Introduction

Merger control is considered to be one of the most important pillars of competition law and policy worldwide. The main purpose behind merger control is to ensure that mergers do not create adverse conditions for competition in the relevant market. For a long period of time, this important aspect of competition law was not made effective in India. However, after much debate and deliberation, the merger control provisions under the (Indian) Competition Act, 2002 (“Act”) and the allied Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (the “Combination Regulations”) which set out the scheme for implementing the merger control provisions under the Act, came into effect from June 1, 2011. The merger control regime has been in force for nine months. The CCI, on 23 February 2012, has amended the Combination Regulations, by way of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012 (the “Amendment Regulations”) to inter alia make them consistent with the SEBI Takeover Regulations amongst other key changes which include substantial increase in filing fees, limited exemption to intra group re-organizations by way of merger and amalgamations and changes to the notification forms.

Merger Control Provisions Under the Act

Section 5 and 6 of the Act are the operative provisions dealing with merger control in India. Section 5 prescribes worldwide and Indian assets and turnover thresholds for transactions involving the acquisition of an “enterprise” or mergers and amalgamations of an enterprise that will be subject to merger control (i.e., require prior approval of the Competition Commission of India (the “CCI”)). An “enterprise” under the Act means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any body corporate, either directly or through one or more units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space. Section 6 prohibits combinations that cause or are likely to cause an appreciable adverse effect on competition (“AAEC”) within the relevant market in India and treats such combinations as void.

Consequently, any acquisitions of shares, voting rights, control, assets, merger or amalgamation meeting the specified asset/turnover thresholds (“Combination”) require prior notification to, and approval from, the CCI. Section 5 enumerates three types of transactions necessitating prior approval from the CCI:

• acquisition of control, shares, voting rights or assets of one or more enterprises by one or more persons (Section 5(a));

• acquisition of control by a person over an enterprise when such person already hasdirect or indirect control over an enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service (Section 5(b)); and

• merger or amalgamation (Section 5(c)).

The Ministry of Corporate Affairs has, on March 4, 2011, also published a series of notifications, increasing the asset/turnover thresholds by 50% (on the basis of wholesale price index) and providing for an exemption to certain categories of enterprises from the scope of the merger control provisions (“Notifications”).

Exempted Transactions

The Notifications exempt Combinations from the mandatory filing requirement for a period of 5 years where the target enterprise, including its divisions, units and subsidiaries has:

• either assets not exceeding Rs. 250 crores (USD 50 million approximately*) in India; or

• turnover not exceeding Rs. 750 crores(USD 150 million approximately*) in India; (“Target Exemption”).

* The Combination Regulations provide that the exchange rate to be used to determine whether thresholds are met is the average of the spot rate published by the Reserve Bank of India for the six months prior to the trigger event. However, for ease of reference, the exchange rate used throughout this article is 1 USD = Rs. 50.

The intent behind the Target Exemption is to provide a ‘local nexus’ requirement thereby excluding global transactions having ‘insignificant’ local nexus and impact on the relevant market in India. Interestingly, the Combination Regulations separately provide an exemption for Combinations occurring outside India having an insignificant local nexus and impact on the relevant market in India (as discussed below). However, the term ‘insignificant’ remains undefined thus leaving scope for interpretation.

The Notifications also exempt, for a period of 5 years, enterprises exercising less than 50% of voting rights in the other enterprise to be treated as part of the same ‘Group’. Consequently, the asset and turnover figures of an enterprise in which the other enterprise holds less than 50% voting rights will not be aggregated for the purposes of determining the notifiability of a proposed Combination under the “Group test” (as discussed below).

The Combination Regulations also list out (under Schedule I) various Combinations which are not “ordinarily” likely to cause AAEC in India and would not “normally” require a notification to the CCI:

• Direct or indirect acquisitions, which do not entitle the acquirer to hold 25% or more of shares or voting rights of a target company (including through shareholders’ agreements or articles of association), solely for investment purposes or in the ordinary course of business, not leading to acquisition of control;

• Acquisitions above 50%: Acquisitions where the acquirer already holds 50% or more of the shares or voting rights in the target, except in cases where the transaction results in transfer from joint to sole control. In the case of the proposed acquisition of UTV Software Communications Limited by Walt Disney Company (Southeast Asia) Private Limited (“Walt Disney”) (C-2011/08/02), resulting in transfer of joint control to sole control, the CCI granted its approval on the basis that the relevant market was wide and fragmented with low entry and exit barriers and that the parties to the transaction operated in different segments, i.e., there were no horizontal or vertical overlaps;

