On January 19-21, the India Committee organized the ABA Section of International Law’s first event in India – “U.S. and India Key Legal Aspects of Cross Border Business” held at Mumbai’s gorgeous sea-facing Taj Lands End Hotel. Bringing together 178 participants, from India, USA as well as other Asian and European countries, the 2½ day event resulted in useful exchange of contacts for participants as well as sharing of legal and business insights into cross-border work between the US and India.

The conference opened with a gala dinner on Thursday, with opening remarks from Peter Haas, the U.S. Consul General in Mumbai, and Darius Khambatta, the Additional Solicitor General of the Government of India. The sessions over Friday and Saturday explored the legal and regulatory aspects, both of Indian investments into the U.S., as well as U.S. investments into India. Speakers shared their experiences on various key issues of cross-border investments, including taxation, immigration, franchise issues, intellectual property protection and dispute resolution. With uncanny timing, one of the most significant recent decisions for foreign investors in India, the Indian Supreme Court’s decision in the Vodaphone tax case came out during the lunch break on Friday, which made Vodaphone every panel’s favorite topic of discussion during the following sessions, as well as offline during Friday’s dinner. The positive outcome of the case and its implications on revitalizing the use of Mauritius and other offshore vehicles for transactions with India generated an additional layer of positive buzz to the goodwill created by the conference. (Indian tax authorities have since sought review of the decision before the Supreme Court, which is expected to be heard at the end of February.)

The organizers also pulled together pre-conference meetings with senior officials of the Securities Exchange Board of India (SEBI), the Bombay Stock Exchange and BNY Carnegie Mellon in Mumbai. The SEBI meeting was especially fruitful, with a refreshing exchange of information on matters of concern for Indian as well as US securities regulators, such as the parallel situations in India and US relating to consent decrees. NY District Judge Rakoff recently created waves by not accepting the U.S. Securities and Exchange Commission’s (SEC’s) settlement with Citibank where Citibank neither admitted nor denied the allegations. Similarly, SEBI is awaiting the decision in a Delhi High Court case filed to challenge the legal validity of consent orders. The SEBI officials expressed an interest in continuing interaction with U.S. legal professionals on such matters of mutual interest, and the India Committee is exploring ways and fora for this.

Richa Naujoks is an Associate in Nixon Peabody LLP’s Mergers & Acquisitions and Public Transactions teams. She can be contacted at rnaujoks@nixonpeabody.com.

 

 

By Richa Naujoks

India’s modern competition law, introduced by the Competition Act 2002 (the Competition Act), has had a long and often troubled period of gestation. Although the Competition Act was enacted by the Indian Parliament and published in 2003, it has been dormant over a number of years and seen a piecemeal implementation. Since 2005, India has had a dedicated competition regulator – the Competition Commission of India (“CCI”) – which began to build capacity even before its was vested with formal powers. It has been trying to make India’s markets more competitive by cracking down on restrictive practices in industries ranging from airlines, to films, financial services and real estate.

In May 2009, the legal provisions on anticompetitive agreements (section 3 of the Competition Act) and abuse of a dominant position (section 4 of the Competition Act) came into effect. With the implementation of mandatory merger control effective from 1 June 2011, India can claim to have joined the ranks of over 100 countries worldwide with modernised competition laws. The new package of laws significantly updates India’s existing competition law framework which was considered ‘lacking in teeth’. The Competition Act, largely modelled on EU law and influenced to some extent by similar legislation in the U.S., has to be assessed in terms of its adequacy for the specific challenges India faces as an expanding economy.

This article outlines the main developments to date and their impact on businesses in India and on operations in India now and in the near term. Rather than taking a static view of the law and practice, it seeks to identify areas where the law may be made more effective in the future.

Agreements and commercial practices

The Competition Act has brought about a sea change in the way competition law operates in India. Enterprises with operations in, or whose activities outside, have a nexus with India need to examine their existing and proposed commercial practices for compliance with the Competition Act.

The Competition Act regulates two main categories of commercial behaviour: agreements and abuse of market power.

Section 3 of the Competition Act prohibits two categories of agreements: horizontal agreements (between businesses at the same level in the supply chain such as two manufacturers); and vertical agreements (between businesses at different levels in the supply chain such as a manufacturer and retailer). The provisions are broadly analogous to the provisions on anticompetitive agreements under Article 101 of the Treaty on the Functioning of the European Union and section 1 of the Sherman Act in the U.S. The CCI has sufficiently wide jurisdiction to bring under its ambit agreements and arrangements taking place outside India, provided that they have an “appreciable adverse effect” (“AAE”) on competition in India.

There are some India-specific aspects to regulation of agreements. For example, horizontal arrangements relating to price, production, supply, or market sharing are presumed anticompetitive under the Competition Act. The scope to establish the legality of such arrangements would therefore appear limited. There are no general exemptions for defined categories of agreements that could be likened to the block exemptions that exist in the EU (essentially, group exemptions which automatically exempt certain categories of agreement falling within their terms). Such block exemptions assist companies to determine the legality of their agreements where certain conditions are met, including as to market share and the non-inclusion of certain hardcore restrictions such as resale price maintenance. Finally, there is only a very limited defence, i.e in the case of a joint venture improving efficiency – a concept which is yet untested.

Section 4 of the Competition Act prohibits companies with market power (a dominant position) from abusing that position. Market share is a starting point for determining dominance, but neither the Competition Act nor specific guidance from the CCI provides a ‘bright line’ market share test for determining when a company may be considered dominant for Indian competition law purposes. As in the EU, it is not the holding of a dominant position that is unlawful; only its abuse can be unlawful. Companies with a significant market position in India will therefore need to consider whether their commercial practices may be considered abusive. Examples of such abusive conduct include predatory (below cost) pricing, discriminatory pricing, denial or restriction of market access, and tying or bundling.

The CCI’s enforcement over the past two years indicates that it will not shy away from disallowing anticompetitive practices. In May 2011, the CCI found an infringement of section 3 of the Competition Act involving United Producers/Distributors Forum, The Association of Motion Pictures and TV Programme Producers. The three parties collectively comprise 27 film producing entities and were each fined 100,000 rupees (approximately USD 2,200/Euro 1,500) after the CCI found that they had unlawfully engaged in anticompetitive agreements to collectively stop distribution of films thereby, depriving consumers of choice as new films were not released.

The first case involving a fine imposed for abuse of dominance was against the National Stock Exchange of India (“NSE”), which was fined 5 per cent of average turnover, equating to 55.5 million rupees (approximately USD 1.2 million/Euro 836,000) for engaging in predatory pricing. The majority of members of the CCI considered that the zero pricing harmed competition and that NSE was leveraging its dominant position in other derivatives market segments to undercut competitors.

A second, and the most recent, case resulting in a fine for abuse of dominance represents the most substantial penalty to date, where the real estate company DLF Ltd was fined 7 per cent of average turnover, equating to 6.3 billion rupees (approximately USD 138 million/Euro 95 million). The CCI received a complaint from real estate association Belaire Owner’s Association (“BOA”) against DLF. DLF was to build a new apartment block for BOA in the outskirts of New Delhi. According to the agreement, the building was to have 19 floors and be completed in 36 months. BOA alleged that DLF changed the terms of the agreement by building 29 floors which delayed completion. BOA alleged that the result of the delay was that hundreds of apartment allottees incurred financial losses since they had to wait indefinitely for occupation of their apartments. The CCI considered that DLF had abused its dominant position against a vulnerable section of consumers who had little ability to act against the abuse. An appeal against the CCI’s decision is pending before the Indian Competition Appellate Tribunal.

