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March 8, 2011
Acquirers Beware: Indian Merger Control
Regulations Notified!
In the backdrop of
corporate India gaining momentum and mergers, acquisitions and corporate
restructuring being the order of the day, the Government of India has finally
decided that time is ripe to give full effect to the merger control
provisions. On March 4, 2011, the Government of India, Ministry of Corporate
Affairs notified the much debated and dreaded provisions of the Competition
Act, 2002 (“Act”) relating to “combinations” namely Sections 5 and 6.
Although notified as of March 4, 2011, these provisions are to take effect
from June 1, 2011 (“Effective Date”) giving all those subject to the
same, a period of 3 months to tie loose ends and complete unfinished
transactions before getting entangled in the web of the Act.
In terms of Section 5
of the Act, a ‘combination’ includes:
(1) the acquisition of
control, shares or voting rights or assets by a person;
(2) the acquisition of
control of an enterprise where the acquirer already has direct or indirect
control of another engaged in identical business; and
(3) a merger or
amalgamation between or among enterprises, that cross the financial thresholds
set out in Section 5.
Section 6 makes void
any combination which causes or is likely to cause an appreciable adverse
effect (“AAE”) on competition within India. In furtherance of this
determination, Section 6 of the Act requires every acquirer to notify the
Competition Commission of India (“CCI”) of a combination and seek its
approval prior to effectuating the same in the manner set out therein. The term ‘AAE’ has not been
defined under the Act. However, Section 20(4) of the Act states that
while determining whether a combination has an AAE, CCI shall have due regard
to certain factors which are
merely subjective and do not provide clear determining factors as to what
would constitute an AAE.
The procedures to be
followed pursuant to Section 6 of the Act are the subject matter of a
separate draft regulations issued by the CCI on March 2, 2011 (“New Draft
Regulations”)1. The CCI had, in 2008,
proposed draft combination regulations which were however never brought into
force (“2008 Regulations”).
In this hotline, we
have summarized the key amendments proposed in the New Draft Regulations and
analysed the implications arising out of the notification of Sections 5 and 6
of the Act on potential M&A transactions.
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S. No
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Proposed Amendments
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Effect
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1.
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Provisions relating
to ‘Combinations’ to apply prospectively:
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The New Draft
Regulations provide that the combinations which have ‘taken effect’
prior to the combination provisions being effective in India will be exempt from the filing requirement.
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The proposed provision creates ambiguity as it does not explicitly state when exactly a combination ‘takes effect’ and this is therefore subject to interpretation. Of importance are transactions which are subject to completion by tranches – where one tranche has been closed, but the second tranche is due completion post the Effective Date and whether such transactions will also need to comply with the requirement of the New Draft Regulations.
More importantly is
the catch all provision of Section 20 of the Act which grants the CCI a
retrospective power to “look back” into transactions that have taken
effect one year prior thereto. Therefore, despite the Effective Date,
there is an ambiguity as to whether CCI will still have the power to
look into transaction completed prior to the Effective Date in pursuance
of Section 20 of the Act.
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2.
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Pre- merger
consultation:
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Any enterprise
which proposes to enter into a combination may request in writing to the
designated authority, for an informal and verbal consultation about
filing, under the New Draft Regulations, with the officials of the CCI.
It should however
be noted that such informal and verbal consultation with the CCI will not
be binding on the CCI.
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The introduction of
pre merger consultation provisions on the line of advance ruling procedure
is a welcome move as parties to the combination can freely seek
clarifications from the CCI before triggering the filing requirements.
This will further help parties in presetting the statutory time period and
avoiding any forfeiture of filing fee.
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3.
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Waiting period:
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As per the
provisions of the Act, CCI shall pass a final order or issue a direction within
210 days from the date of filing or else the combination shall be
deemed to have been approved.
However, as per the
provisions of the New Draft Regulations, CCI shall endeavour to pass a
final order or issue a direction within 180 days from the date of
filing.
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Whilst the New Draft
Regulations indicate that CCI shall endeavor to come to a final decision
within 180 days, the statutory time limit i.e. waiting period continues to
remain 210 days and consequently the 180 day time period is optical in
nature and not binding on the CCI.
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4.