• Asset acquisitions: Acquisition of assets, not directly related to the business of the acquirer or made solely as an investment, or in the ordinary course of business, not leading to control of the target, except where the assets represent substantial business operations in a particular location or for a particular product/service of the target, irrespective of whether such assets are organized as a separate legal entity or not. As of December 2011, the CCI has cleared three merger filings in relation to an acquisition of assets on a going concern basis by another enterprise by way of a slump sale. (See G&K/Wockhardt (C-2011/08/03), AICA Laminates/BBTCL (C-2011/09/04), NHK Automotive/BBTCL (C-2011/10/05) ) ;

• Amended/renewed tender offers: An amended or renewed tender offer, where notice has been filed by the party making such an offer;

• Routine business acquisitions: Acquisition of stock-in-trade, raw materials, stores and spares in the ordinary course of business;

• Bonus/rights issue/stock-split: Acquisition of shares or voting rights pursuant to bonus issue, stock splits, consolidation of face value of shares, subscription to rights issue (beyond the extent of entitlement) or buy-backs, not leading to acquisition of control;

• Underwriting/stock-broking: Acquisition of shares by a securities underwriter or registered stock broker (on behalf of its clients), in the ordinary course of business;

• Intra-group acquisitions: Acquisition of control, shares, voting rights or assets by a person or enterprise of another person or enterprise within the same group. In the Alstom Holdings/Alstom Projects case (C-2011/10/06.), Alstom Holdings (India) Limited proposed to merge into Alstom Projects India Limited pursuant to a scheme of amalgamation under the Companies Act, 1956. The CCI approved the proposed Combination by taking into account the fact that both parties were engaged in completely different business activities, and also that there would be no change in the management of the companies, as the parties to the proposed Combination were part of the same group. The CCI has further approved fourteen intra-group reorganizations by way of merger or amalgamation. However, the Amendment Regulations have amended the Combination Regulations to provide a partial exemption to intra-group reorganizations by way of mergers or amalgamations of a parent and its subsidiary wholly-owned within the same group or subsidiaries wholly owned by enterprises within the same group;;

• Current assets: Acquisition of current assets, in the ordinary course of business; and

• Purely offshore: Combinations taking place entirely outside India with “insignificant” local nexus and effect on markets in India.

The usage of term(s) “ordinarily” and “normally” leads to uncertainty leaving the onus on parties to determine whether a transaction is “extra-ordinary” and thus likely to cause an AAEC in India. Such ambiguous wording allows the parties two choices: (a) notify all transaction(s) which to the best of their judgment is likely to cause an AAEC in India; or (b) to take a gamble of not notifying the transaction, in which case the CCI may use the “look back” provision under Section 20(1) of the Act. This provision provides the power to the CCI to inquire, within one year of the Combination taking effect, whether the Combination has caused or is likely to cause an AAEC in India. However, the erstwhile Chairman of the CCI has publicly stated that Schedule I would operate as exemptions and parties can derive some comfort from this statement.

Notification Thresholds

The merger control provisions under the Act, prescribe the following thresholds, for notification of a transaction:

• Target Test – Any enterprise, whose control, shares, voting rights or assets are being acquired, has either assets of the value of not more than Rs. 250 crores (approximately USD 50 million) in India or turnover of not more than Rs. 750 crores (approximately USD 150 million) in India, is exempt from the purview of the merger control provisions under the Act, for a period of five years (“Target Exemption”).

• Parties Test – In order to determine as to whether the thresholds (provided in the table below) are breached, in case of an acquisition, the combined value of the acquirer (on a standalone basis) and target enterprise (including its subsidiaries, units, or divisions) is to be considered. However, in case of a merger or amalgamation, the asset/turnover figures for the enterprise remaining after the merger or enterprise created pursuant to an amalgamation has to be taken into consideration. Further, if as a part of a series of steps in a proposed transaction, particular assets of an enterprise (i.e., a business or a division) are moved to another separate enterprise 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) would be attributed to the second separate enterprise when calculating the assets and turnover for the purpose of Section 5.
• Group Test: The Group test is applicable to the group to which the target enterprise would belong post the acquisition or merger or amalgamation.