While the absolute level of fines may not be particularly significant by international or absolute comparisons, these cases suggest that the CCI is adopting a deterrent approach as in the DLF case the CCI came close to imposing the maximum level of fine of 10 per cent of turnover.

Mandatory notification and review of mergers and combinations

Companies contemplating or engaging in merger and acquisition activity will need to consider how the merger control process in India will affect the timing and likelihood of successful implementation of their transactions in all markets where they do business. Recent global deals , prior to the implementation of mandatory merger control in India on 1 June 2011 including transactions concerning Kraft and Cadbury and Tata Motors and Ford, have involved Indian operations but were not subject to competition law scrutiny in India. For example, U.S. food manufacturer Kraft’s acquisition of UK confectionary maker Cadbury included the acquisition of Cadbury India which was considered as a prize asset consistent with a decentralisation strategy and expansionary focus. In 2008, India’s largest motor vehicles manufacturer Tata Motors announced that it had purchased the Land Rover and Jaguar brands from Ford Motors for £2.3 million. Two leading luxury car brands were added to its portfolio of brands. In the future, mandatory merger control in India and the power of the CCI to prohibit transactions or accept remedies will give the CCI tools to deal with cross-border activity affecting its markets and to determine whether such transactions give rise to an AAE on competition in India.

The CCI has a set period of 30 days from a notification being accepted in which to conduct an assessment and deliver a “prima facie opinion” as to whether the combination will, or is likely to, have an AAE on competition in the relevant market in India. If the CCI raises initial concerns that cannot be resolved by remedies that the parties are able or willing to offer, an in-depth review may be launched. The CCI has to make an “endeavour” to clear transactions within 180 days.

The CCI completed its first merger review within two weeks. The CCI cleared Reliance Industries Ltd’s buyout of Bharti Enterprises’ interest in an insurance joint venture with French insurer AXA SA. Reliance Industries is a new entrant in the Indian insurance industry and does not have a presence in India’s general or life insurance markets. Businesses will take some comfort that this transaction was reviewed swiftly. However, this needs to be viewed in context, since the case did not raise material competition issues.

Penalties with clout

The consequences of non-compliance may be serious in terms of significant financial penalties including up to 10 per cent of turnover for agreements and commercial practices; void agreements; impacts on M&A in terms of timing and modifications to secure clearance and harm to reputation and shareholder value as a result. The CCI has already imposed fines for violation of the prohibitions on anticompetitive agreements and abuse of a dominant position. However, the CCI has not yet provided any clarity on how it determines penalties other than to say that the fine must be “commensurate” to the violations.

Competition law enforcement trends emerging

As with any new law in the early stages of adoption, it can be difficult to chart the path that the regulator will take in prioritising its enforcement. In the absence of detailed case law and guidance under the Competition Act, the case law under the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTPA”) is likely to be a starting point for enforcement priorities. However, since it is intended that the new law represents a ‘clean break’ from the old, the CCI will be determined to establish its own way. It is likely that the experience of competition enforcers outside India, in particular in Europe and the U.S., can be expected to provide insights on how the law will be applied in practice. It is interesting to see that the CCI is already citing EU cases to substantiate their analysis and conclusion(s). Businesses under investigation can therefore serve themselves well by strengthening their arguments and evidence with international competition case law precedents where relevant.

The CCI has already begun to turn its gaze to particular industries presenting competition issues including airlines, cement, motion pictures, real estate, shipping, technology and telecoms. Businesses dealing in commoditised sectors or mature markets or facing low margins are likely to be subject to particular scrutiny owing to the obvious risk of collusion in such markets. Other future areas for intensified competition enforcement could include the energy, financial services, and pharmaceutical sectors. These sectors are vital to the economy, health and development of India and have been the subject of recent competition inquiries in Europe and the U.S. It would not be surprising if, in the future, the CCI follows the international competition law brethren with inquiries in these areas.

Risk management

Businesses may adopt mechanisms to manage the risks and opportunities presented. This recognises that an awareness of how competition law impacts businesses in practice may identify areas where the law can be used to business advantage, for example where a company is the victim of anticompetitive practices by others. The steps that can be taken vary from business to business but will tend to involve: conducting a competition law risk assessment; developing a competition law policy; devising a competition law manual, developing fact-specific guidelines and case studies; conducting employee training; and regular competition law audits and monitoring. The CCI has issued guidance to businesses on how to create effective compliance programmes.

Future legal developments and areas where competition law may be strengthened

The law is not static and there are a number of areas where the law is either unclear or the enforcement agency lacks specific powers. No doubt experience itself will reveal additional areas for modification or enhancement. Potential areas for future examination, enhancement and guidance include:

• Continuing to ensure that the members of CCI are from a wide range of disciplines including law, business, finance and economics, and are economically and politically independent and that they are recruited on a permanent basis to facilitate the necessary capacity building and commitment to the CCI’s future development of expertise. A concern has been raised that at least in the early days the CCI has had a staff from government departments;
• Reasserting the principle of prohibiting cartels as an enforcement priority in the practical application of competition law and advocacy. A notable feature of the CCI’s initial case record has been the weighting of abuse of dominance cases. Whilst preventing and sanctioning abuse of market power is a key plank of the legislation, the controversial nature of these cases can raise questions about the appropriate deployment of the CCI’s resources where budgets are tight. A focus on price fixing, market sharing and bid rigging would send a signal of a change in the underlying paradigm away from the MRTPA and towards a zero-tolerance of cartels;
• Guidance on the CCI’s approach to calculation of the appropriate level of fines, leniency and powers to conduct unannounced inspections;
• Guidance on the CCI’s approach to typical commercial practices such as the treatment of joint ventures under the behavioural or merger control provisions of the Competition Act and the circumstances in which efficiency enhancing vertical agreements may be compatible with competition law;
• Abbreviated investigation procedures where investigated parties may be prepared to offer commitments or modifications to commercial practices;
• Strengthening competition in regulated markets through increased cooperation with the sector regulators and establishing guidance on the appropriate demarcation between the two to improve the coherence of competition policy;
• Increasing the role of competition law in state-controlled sectors;
• Confronting the roles of consumer protection and price regulation and how these interface with the CCI’s role as an economic competition regulator;
• Increasing consultation and cooperation with the international antitrust community (whether regulators, business or practitioners) to continue and enhance the CCI’s credibility and effectiveness globally.
  

Conclusion

The challenges of creating an effective enforcement regime and culture of competition compliance must not be underestimated. The CCI will have a critical role to play and has done much to lay the groundwork. As with any law with wide ranging commercial impact, business can also enhance this process by disseminating knowledge and experience of what constitutes a violation. For multinational companies with operations in India, educating local employees and monitoring local activities reduces the risk of competition law investigations. Further strengthening of the CCI is the key for effective enforcement but the CCI will also need to tread carefully if it is to command the respect of business that its enforcement is targeted to those cases which present serious risks to competition. Its early track record signals a determination to tackle problems that currently impede wider participation by India’s consumers in the benefits that robust competition may bring. However, matters are complicated by institutional arrangements and legacies of the old regime that may temper resolute action. While it may be too early to tell how effective it will be, an important factor will be how the CCI can encourage a fundamental change in attitudes among businesses, government and consumers to adopt a more vigorous approach to competition law enforcement and improve economic growth such that it is no longer ‘business as usual’ in India.

