grant approval, allowing parties to consummate the transaction, or that the proposed combination is likely to cause an AAEC in the relevant market in India, at which point a “phase II” investigation will be initiated.
Overall, the CCI can take a maximum of 210 days to approve a combination, failing which the combination is deemed to be approved. The CCI has approved 51 notifications filed in the first year of merger control within the statutory time period.
GREY AREAS
There are several interpretational issues under the Act, such as ambiguity relating to the treatment of joint ventures under Section 5 and the insignificant local nexus exemption which need to be addressed. The CCI provides for informal, verbal, non-binding pre-merger consultation.
Even though the Act is largely patterned on the position under competition law in the European Union (EU), the CCI has in some instances adopted a contrary position. For instance, in relation to acquisitions by way of slump sales, the CCI has taken the view in three merger control reviews that the vendor enterprise (and not the business division being sold) would be treated as the target entity under the Act.
The recent amendments introduced a partial exemption to intra-group mergers and amalgamations between a parent company and a subsidiary wholly owned by the same group or between subsidiaries wholly owned by the same group. Previously, the merger control regime exempted only acquisitions between enterprises belonging to the same group, as a result of which 32 of the 51 merger notifications (to date) have been intra-group re-organisations through mergers. Intra-group re-organisations (regardless of mode) do not change the competitive structure of the market and should therefore, be wholly exempt from the purview of merger control.
One key concept that remains open to interpretation pending substantive guidance from the CCI is that of “control”. While the definition of control under the Act is circular and inclusive, some orders passed by the CCI offer clarity on limited aspects.
For instance, the CCI has noted that the existence of common directors and shareholders between two companies proposing to merge indicates common control.
Further, the CCI has also held that a person or enterprise not holding more than 50 per cent equity shares in a company but holding management rights would be considered to be in “control” of such company, implying that negative control also amounts to control for the purposes of the Act. The CCI can also impose penalties on parties who fail to notify or make a belated filing.
As of date, the CCI has initiated penalty proceedings in eight of nine belated filings, but did not impose penalties. Given that the first year has been completed, it is very likely that the CCI will tighten the reins in terms of scrutiny of merger notifications.
Despite initial hiccups, the CCI has risen to the challenge as the newest regulator on the block and has thus far enforced merger control in an efficient manner, allaying industry concerns that merger control would result in transaction delays and adversely impact investment in India.
The true test will arise when the CCI has to deal with a Form II notification (long form filing), which is the most complex merger form in the world and requires advanced economic analysis. The development of India’s merger control regime will also depend on the CCI and the outcome of its tussle with various sectoral regulators.
(The author is with Amarchand Mangaldass, Chennai.)