The thresholds prescribed under Section 5 of the Act are provided below:

In India	Applicability	Assets	Turnover
	For individual parties (i.e. acquirer and target) (Combined)	Rs. 1,500 crores (USD 300 million)*	Rs. 4,500 crores (USD 900 million)*
	For ‘Group’ (to which target belongs post- acquisition)	Rs. 6,000 crores (USD 1.2 billion)*	Rs. 18,000 crores (USD 3.6 billion)*

 

In India and Outside India	Applicability	Assets		Turnover
		Total	Minimum in India	Total	Minimum in India
	For individual parties (i.e. acquirer and target) (Combined)	USD 750 million	Rs. 750 crores (USD 150 million)*	USD 2.25 billion	Rs. 2,250 crores (USD 450 million)*
	For ‘Group’ (to which target belongs post- acquisition)	USD 3 billion	Rs. 750 crores (USD 150 million)*	USD 9 billion	Rs. 2,250 crores (USD 450 million)*

* Assuming the exchange rate of 1 USD = Rs. 50.

Determination of the relevant market

From a merger control perspective, determination of the relevant market is critical to determine the effect of the proposed Combination. Under the Act, the term ‘relevant market’ includes both the ‘relevant product market’ (i.e., market comprising all those products/services which are regarded as interchangeable or substitutable) and the ‘relevant geographic market’ (i.e., market comprising the area in which the conditions of competition for demand or supply are distinctly homogenous and distinguishable). After the determination of the relevant market, the next step is to consider whether the proposed Combination causes or is likely to cause an AAEC in India or not. The factors for assessing an AAEC set out in Section 19(3) of the Act are as follows:

• actual and potential level of competition through imports in the market;

• extent of barriers to entry into the market;

• level of Combination in the market;

• degree of countervailing power in the market;

• likelihood that the Combination would result in the parties to the Combination being able to significantly and sustainably increase prices or profit margins;

• extent of effective competition likely to sustain in a market;

• extent to which substitutes are available or are likely to be available in the market;

• market share, in the relevant in market, of the persons or enterprise in a Combination, individually and as a Combination;

• likelihood that the Combination would result in the removal of a vigorous and effective competitor or competitors in the market;

• nature and extent of vertical integration in the market;

• possibility of a failing business;

• nature and extent of innovation;

• relative advantage, by way of the contribution to the economic development, by any Combination having or likely to have an AAEC; and

• whether the benefits of the Combination outweigh the adverse impact of the Combination, if any.

Forms

The Combination Regulations provide for three types of forms for the purpose of notification to the CCI:

• Form I: All Combinations are “ordinarily” notifiable in Form I (short form), which is the default option. Further, the Amendment Regulations have increased the filing fee from Rs. 50,000 (approximately USD 1000)* to Rs. 1,000,000 (approximately USD 20,000).*
• * Assuming the exchange rate of 1 USD = Rs. 50.
• Form II: Parties to the Combination also have the option of filing Form II, which is a long form. While Form I is a very simple form and requires basic details of the parties to the Combination and the transaction, Form II is fairly extensive and requires minute details regarding the proposed Combination, including details such as analysis, reports, surveys, ownership details of the parties and groups, details of all the products of the parties, end use, etc. Form II is to be “preferably” filed in the following instances: (i) where the parties to the Combination are competitors and have a combined market share in the relevant market of more than 15%; and (ii) where the parties to the Combination share a vertical relationship, and the combined or individual market share of the parties in either the upstream or the downstream market is greater than 25%. In cases where the parties have filed Form I and the CCI is of the opinion that Form II should have been filed, it can direct the parties to re-file the notice in Form II. Further, the time taken by the parties to the Combination in having incorrectly filed Form I will not be taken into account. Therefore, it becomes significant for the parties (from the point of view of time and acquisition financing cost) to accurately determine the appropriate form in which the filing has to be made with the CCI. The filing fee for a Form II filing has increased from Rs. 1,000,000 (approximately USD 20,000) to Rs. 4,000,000 (approximately USD 40,000), by way of the Amendment Regulations.