Suzanne Rab is a Partner in the Antitrust practice at King & Spalding in London. Suzanne advises clients across all areas of European and UK competition law. She has particular experience advising on transactions and behavioural matters, including in proceedings before the UK competition and regulatory authorities and the European Commission. She has worked on some of the most high profile merger, market and cartel investigations in Europe and the UK. Suzanne can be contacted at srab@kslaw.com.

 

 

By Suzanne Rab

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 sets out the scheme for implementing the merger control provisions under the Act, came into effect from June 1, 2011.

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, of not more than 15% 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 or subscription to rights issue to the extent of entitlement, 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 nine intra-group reorganization by way of merger or amalgamation;

• 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.
• 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 proposedCombination. 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, including for the following Combinations:

• Where there are no horizontal or vertical overlaps;

• Where the enterprises are predominantly engaged in exports of goods or services (i.e., constituting at least 75% of its turnover) from India and continue to be engaged in exports even after the Combination takes effect, provided that the market share of the combined entity is less than 15% in the relevant market in India;

• Where an acquisition or acquiring of control over an enterprise is by a liquidator, administrator or receiver appointed through court proceedings or through any scheme approved under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or under the Sick Industrial Companies(Special Provisions) Act, 1985;

• Wherethe acquisition is resulting from a gift or inheritance;

• Where there is an acquisition of a trustee company or change of trustees of a mutual fund established under the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996;

• Where there is a horizontal overlap but the combined market share of the parties to the Combination is less than 15% (de-minimis horizontal overlap);

• Where there is a vertical overlap but the individual or combined market share of the parties to the Combination is less than 25% (de-minimis vertical overlap).

• Form II: Parties to the Combination also have an 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. 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.

• 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.
  

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.

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, 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/UTVcase, 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.

• Intra-group reorganization by way of merger or amalgamation not exempted

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 Projectscase where an internal reorganization by way of a scheme of amalgamation was cleared by the CCI on merits. The unfortunate implication of this ruling is that now, all internal reorganization by way of mergers and amalgamations would have to be notified to the CCI for clearance even though there is no distinction between an acquisition, merger or amalgamation as a mode of corporate reorganization.

 

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 thresholds 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 nineteen 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. They specialize in M&A, General Corporate and Securities law. They can be contacted at ashish.jejurkar@amarchand.com and nishakauruberoi@amarchand.com.

 

 

By Ashish Jejurkar and Nisha Kaur Uberoi

 

BACKGROUND

In the wake of economic liberalization and widespread economic reforms introduced in India since 1991 and in its attempt to march from a “Command and Control” regime to a regime based on free market principles, India replaced its archaic Monopolies and Restrictive Practices Act, 1969 with a modern competition law, in sync with modern and internationally established competition law principles, in the form of the new Competition Act, 2002 (“the Act”). The Act, though enacted in 2002, remained under challenge before the Supreme Court and was amended in accordance with the directions of the Supreme Court in 2007. The Central Government notified selected portions relating to prohibition of “anti competitive agreements” (Section 3) and “abuse of dominant position” (Section 4) on 20^th May, 2009 and the portions relating to “regulation of combinations” (Section 6) i.e. regulation of mergers and acquisitions etc. has been notified with effect from 1^st June 2011. The provisions of the Act are all encompassing and cover all sectors of our economy, including the real estate sector.

On Friday, August 12, 2011, a tectonic incident jolted the real estate industry in India. The Competition Commission of India (“CCI”), the competition regulator created under the Act, that is responsible for regulating competition in markets in India, vide an Order , in Belaire Owner’s Association vs. DLF Limited and HUDA (the “Order”) has imposed a penalty amounting to Rs 630 crores (INR 6.3 Billion) on DLF Ltd. (“DLF”) for abuse of dominant position for imposing unfair conditions in the agreements entered into by the company with flat buyers and directed DLF to ‘cease and desist’ from formulating and imposing such unfair conditions in its agreements with buyers in Gurgaon and to suitably modify such unfair conditions within three months of the date of receipt of this order. The huge penalty imposed on DLF is calculated at the rate of 7% of its average group turnover for the last three preceding financial years and is the heaviest ever imposed for any competition law violation in India so far. In the said order, CCI has also advised the Centre as well as State Governments to come out with a regulatory framework for the realty sector. In a separate report published in the Media, CCI has also hinted at the possibility of initiating suo moto (of its own motion) investigations into the flat buyers’ agreements of other builders. In another event, the Maharashtra State Consumer Disputes Redressal Commission on August 19, 2011 has ordered a Pune-based builder to pay a flat buyer Rs 45 Lakh for a flat he purchased for Rs 6.5 Lakh in 2001 but never received possession. The Commission has also reprimanded the builder for creating a third party interest by selling the same flat to another buyer.

In the case before the CCI, it was alleged by the complainant Belaire Owner’s Association, Gurgaon that DLF has imposed “arbitrary, unfair and unreasonable conditions” on the apartment – allottees that amounted to abuse of its dominant position, in the so called relevant market for services of developer / builder in respect of ‘high-end ‘residential accommodation’ in Gurgaon. So what are these clauses that CCI found unfair and hence “abusive” in DLF’s Belaire project agreement in the Order? There are as many as sixteen of them.

1. Unilateral changes in agreement and suppression of terms by the Builder without any right to the allottees.

2. Builders’ right to change the layout plan without consent of allottees.

3. Discretion of the Builder to change inter se areas for different uses like residential, commercial etc. without even informing allottees.

4. Preferential location charges paid up front, but when the allottee does not get the location asked for, he only gets a refund/adjustment amount at the time of last instalment, and that too without interest.

5. Unilateral right of the Builder to increase/decrease super area at its sole discretion without consulting allottees, which nevertheless are bound to pay additional amounts or accept a reduction in the area.

6. The proportion of land on which apartment is situated on which allottees have ownership rights shall be decided by the Builder.

7. The Builder continues to enjoy full rights on the community buildings, sites, recreational and sporting activities, including maintenance, with the allottee having no rights in this regard.

8. The Builder has sole discretion to link one project to other projects, with consequent impact on ambience and quality of living, with buyers having no right to object.

9. Allottees are liable to pay external development charges, without these being disclosed in advance and even if these are enhanced.
10. Total discretion of the Builder regarding arrangement for power supply and rates levied for the same.

11. Arbitrary forfeiture of amounts paid by the allottees in many situations..

12. Allottees have no exit option except when the Builder fails to deliver possession within the agreed time, but even in this case they get refund without interest, and that too only after the apartment is sold.

13. The exit clause gives the Builder full discretion, including the right to abandon the project, without any penalty.

14. The Builder has the sole authority to make additions/alterations in the buildings, with all the benefits flowing to the Builder, with the allottees having no say in this regard.

15. Third party rights can be created without allottee’s consent, to the detriment of allottee’s interests.

16. Punitive penalties can be imposed by the Builder for default by allottees, but insignificant penalty for the Builder’s default.