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Prima facie opinion:
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The New Draft
Regulations mandate CCI to form a prima facie opinion on whether a
combination has caused or is likely to cause an AAE on competition within
the relevant market in India, within 30 days of filing.
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The 30 day time
period for forming a prima facie opinion by CCI is likely to speed
up the procedure for obtaining approval in case of simple / routine
transactions doing away with the need to wait for the outer limit of 210
days to expire.
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5.
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Filing requirements:
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The 2008 Regulations
prescribed categories of transactions not likely to have an AAE on
competition. On a plain reading of Section 6 of the Act, it was unclear as
to whether a combination that did not result in an AAE, had to be notified
to the CCI.
The New Draft
Regulations do not differentiate between transactions likely to have an AAE
and those that do not. Instead separate forms (Form I) have been prescribed
for those transactions that were in 2008 Regulations deemed not to have an
AAE. For other transactions, Form II has been prescribed.
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Although it could be
deduced that transactions forming the subject matter of Form I would be
looked at with less scrutiny, there is no clarity as to whether such
transactions will be considered on a fast track basis and processed
quickly.
Further, the
requirement of filing for possibly each and every transaction may hinder or
impede fresh investment or consolidation activity in an industry.
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A separate form
needs to be filed without fee where the acquirer is a public
financial institution, foreign institutional investor, bank or venture capital
fund.
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In continuation with
the spirit of the Act, public financial institution, foreign institutional
investor, bank or venture capital fund will now be required to make
reporting under prescribed forms and are exempt from seeking CCI approval.
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Under the New Draft
Regulations, it is obligation of the acquirer to make filing/ provide
information to CCI.
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The obligation of
the acquirer to provide detailed information about the target to CCI, may
at times lead to disagreement between the acquirer and the sellers about
the quantum of confidential information that can be shared with CCI.
Further, it is
important to note that under the forms the acquirer is required to state
with reasons if the proposed combination is not likely to cause an AAE in India thereby shifting the onus of proof on the acquirer.
Also, it needs to be
noted that estimates under HHI (Herfindahl-Hirschman Index), an
internationally and commonly accepted measure of market concentration also
needs to be provided alongwith the filings.
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6.
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Publication of
details of combination:
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Where the CCI is of
the prima facie opinion that the combination has caused or is likely to
cause AAE on competition within the relevant markets in India, it shall
direct the parties to publish the details of the combination within 10
working days in all India editions of four leading daily newspaper
including at least two business newspapers.
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CCI has been given
discretionary powers, should it form a prima facie opinion that a
combination causes or is likely to cause an AAE on competition, making the
information relating to the combination public. Although, it may be said
that the CCI may, through this publication, gain information about its
adverse effects, if any, from the market, the implications of such a publication
to the target, seller and the acquirer could be dire since the competitors
of the acquirer may file frivolous complaints with CCI. It may be noted
that this publication will have to be made without the parties being
offered an opportunity of being heard as required under Section 29 of the
Act thereby diluting this protection.
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7.
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Modification:
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During the scrutiny
of the notice filed by the parties to the combination, if the CCI is of the
opinion that certain modifications need to be carried out in the
combination and parties accept such modification, it may appoint
independent agencies to oversee the modification and file a report.
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Parties to a
combination may have to report to a third party independent agency. This
could delay the execution of the combination transaction. Further, no
parameters have been laid down as to how the independent agency may utilize
its supervisory powers.
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8.
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Filing Fees:
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Under the New Draft
Regulations, the filing fee to be paid alongwith the forms range between INR
1 million (approx. USD 22,222) to INR 4 million (approx. USD 88,888).
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The filing fee
prescribed under the New Draft Regulations seems exorbitant considering
that almost all combination will be subject to the filing requirement.
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9.
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Confidentiality:
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The New Draft
Regulations also entitle the parties to the combination to seek
confidentiality of the information filed.
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As per the filing
requirements, the information filed with the CCI with the relevant forms
include diligence reports, surveys, details of shareholders etc. Although,
confidentiality may be claimed with respect to the sharing of information
with the public, there is no such restriction for the sharing of
information if required by other regulatory / sectoral authorities under
applicable law. Further, the CCI has also been given the powers to approach
other statutory authorities concerned with such a combination to seek
inputs therefrom in connection with the transaction which may further lead
to sharing of confidential information so filed.