• Form III: This is a post-facto intimation form which is required to be filed in case of share subscription or financing facility or any acquisition by public financial institutions, foreign institutional investors, banks and venture capital funds, pursuant to any covenant of a loan agreement or investment agreement.

* Assuming the exchange rate of 1 USD = Rs. 50.

Trigger Events for notification of the Combination

Parties are required to file a notification with the CCI in either Form I or Form II within 30 days of:

• approval of the proposed merger or amalgamation by the boards of directors of the enterprises concerned;

• execution of any binding agreement or “other document” for acquisition or acquiring of control. The term “other document” refers to (a) any binding document, by whatever name called, conveying an agreement/decision to acquire control, shares, voting rights or assets; and (b) for hostile acquisitions, any document executed by the acquirer conveying a decision to acquire.

A copy of such documents or board approval, as the case may be, is now required to be submitted as a part of a Form filing. In case the documents have not been executed but the intention to acquire is communicated to the Central Government/State Government or any statutory authority, the date of such communication will be the date of execution of the other document. Under Section 20(1) of the Act, the CCI has the power to initiate a suo moto inquiry into a Combination which was not notified to it, for up to one year from the date the Combination has taken effect.

Timelines

• The Act provides for a 210 day period for the CCI to reach a final decision, failing which, the transaction is deemed to be approved. Given the mandatory suspensory regime, no transaction in which the merger filing has been made can be completed before receiving approval from the CCI.

• However, the CCI is required to form a prima facie opinion on whether a Combination is likely to cause an AAEC, within the relevant market in India, within a period of 30 days from receipt of the notification. The CCI gets an additional period of 15 days in case the parties to a Combination propose a modification before the CCI forms a prima facie opinion in relation to the proposed Combination.

• The CCI can ‘stop the clock’ for defects or until such time as any information requested from the parties remains outstanding. The timelines for the review process are therefore not absolute.

• In case the CCI forms a prima facie opinion that a Combination is likely to cause an AAEC, a more detailed investigation will be conducted. Thus, the merger control process can be viewed as a two phase process:

• Phase 1 (Prima Facie Opinion) – In the Phase 1 period, the CCI can take upto 30 calendar days to form a prima facie opinion on whether a Combination is likely to cause an AAEC, or subject it to further investigation (45 calendar days, if modifications are offered by the parties); and

• Phase 2 – In Phase 2, clearance may take a further 180 calendar days where a detailed investigation will be carried out by the CCI in those transactions where the CCI in its prima facie opinion believes that an AAEC in India is likely to be caused.

Extraterritoriality

Section 32 of the Act empowers the CCI to initiate inquiry into a Combination taking place outside India if such Combination has or is likely to cause an AAEC in India and to pass such order as it may deem fit. However, the Combination Regulations provide for a local nexus and effects test on the relevant market in India.

Penalties

• The Act provides for severe penalties on parties for any non-compliance of its provisions. In case a person or enterprise fails to notify any Combination, the CCI has the power to impose a penalty which may extend up to 1% of the total turnover or assets, whichever is higher, of such Combination. In addition, where a Combination has or is likely to have an AAEC in India, the Combination (and presumably all acts in furtherance of the transaction) is void as a matter of Indian law.

• Additionally, any non-compliance with the orders of the CCI can attract a monetary penalty up to Rs. 25 crores (approximately USD 5 million)* or imprisonment of up to three years or both. The Act also imposes personal liability on the persons in-charge and responsible for the conduct of the company, for contravention of any of the provisions of the Act.

* Assuming the exchange rate of 1 USD = Rs. 50.

Recent Trends

The recent trends emerging from the various Combination orders passed by the CCI are as follows:

• No merger filing trigger on ‘option to acquire’

In the Reliance/Bharti AXA        case (C-2011/07/01), the proposed agreement for acquisition by Reliance Industries Limited (“RIL”) and Reliance Industrial Infrastructure Limited (“RIIL”) of a 74% stake in each of the joint venture companies between the Bharti entities and AXA contemplated an ‘option’ by which AXA would acquire up to 24% shareholding in the two joint ventures companies from RIL and RIIL as and when FDI Regulations permit such holding by AXA. The CCI order in relation to this merger approval suggests that in case of ‘option to acquire’, the determination from a competition perspective can only be made at the point when the transaction happens, for e.g. at the time the option is exercised and the “acquisition” takes place. Therefore, filing should, and can, be made only at the conversion stage (not at the time of grant). However, in this case, AXA’s option to acquire further shares was not an integral part of RIL’s and RIIL’s acquisition. Therefore, in a clearly inter-connected transaction the position may be different.