According to the Order of CCI, DLF violated Section 4(2)(a)(i) of the Act , dealing with abuse of dominant position by, inter alia, imposing , directly or indirectly , “unfair or discriminatory conditions or prices with respect to the purchase or sale of goods or services.”

[The Order of CCI has since been challenged by DLF Ltd. before the Competition Appellate Tribunal (“COMPAT”), headed by a retired Judge of the Supreme Court of India. The appeal was admitted by the Tribunal on 9^th November, 2011 and the direction regarding payment of penalty of Rs. 630 Crores has been stayed, subject to DLF Ltd. furnishing an undertaking to pay interest @ 9% per annum on the amount of penalty to be decided, if any, after the appeal by the COMPAT.]

ANALYSIS

The Order of CCI in the DLF case, imposing the highest known penalty for a competition law violation in India, is likely to have vast ramifications in a real estate industry in India that is already reeling under the effects of high inflation and increased home loan rates, which has further dampened demand from homebuyers. There are many projects where delays are beyond the control of developers and if regulators start imposing stringent measures, the sector will be negatively impacted. The DLF case might become a precedent for other such litigations to follow, which would pose a serious problematic situation for the industry.

The decision assumes significance for several reasons , first, for the first time in India competition law has covered the “exploitative” nature of “abuse of dominant position” as the jurisprudence on abuse of dominant position mainly centred around the “exclusionary” abuses like predatory pricing or refusal to deal, which have an effect of excluding the competitors, second, the decision has a overlap with the well defined concepts of “unfair trade practice”, which hitherto have been deemed to be reserved  for consumer disputes ,third, the order has also exposed a largely prevalent industry practice of builders appropriating the funds raised from buyers for other projects Finally, the decision shows that the CCI continues to rely on international case law and jurisprudence , particularly cases in the US and EU , but there remains some ambiguity on the methodology used by the CCI for the computation of the penalty, in the absence of well defined guidelines for imposition of such heavy monetary fines, unlike other jurisdictions. Given the highly complex definition of what constitutes a “dominant position” under section 4 of the Act, which is not dependent only on market share, the Builder fraternity will need to be careful while drafting “Flat Buyer Agreements” to ensure that such violations are not repeated so as to invite heavy Penalty.

COMPETITION COMPLIANCE – A WAY FORWARD

Notwithstanding the outcome of the appeal in the DLF case, the real estate industry in India should understand that the purpose of competition law is to preserve free and fair competition in the markets, which is in the interests of all companies operating in the industry and their clients as well. Competition is necessary to achieve economic efficiency and is one of the essential conditions of a free market economy. Competition encourages enterprises to be more efficient which reduces the cost of products and services. This, in turn, leads to reduction in prices and improves quality, thereby increasing the demand for the products and services. These universal principles apply equally to the real estate sector. The real estate industry must, therefore, agree to   voluntarily commit itself to ensuring the highest standards of competition law compliance within the sector by adhering to the principles of fair competition in all of its business practices and to ensure that construction companies do not engage in conduct which is anti-competitive. Flat buyer agreements, therefore, also need to be redrafted in sync with competition law in general and in accordance with the provisions of the Act, in particular. For example, in the state of Maharashtra, in India, all such agreements must conform to the model format prescribed under the Maharashtra Ownership Flats Act 1963 (“MOFA”). Clauses 1 to 5, 8 to 13, and 22 of this model agreement are statutory and must mandatorily form part of the agreement. Other clauses can and should be negotiated between the builder and the flat buyer if there is to be any semblance of transparency in this area. In the DLF case, CCI defined the relevant market as ‘the high-end residential market in Gurgaon’. Similar “relevant markets” may exist in other parts of the Delhi NCR such as in Greater NOIDA as well as in other metropolitan cities in India and in case any association of the allottees of similar apartments were to file complaints with the CCI, it shall have to intervene again on the basis of the precedent of the DLF case and the builders may have to face similar penalties. The answer lies in introducing a voluntary in-house check of the clauses in the agreements entered or to be entered with the prospective clients/buyers to make the agreements competition compliant.

Why Competition Compliance?

Apart from causing a loss of reputation and adverse effect on the share valuation more so in the case of a public quoted company, competition law litigation also happens to be extremely expensive. The penalties and fines prescribed under the Act are very high and the Act also incorporates provisions that , besides the liability on the company, the CCI may also fix   personal liabilities on senior management in case of even unintended violations by the employees of the company. More than 110 countries around the World, including neighbors like Pakistan and China, have already implemented a competition law regime; Competition law compliance should, therefore, be at the heart of every business’s risk management strategy.

Competition Compliance Program

It is therefore advisable that all companies should have a Competition Compliance Programme (“CCP”) in place, which is a multi -pronged tool to ensure compliance with Competition law and rapid detection in case of any unintended violation. It works on the principle that ‘prevention is better than cure’. It is developed keeping in mind the specific requirements of an enterprise and has the following fundamental targets:

• Educating employees about the basic concepts of competition law and about the types of conduct that violate it.

• Creating a system, that will detect any anti-competitive conduct.
• Training the employees on best practices for dealing with investigations by CCI, in case of an unintended violation.

An effective compliance programme would include imparting awareness and training to employees who may engage themselves or are exposed to anticompetitive conducts. The programme should provide for identifying possible violations so as to take pro-active, corrective and remedial steps. Effective compliance not only reduces the risk of contraventions, but also facilitates timely detection and can be useful in mitigating penalties by suggesting disclosure of information at the first opportunity. To make the programme truly effective, continuous review is essential. It also requires continuous support from senior management, which should be visible and reinforced from time to time.

CCP as a mitigating factor for deciding penalties

The presence of a well-defined CCP in enterprises has been accepted as a mitigating factor in determining  penalty amounts by competition authorities in developed economies and CCI can be no exception. In many jurisdictions, even if a breach occurs, the degree to which an enterprise can demonstrate a genuine commitment to compliance with competition laws may be an important factor for consideration by the competition regulator while determining the severity of any penalties to be imposed. For example, in 2009, the U.K. Competition Authority, Office of Fair Trading (OFT) imposed a hefty fine of GBP 130 Million on 103 Construction Companies. Twenty five companies appealed against the fines imposed. In March 2011, the Competition Appellate Tribunal of U.K., reduced fines by ninety per cent in most cases as these companies were able to demonstrate that they had an in house CCP. Parties received a discount in the penalties imposed proportionate to the percentage of their competition compliance program as a separate mitigating factor. However, “off the shelf” compliance programmes may not be useful and may do more harm than good. Compliance programmes must, therefore, be designed under expert advice and supervision and should be included in the company policy on a permanent basis.

Role of Builder’s Associations-International Practices

Builders associations can play a vital role in sensitizing their member builders on the benefits of competition compliance. In many other countries, responsible builders associations prescribe standard pro-forma contracts that are less skewed. In Australia, for example, there are three major associations of builders, each of which provides standard pro-forma contracts to the potential buyers for various kinds of contracts ranging from purchase of a new property to existing property to renovation of bathrooms and kitchen in order to reasonably protect the interests of homebuyers. Recently, National Federation of Builders (NFB), a prominent builders’ association in UK launched an industry-wide code of conduct. The code demands that UK construction companies meet the highest standards of competition law compliance and will form a mandatory part of the NFB’s code of conduct for members. The trade and its Associations (especially when its members are rivals in market) need to take note of the “Do’s and Don’ts”. Similarly, under the Act, Trade Associations are not immune from the consequences of an antitrust infringement. As a matter of fact, inquiries are already going on against trade associations in other sectors such as tyres, cement, sugar etc. before CCI, for allegedly facilitating cartel like behavior amongst their members. Therefore, Apex Trade Associations of the real-estate sector e.g. the Confederation of Real Estate Developers’ Associations of India (CREDAI), as the widely recognized apex body for private Real Estate developers in India, which has played an important role in development of Indian real-estate industry, should also develop and adopt a competition friendly ‘Code of Conduct’ for the betterment of its members.