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New prescribed thresholds:
The new prescribed
thresholds for the joint assets/turnover are presented in the
form of a table below:
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Type of Combination
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For Parties in India
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For Parties world-wide
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For the Group* in India
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For the Group world-wide
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Acquisition, Dominant Position, Mergers and
Amalgamations
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Assets
INR 15 billion (approx USD 333 million) or Turnover INR
45 billion (approx USD 1 billion)
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Assets
USD 750 million or Turnover USD 2,250 million
AND
In India
Assets
INR 7.5 billion (USD approx 167 million) or Turnover
INR 22.5 billion (approx USD 500 million)
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Assets
INR 60 billion (approx USD 1.3 billion) or Turnover INR
180 billion (approx USD 4 billion)
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Assets
USD 3 billion or Turnover
USD 9 billion;
AND
In India
Assets
INR 7.5 billion (approx USD 167 million) or Turnover
INR 22.5 billion (approx USD 500 million)
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* The definition of the “group” had been
modified to increase the % shareholding from 26% to 50% for the purposes of
compliance with Section 5 of the Act.
Analysis:
Enterprise value – The triggers of the
Act relating to combinations are linked to the combined value of the
turnover/asset of the acquirer and the target and not the transaction value.
Vide its notification
on March 4, 2011 the Government of India has exempted the acquisitions of
small enterprises whose turnover is less than INR 7.5 billion (approx USD 167
million) or whose assets value is less than INR 2.5 billion (approx USD 56
million) from the definition of combination as defined under Section 5 of the
Act . However, it is still ambiguous as to whether these values are to
be computed on a standalone basis for the target or on a consolidated basis
for the target along with its subsidiaries.
Structuring a
transaction - Structuring of a merger or an acquisition involving Indian
assets would now have to be done more meticulously and the parties would now
have to contemplate the implications of various future scenarios. 210 days
being a long time for the deemed approval, by the time approval is granted,
it is possible that the whole dynamics of the transaction, be it pricing, or
commercials may change, affecting the viability of the transaction. Further,
even if the transaction is concluded, since the terms “acquirer” and
“acquisition” have not been defined, a subsequent acquisition through a
default mechanism such as the exercise of call options / put options /
enforcement of security etc. may again trigger the provisions of the Act.
Also, since the CCI has the right to call upon the diligence reports from the
acquirer, the acquirer may face lack of co-operation from the sellers in
sharing of confidential information about the target.
No provision for
seeking exemption – The current provisions relating to combinations under
the Act and the New Draft Regulations do not provide for seeking an exemption
or waiver from the applicability of the said provisions. It should be noted
that a ‘prima facie opinion’ may be formed by the CCI solely on the basis of
the information submitted by the acquirer at the time of filing the relevant forms
as no hearing at this stage is prescribed. Acquirers may therefore need to
weigh the pros and cons of sharing information with the CCI and the risk that
the company/acquirer may be subject to upon the regulator having access to
such information.
Conclusion:
The landscape of
domestic and cross border M&A activity in India will now see radical
changes with the proposed merger control provisions soon coming into effect.
Though proposed amendments such as pre merger consultation and so called
reduced time line are a welcome change for the investor community, the
inherent loop holes or lacunae in the proposed provisions continue to hound
the market players.
CCI now has the
herculean task of ensuring that the Indian merger control provisions do not
in any manner hamper the domestic and cross border M&A activity in India. The recent precedent of Chinese competition regulator being battered by the
international community for blocking Coca Cola’s takeover of leading Chinese
juice maker Huiyaun could act as a good example for the CCI on how to handle
big ticket M&A deals from a competition law perspective since the same
could make or mar its reputation as a competition regulator.
This leaves the
nascent regulator with a tough balancing act - on one hand to be regarded as
a serious upholder of competitive markets and on the other hand to ensure
that the proposed merger control provisions are conducive such that the
global acquirers continue to subscribe to India’s success story.
_____________________________
1 Draft
the Competition Commission of India (Procedure in regard to the transaction
of business relating to combination) issued on March 2, 2011
* For reference USD 1 = INR 45
- Team Competition Law
You can direct your queries or
comments to the to the above email address.
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