• Joint to sole control is notifiable

In the Walt Disney/UTV case, it was stated that the acquisition of shares by an enterprise holding 50% or more shares in another enterprise resulting in transfer from joint control to sole control is notifiable under Section 6(2) of the Act and is excluded from exemption under Regulation 4, read with Item 2 of Schedule I of the Combination Regulations. This was also the case in the Tata Power Company/Tata BP Solar case (C-2012/01/26).

• Intra-group reorganization by way of merger or amalgamation

An intra-group reorganization does not affect the competitive landscape and should not come under the purview of competition law. Also, the Combination Regulations exempt an intra-group reorganization by way of an acquisition. The availability of Intra-group exemption in case of internal re-organization by way of mergers and amalgamations was always a debatable topic considering the absence of the express wordings under Item 8 of Schedule I of the Combination Regulations in this regard. However, this debate was put to rest by the CCI in the Alstom Holdings/Alstom Projects case where an internal reorganization by way of a scheme of amalgamation was cleared by the CCI on merits. As a result of this ruling, 14 other intra-group reorganizations were notified to the CCI and cleared, to date, even though there is no distinction between an acquisition, merger or amalgamation as a mode of corporate reorganization. However, the Amendment Regulations have now brought in a partial exemption for intra-group reorganizations by way of merger or amalgamation.

• Slump sale – the total asset/turnover of the transferor to be considered

The CCI, in three merger control reviews, has indicated that in the case of slump sales, or the sale of business divisions (i.e., less than an “enterprise” under the Act) the entire asset and turnover of the vendor enterprise has to be taken into consideration for determining the asset/turnover thresholds. Therefore, in such cases, the parties to the transaction cannot apply the thresholds for the Target Exemption or the Parties test to the business division being acquired, but to the vendor enterprise in its entirety. (i.e. G&K Baby Care Private Limited/Wockhardt Limited (C-2011/08/03), AICA Laminates /BBTCL (C-2011/09/04) and NHK Automotive/BBTCL, (C-2011/10/05).)

Grey Areas

As competition law in India is at a nascent stage, there are several grey areas under the Act and the Combination Regulations, with respect to merger control:

• Treatment of Joint Ventures under Section 5

It is important to note that the formation of a joint venture is not specifically covered by Section 5 of the Act. The merger control provisions of the Act only cover acquisitions, mergers and amalgamations. The Act also does not make any distinction between “full function” and “non-full function” joint ventures. Further, there is no distinction as regards the treatment of ‘greenfield’ joint ventures and ‘brownfield’ joint ventures.

• Insignificant local nexus exemption

Item 10 of Schedule I of the Combination Regulations exempts the notification of a combination taking place entirely outside India with insignificant local nexus and effect on markets in India. However, the word ‘insignificant local nexus’ has not been defined, leaving the parties with no guidance as regards the criteria to be applied determine the ‘insignificance’ of the Indian nexus of any combination taking place outside India.

Conclusion

Since June 1, 2011, the CCI has approved twenty eight merger filings at a swift pace, which has given Indian industry the much needed comfort that the CCI merger clearance process will not be unnecessarily long drawn. However, these are early days and the next few months are likely to see several merger filings which would be the true test of the CCI’s responsiveness. Also, the notifying parties are presently facing several interpretational issues from a merger filing standpoint due to ambiguities in the Act and the Combination Regulations. It is expected that the grey areas under the Act and the Combination Regulations in relation to merger control provisions would be addressed either through express clarifications or through the jurisprudence emerging from the orders of the CCI. Irrespective of that, merger control is here to stay in India and will have significant implications on inorganic growth through M&As, particularly India-centric M&A transactions, both within India and offshore.

Ashish Jejurkar is a Partner and Nisha Kaur Uberoi is a Principal Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co. Ashish specializes in M&A, General Corporate and Securities law and Nisha specializes in Competition Law. They can be contacted at ashish.jejurkar@amarchand.com and nishakaur.uberoi@amarchand.com.

 

 

By Ashish Jejurkar and Nisha Kaur Uberoi