MM Sharma is the former registrar of the Competition Commission of India. He heads the Competition Law & Policy Practice of Vaish Associates, Advocates, a corporate law firm that has offices in New Delhi, Mumbai, and Bangalore, India. Mr. Sharma may be contacted at mmsharma@vaishlaw.com.

 

 

By MM Sharma

By Aseem Chawla and Surabhi Singhi

On October 11, 2011, the Supreme Court of India condemned the increasingly frequent malpractice of transferring immovable properties without a registered deed of conveyance in the case of Suraj Lamp and Industries Pvt. Ltd. v State of Haryana [2011 (11) SCALE 438]. The court, assisted by amicus curiae Mr. Gopal Subramanian, Solicitor General, investigated the rampant practice of transferring property through a general power of attorney]. The States of Delhi, Haryana, Punjab and Uttar Pradesh were also notified to submit their views in the form of affidavits.

According to the court, the modus operandi behind these transactions is the avoidance of stamp duty payments, registration charges, income tax (capital gains on transfers) as well as unaccounted “black” money or illegal money. Therefore, property vendors with imperfect title and purchasers aiming to invest “black money” are the chief propagators of such transactions.

In order to address this issue, the Court clarified that Section 17 of the Registration Act, 1908 has made the transfer of property legitimate only through a registered deed and Section 49 prohibits the use of such documents as evidence to prove title. Thus, the documents in the nature of power of attorney cannot convey any title or create any interest in an immovable property. [The court also stated the ill effects of such transfers by stating that bona fide purchasers may in future be threatened by the ever growing land mafia. Further, the Court emphasized that the vendors are tempted to resell the property due to lack of evidence with the purchaser and owing to an imperfect title and an inevitable consequence is the criminalization of real estate transactions.

The Court highlighted the importance and benefits of transfer of immovable property through a registered instrument such as safety and security of transactions due to publicity of documents and creation of a permanent record in the event of loss or destruction of documents, prevention of fraud and forgeries and easier verification of a marketable title. Further, the court stated that the states may take necessary steps such as reduction of stamp duty, which would encourage the public to get their sale deeds registered. The Court further noted that this may lead to a loss of revenue, yet it would be significant in reducing generation of black money and undervaluation of property.

The Court pointed out, however, that the validity of a power of attorney or a sale agreement in a genuine transaction is not disputed since a person may, for the better management of his property, execute such documents.

Therefore, in the absence of a registered deed, such transactions in the nature of power of attorney are not completed transfers or do not create any interest / title in the property (except to the extent mentioned in Section 53A of the Transfer of Property Act, 1882) and would only protect the transferee against the transferor.

Mr. Aseem Chawla is a Partner, and Ms. Surabhi Singhi is an Associate, Amarchand & Mangaldas & Suresh A. Shroff & Co., based out of Delhi, India. Mr. Chawla leads the tax practice group of the firm and can be contacted at aseem.chawla@amarchand.com. Ms. Singhi is an Associate with the tax practice group of the firm and can be contacted at surabhi.singhi@amarchand.com.

 

 

With a population of 44.9 million people and a per capita income of $9,070, Colombia is one of the largest markets in Latin America. Colombia has become an attractive market for foreign investments thanks to its political stability, and burgeoning oil, gas and mining sectors. In the first half of 2011, foreign investment in the petroleum and mining industry (representing approximately 85% of all direct foreign investment in Colombia) reached $7.3 billion dollars, which is an increase of roughly $2.3 billion dollars from the first half of 2010. In 2010, total direct investment in Colombia by Indian investors was approximately $500 million dollars. This figure is expected to increase significantly due to the recently enacted bilateral investment protection treaty entered into between Colombia and India, and the signing of the India-Colombia double tax treaty.

On June 12, 2011 India and Colombia entered into a bilateral investment protection treaty (the “India-Colombia BIT”). Investment protection treaties are agreements entered into by countries for the reciprocal encouragement, promotion, and protections of investments made by nationals of one treaty country in the territory of the other treaty country. Investment treaties are adopted by countries in order to spur economic development by attempting to attract foreign capital and encourage investment.

India-Colombia Investment Treaty

The India-Colombia BIT encourages bilateral investment by protecting the investors of a contracting party against arbitrary or confiscatory government measures. The protections to Indian investors are enforceable by independent international arbitration. The India-Colombia BIT is typical of most investment treaties in its framework and substantive protections. Thus, it includes: (i) initial provisions establishing the scope of coverage and the meaning of the terms “investor” and “investments”; (ii) substantive protections related to non-discrimination of treaty investors, fair and equitable treatment, and protection against government expropriation; and (iii) mechanisms for the settlement of disputes. While a discussion of each provision of the India-Colombia BIT is beyond the scope of this article, the following is a brief summary of its substantive provisions:

• Fair and Equitable Treatment: the India-Colombia BIT affords a foreign investor protection against arbitrary and unfair or inequitable treatment by the government under standards of international law.

• Non Discrimination: the India-Colombia BIT assures national treatment and most favored nation status to investors of each state. This means that foreign investors cannot be treated less favorably than investors from the host country or from a third party country.

• Anti-Expropriation: the India-Colombia BIT guarantees that government expropriation of investments, including actions tantamount to expropriation, are prohibited except under due process of law and accompanied by full compensation.

• Dispute Settlement: Under the India-Colombia BIT a state must submit a foreign investor’s claim of a treaty violation to arbitration. The arbitration must be conducted by an independent ad hoc tribunal and the tribunal’s award will be binding.

Covered Investors and Investments under the India-Colombia BIT        

Perhaps the most significant provisions of bilateral investment agreements are those related to the definitions of “investor” and “investments”. As with all investment agreements, the definition of the term “investor” and “investment” is usually found in Article 1 of an investment treaty. Read together, the definition of “investment” and “investor” delimits which parties may benefit from treaty protection.

“Investment”

The definition of “investment” is often the first point in determining whether a transaction is subject to treaty protection. Since the principle purpose of investment agreements is to encourage foreign investment, the definitions of investment found in most treaties are virtually always expansive. Accordingly, Article 1, Section 2.1 of the India-Colombia BIT defines investments to mean: “every type of asset that have been established or acquired by investors of a contracting party in the territory of the other contracting party…” Similarly to most investment agreements, the India-Colombia BIT subsequently provides a non-exclusive list of permitted investments, and Article 1, Section 2.3 specifically states that the minimum characteristics of an investment under the treaty must include: (i) the commitment of capital or other resources (ii) the expectation of gain or profit and (iii) the assumption of risk for the investor. Hence, an “investment”, for purposes of the India-Colombia BIT, applies to a broad spectrum of current and future potential arrangements within each member country.

Tribunals interpreting the term “investment” tend to apply the term liberally. In Fedax N.V. v. Venezuela, for example, the tribunal determined that, even an indirect transaction in which a claimant acquired Venezuelan promissory notes by endorsement from the original note-holder qualified as an “investment” under the Netherlands-Venezuela investment treaty. Furthermore, tribunals have ruled that a qualifying investment under an investment treaty may even include transactions that, taken in isolation, might not otherwise qualify as an investment. For example, the tribunal report in Chevron-Texaco v. Ecuador, stated that an “investment” needed to be “viewed holistically and not as discrete transactions or components”. Therefore, countries that seek a restrictive reading of the term will often find themselves on the losing end of the argument.

“Investor”

The definition of the term “investor” is the second point of reference in determining whether a party is subject to the protection of an investment treaty. The India-Colombia BIT defines investor as follows:

Any physical or natural person or an entity of one of the contracting parties that has made investments in the territory of the other contracting party in accordance with its national legislation.

1. A physical or natural person shall mean a person who, in the case of India is a citizen of India and in the case of Colombia is a citizen of Colombia pursuant to their respective legislations

1. An entity shall mean a company, corporation, firm or association incorporated or constituted or otherwise duly established pursuant to the laws of that contracting party and is engaged in substantial business activities in the territory of the Contracting Party.

Natural persons that are nationals of the state party to the India-Colombia BIT and entities incorporated or constituted under the laws of such state that carry out substantial business in the are thus able to rely on treaty protection. Interestingly, the India-Colombia BIT is representative of various Latin American investment treaties in that it requires corporate investors to carry out substantial business in the relevant state. This provision is included to prevent treaty shopping, i.e., when individuals from 3^rd party jurisdictions create a new company, or shell company simply to benefit from the provisions of a particular investment treaty. As further discussed below however, this provision should not limit treaty protection to Indian nationals or Indian corporations (with substantial activities in India) that structure their investment in Colombia through intermediary corporate vehicles located in third party jurisdictions.

Many BITs expressly include in their definition of investor, corporations “owned or controlled” by nationals of a contracting state. This is important in order to account for the myriad of ways in which investment may be structured in a foreign country. Often, the corporate structure of a contracting partner to an investment treaty may include one or more intermediary corporate entities located in third party jurisdictions. For example, the Netherlands includes in its 2004 model investment treaty, the definition of investors that are:

“Legal persons not constituted under the law of that contracting party but controlled, directly or indirectly by natural persons… or by legal persons [ who otherwise meet the definition of national]”. Article 1(b)(iii).

Likewise, Article 1 of the U.S. 2004 model investment treaty covers protection to intermediary corporations by expressly defining “investment” to include “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment”. ”. It would have preferable to have seen this language incorporated into the India-Colombia BIT and not leave it potentially open to argument of whether indirectly controlled investments are covered by the treaty protection.

Nonetheless, we believe that a bona-fide Indian national (or entity with substantial business activities in India) who invests in Colombia through a corporate intermediary established in a third party jurisdiction would be provided treaty protection. In such a case, treaty protection would be consistent with Article 31, Section 1 of the Vienna Convention on Law of Treaties, which states that “a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.” The objective and purpose of investment agreements, which is stated in their preamble, is to encourage foreign investment. Thus, tribunals have traditionally been flexible and willing to uphold the right of bona-fide investors under a particular treaty, including where investments are made through intermediary companies.

New Tax Treaty signed between India and Colombia.

On May 13, 2011 India and Colombia signed a Double Taxation Avoidance Agreement (“DTAA”). The DTAA is a comprehensive tax treaty designed to prevent double taxation of income earned in one country by a resident of the other country. The DTAA will also include provisions for the exchange of information for tax purposes.

The DTAA has yet to be ratified by the contracting parties and enter into force. However, if ratified, the DTAA will set maximum rates for withholding taxes imposed on dividends, interest and royalties. While, dividends, interest and royalties will be subject to tax in both India and Colombia, the maximum withholding tax will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. The DTAA provides that business profits from a permanent establishment will be taxable in the source State. Furthermore, profits derived from construction, assembly or installation projects lasting at least six months will be taxed in the source state. Capital gains from the sale of shares will be taxable in the country of source.

The DTAA is an important development for India-Colombia trade and bilateral relations.

Colombian Investments

Colombia allows foreign investment in virtually all sectors of the economy except for sectors related to national security and the disposal of hazardous waste product. Colombia offers a variety of incentives such as tax exemptions and tax holidays for investment in priority sectors, including manufacturing, agro-industry, mining and petroleum.

The forms of business organization most often used by foreign investors in Colombia are joint capital stock corporations (“Sociedad Anonima”) and limited liability companies (“Sociedad Limitada”). The corporate income tax rate and capital gains rate is 33%, which applies both to the Sociedad Anonima and the Sociedad Limitada, and all expenses incurred in the normal course of business are generally deductible to both types of entities. Furthermore, no thin capitalization rules or CFC regime exists. Significantly, dividends paid to a foreign company or entity not domiciled in Colombia are not subject to Colombian withholding tax so long as the corporate profits have already been subject to taxation at the corporate rate.

Interest is subject to a 33% withholding tax. Lastly, the deductibility of interest payments is limited to the interest rate published from time to time by Colombian Superintendencia. Thus, Colombia encourages foreign capital investments over foreign financing.

Structuring opportunities

There are various outbound structuring opportunities for Indian persons seeking to invest in Colombia. Significant planning opportunities exist to minimize the taxes on the repatriation of after-tax profits at the Colombian entity level. An Indian investor would obtain the greatest tax efficiencies, by structuring their investment through one or more corporate intermediaries located in a low-tax jurisdiction that has entered into a comprehensive income tax treaty with India. The following diagram illustrates the potential effects of utilizing a Cyprus and Panama intermediary; however, similar results may apply utilizing alternative jurisdictions. In each case, an efficient exit strategy would involve the tax free sale by Cyprus Co of its shares of Panama Co.

1. Equity Investment

 

 

 

 

 

 

100%

 

 

 

 

 

 

100%

 

 

 

 

 

 

 

 

100%

 

			Hold Co Ltda Colombia

 

 

 

 

 

 

 

 

 

 

 

 

1. Investment Utilizing Financing

 

 

 

 

 

 

 

100%

 

 

 

 

 

 

 

 

 

99%

 

 

 

 

 

 

 

 

 

 

100%

 

 

 

 

			Hold Co Ltda Colombia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

The enactment of the India-Colombia BIT and the impending DTAA are expected to facilitate Indian investment in Colombia. Bona-fide investors, even those that structure their investments through intermediary corporations should benefit from the protections set forth the India-Colombia BIT.

Fernan Rodriguez is a foreign legal consultant for The Richards Group, in Miami Florida. Fernan is a licensed Colombian attorney who specializes in tax and international transactional matters. He may be contacted by email at frodriguez@richards-law.com. Alonso Sanchez is an associate in The Richards Group’s tax department. He may be contacted by email at asanchez@richards-law.

 

 

By Fernan Rodriguez and Alonso Sanchez

Background

            The Competition Commission of India (“CCI”) stepped into a new regulatory role with the release of the CCI (Procedure in regard to transaction of business relating to combination) Regulations, 2011 (“Combination Regulations”) on May 11, 2011. This was a sequential step to the notification of combination provisions (sections 5 and 6) of the Competition Act, 2002 (“Act”) issued on March 4, 2011. As a result, the CCI is now equipped with a complete set of substantive and procedural rules to scrutinize mergers and acquisitions which cross the prescribed assets or turnover based thresholds. Effective June 1, 2011, no transaction that is likely to have an “appreciable adverse effect on competition in relevant market in India” can be consummated without a prior approval from the CCI. After implementing the Combination Regulations for almost nine months, CCI has brought some significant changes through the CCI (Procedure in regard to transaction of business relating to combination) Amendment Regulations, 2012 (“Combination Amendment Regulations”) on February 23, 2012.

This article analyses this new regulatory framework, highlighting the potential impact of the Combination Regulations as well as the Combination Amendment Regulations on mergers and acquisitions in India.

Transactions covered under the Competition Act

Section 5 of the Act has been very broadly cast and defines “combination” to include an acquisition of shares, voting rights, assets, or control of an enterprise or merger or amalgamations of enterprises. Essentially, all transactions crossing the following prescribed monetary threshold would require a prior notification to the CCI. All figures are approximations.

Threshold referencing India:

• Acquirer and target having assets worth $330 million or turnover of $1 billion.
• Acquiring “group” and target having assets worth $1.33 billion or turnover of $4 billion.

Threshold with world-wide reference:

• Acquirer and target having assets worth $0.75 billion (out of which at least $167 million in India) or turnover of $2.25 billion (out of which at least $500 million in India).
• Acquiring “group” and target having assets worth $3 billion (out of which at least $167 million in India) or turnover of $9 billion (out of which at least $500 million in India).

Interestingly, on March 4, 2011 (the same date on which the combination provisions under the Act were notified) the government also issued an array of investor friendly notifications, including: (i) an increase of 50% in asset/turnover based monetary thresholds to reach the present levels mentioned above; (ii) amendment to the definition of “group” whereby groups exercising less than 50% of voting rights in the other enterprise are exempt from the purview of the Act and Combination Regulations for a period of five years starting June 1, 2011; and (iii) a similar exemption of five years to enterprises having assets below $56 million or a turnover of not more than $167 million.

In our view, the monetary criterion alone is not appropriate to define the contours of a combination in every case. But, if the financial triggers are attracted that would compel parties to notify even small combinations having no appreciable adverse effect on competition, just on account of their size. On the other hand, dilution of the definition of “group” is a welcome move as it would ensure safe harbor for many more transactions involving group companies, than would have been the case with the earlier threshold of 26%.

Process of filing notice with CCI

Trigger Point: 30 days!

The Act mandates that a notice is to be filed with CCI within 30 days of an approval by the board of directors in case of intended mergers or amalgamations or execution of any agreement or “other document” in case of acquisitions. According to the definition inserted now in the Combination Regulations, “other document” will mean any “binding document” conveying or exhibiting the intention to acquire. In the context of “hostile takeovers,” mere execution of such a document by the acquirer itself would trigger the deadline of 30 days. The CCI will not interfere with transitory transactions where the relevant trigger event has occurred before June 1, 2011.

Form and fee

The CCI is to be normally notified in Form I (a short form prescribing entries with respect to products/services, market share, etc.) with a stipulated fee of approximately $20,000. This amount is a result of the Combination Amendment Regulations, whereby the fees has been increased almost 20 times. Regulation 5(2) provided an inclusive list of transactions, where in most cases only Form I (Part I) was required to be filed. The recent amendment deleted the reference to transactions for which Form I (Part I) had to be filed. This implies that it is now mandatory to file the complete Form I (Part I and Part II) in every instance.

Parties to the transaction also have an option to file Form II with a prescribed fee of approximately $80,000. The amended regulations also provide for some instance where filing of Form II is recommended. These recommendations include combinations involving horizontally or vertically aligned entities with combined market share of more than 15% or 25% in each case. Form II is longer and contains detailed requests for information regarding (among other things) relevant market structure, demand and supply in the market, entry and exit conditions. It is apparent that the type of detailed information required by the CCI would necessitate filing certain confidential information that could, eventually, be leaked out to the market and competitors and may not be in the best interest of the transacting parties. In order to claim confidentiality, parties are required to formally request and specify cogent reasons, including the implications on the business for protecting confidentiality regarding any information supplied to the CCI. Complete discretion rests with the CCI in granting any such request for confidentiality. Unless addressed properly, this could become a thorny issue as there will be inevitable reluctance to share confidential information without adequate security that it shall be preserved.

Any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to a covenant under a loan or investment agreement does not require a prior approval from the CCI. Such bodies are just required to notify the CCI in a simplified Form III along with a certified copy of the executed loan or investment agreement, without any fee, in seven days post such acquisition. The Combination Amendment Regulations have inserted a new sub regulation whereby CCI may permit filing of Form III even beyond the seven day period. This is inconsistent with section 6(5) of the Act, which specifically limits the filing period to seven days.

Onus of filing notice

In the acquisition of shares, voting rights, or control in an enterprise, the acquirer is under an obligation to file the relevant form with the CCI. In case of a merger or amalgamation, the transacting parties are required to jointly file the appropriate form with the CCI. The recent amendment has also authorized the company secretary of the company, duly authorized by its board, to do filing with the CCI in the aforementioned cases. In a scenario, where the intended objective of a business transaction is achieved through a series of individual transactions (inter–connected or inter–dependant), one or more of which may amount to a combination, the Combination Regulations provide that a single notice can be filed with the CCI. For example, in the recently proposed acquisition of UTV Software Communications by Walt Disney Company , the complete transaction as proposed by the parties involved two steps: firstly, acquisition of shares held by public shareholders through a delisting offer under the Delisting Regulations, 2009 and, secondly, a subsequent acquisition from promoters. The acquirer filed a single notice in Form I and CCI approved the entire transaction through an order dated August 25, 2011.             

Failure to file any of the prescribed forms can result in a penalty of up to 1% of the combined assets or turnover of the combined entity, whichever is higher, on the enterprise(s) that is under the obligation to file the relevant form in a particular case.

Evaluation of Proposals by the CCI

            Prima facie opinion: the CCI is obligated to make a prima facie opinion regarding whether there will be an appreciable adverse effect of the proposed transaction on the Indian market within 30 days of filing the notice. There were apprehensions in the industry on the competence of the CCI to approve proposed combinations within the short span of 30 days. However, on July 26, 2011, the CCI came out with its first order approving an acquisition by Reliance Industries Limited and Reliance Industrial Infrastructure Limited of a 74% stake held by the Bharti Group in each of two joint venture insurance companies, namely Bharti AXA Life Insurance and Bharti AXA General Insurance. The order approving the transaction was passed in a record time of just 18 days. Further, the competition regulator has already given its nod to twenty seven more proposed transactions, and most of them well within the timeframe of 30 days. Certainly, the CCI has started out well and it remains to be seen if such time frames shall be maintained going forward.

Detailed Investigations: If unsatisfied at the preliminary stage, the CCI could go for a detailed investigation, and, in such a case, would endeavor to pass an order within 180 days as opposed to 210 days. It is noteworthy that despite the global concern there is no commitment to approve within the reduced period of 180 days. The obligation of the CCI is merely confined to best efforts. There is also a provision for deemed approval in case the CCI does not pass an order within 210 days.

It remains unclear when the clock will start and the 210-day period will commence because chances are that the CCI will seek additional clarifications/information and that process could prove to be time consuming. Only time will tell whether the 210-day period will be extended or curtailed and respected. So far, the prognosis appears to be encouraging.

Another conundrum remains in case of takeovers or the substantial acquisition of shares of listed entities. In case parties execute an agreement to acquire more than 25% of voting rights in a listed company, this would trigger the “open offer” obligation under the Takeover Regulations. At the same time, notice would also need to be filed with the CCI under the Combination Regulations. This may lead the transacting parties embroiled between the competition and securities law, as they might not be able to complete the open offer within the time stipulated under the Takeover Regulations for want of clearance from the CCI which can, in turn, lead to payment of interest on the offer price to tendering shareholders at a rate decided by the Securities and Exchange Board of India (“SEBI”).             

The Regulations under Schedule I enumerate a list of transactions that are unlikely to cause any appreciable adverse effect on competition in India. The list includes:

• An acquisition of shares or voting rights of an enterprise solely for the purpose of investment or in the ordinary course of business. In this case, the total share holding or voting rights of the acquirer should not exceed 25% and should not lead to the acquisition of control over the enterprise. The limit has been recently increased from 15% to 25% through the Combination Amendment Regulations. This amendment ensures that the threshold of 25% is in consonance with the new Takeover Regulations announced on October 22, 2011.

• Any consolidation of holding where the acquirer already has more than 50% of share holding or voting rights in the target except when such acquisition leads to sole control from joint control. The Combination Regulations are silent upon any acquisition or consolidation of shareholding between 25–50%. This is in contrast to the new Takeover Regulations, which allow the consolidation of shareholding in a listed entity through the “creeping acquisition” of 5% in a financial year without getting indented by open offer requirements, in case the acquirer holds 25% or more in the target and until he transgresses the maximum permissible non-public shareholding limit of 75%. The Combination Regulations, on the other hand, do not provide for such leverage. A clarification on this particular point is very much required, as an acquisition of 5% of voting rights in a financial year in cases where it does result in change of “control” in an enterprise, would not cause any significant appreciable adverse effect on competition in the relevant market and should be exempted.

• An acquisition of stock-in-trade, raw material, stores, etc. in ordinary course of business.

• An acquisition of bonus or right shares not leading to control. The recent amendment has extended this exemption to buy back of shares as well.

• Intra-group acquisitions are exempted. The Combination Amendment Regulations have now specifically exempted intra-group mergers or amalgamation between (i) wholly owned subsidiaries of the parent company inter-se or (ii) wholly owned subsidiary with the parent company. This change will facilitate consolidation of group companies with lesser statutory compliance. Further, the erstwhile regulations provided for a definition of “group” while determining any intra-group acquisition. The amendment has curiously deleted this definition leaving stakeholders with little guidance on interpretation of the term “group.”

• A combination taking place entirely outside India with “insignificant local nexus” and effects on relevant market in India. Regrettably, no objectives or parameters are provided to determine “insignificant local nexus.”

The Combination Regulations state that these transactions are “ordinarily not likely” to cause an appreciable adverse effect in the relevant market, leaving it on the parties to assess the implication of their proposed combination and make a decision on notifying the CCI.

Pre -Merger Consultation

The Combination Regulations failed to provide any pre–notification consultation. But, in conformity with international practices and paying regard to the demands from industry, the CCI has recently started a separate mechanism, offering an informal and verbal consultation with the CCI staff by appointment. It is unclear at this stage what assistance the staff would provide, but in essence it could be confined to clarifications or guidance for the completion of forms. The CCI has also upfront clarified that such consultation should not be construed as its opinion and would not have any binding effect on it. At the very least, the CCI staff should review the relevant form and intimate parties of changes, if any, or any additional information/documents that ought to be supplied to avert delays at a later stage.

Comment

            The combination provisions under the Act have finally gathered full force after being in abeyance for almost a decade. There is some jurisprudence that exists with regard to anti-competitive agreements and abuse of dominant position in India, and now specific merger control regulations are a step in the right direction for healthier competition in the market. The industry anticipates a slowdown in the mergers and acquisitions due to the time the CCI will take in issuing its approval. The CCI is required to make sure that it strengthens the pre-merger consultation mechanism and regularly comes out with clarifications and amendments, as the recent one, to remove ambiguities. Nonetheless, the CCI has gathered the right momentum by approving most of the initial combination proposals within the stipulated 30 days, and this could be the harbinger of favourable and efficient regulatory action in days to come.

Ankush Goyal is an associate with Priti Suri & Associates. His specific area of practice includes general corporate, competition, project finance, M&A, banking and infrastructure. Ankush can be reached by e-mail at a.goyal@psalegal.com.

 

 

By Ankush Goyal

 

Is it good for the Indian economy if Wipro starts purchasing all of the promising small, entrepreneurial firms in India? Do Indian consumers benefit if Cipla and Ranbaxy engage in joint ventures for the research and production of new drugs? These types of questions are characteristic of a technologically advanced economy and are the types of questions India’s new Competition Commission (the “CCI”) will confront, as the CCI seeks to protect India’s marketplaces. This article seeks to identify whether India’s competition law is sufficiently equipped to resolve these questions, and where areas of concern are identified, looks to Canadian competition law for possible assistance.

1. The (Collaborative) Innovation Imperative

As various panels appointed by governments in both India and Canada have identified, technological innovation is critical to the prosperity of each nation and its citizens. According to the OECD, technological innovation is typically defined as the implementation or commercialization of an invention arising from research and development work (OECD, Oslo Manual). It can range in significance from a mere incremental improvement to disruptive technologies, such as electric power.

The economic research driving this call to action could not be more compelling, as seven-eighths of economic growth in the United States between 1909 and 1949 according to economist Robert Solow, and three-quarters of economic growth since then according to the United Stated Department of Commerce, is attributable to technological innovation. This relationship has only grown stronger, such that today, one could look to any number of countries, especially those without significant amounts of natural resources, spending heavily to build domestic capability for technological innovation. China is a poignant example. Domestic technological innovation is therefore imperative if India is to achieve its national ambitions, as illustrated by Vannevar Bush in 1945 with reference to the United States. Innovation in high-technology industries, such as information and communications technology and pharmaceuticals, is especially important because these industries are responsible for major disruptive change to the global economy, such as through the development of the Internet. Technological innovation in high-technology industries often generates tremendous wealth and prosperity.

The “secret sauce” for technological innovation depends on a wide range of factors, and sometimes differs between industries and the stage of development of an industry. Innovation has historically been primarily the result of intra-firm research and development. However, as experience has demonstrated there is a range of potential benefits if the innovation process includes activity outside the firm, it is increasingly becoming a collaborative activity between and among firms in similar industries, dissimilar industries, universities and governments. The mechanisms permitting this transfer of technology include contractual arrangements, joint ventures and especially mergers and acquisitions, a frequent event in the ever-innovative Silicon Valley. However, especially since its modern genesis in the United States at the beginning of the 20th century, competition law has been particularly concerned with conspiring competitors, as consumers are usually harmed by these arrangements, such as in the event of price-fixing. Rapidly changing high-technology industries are no different, and harm to consumers, innovation and the economy is still very much of concern (Barnett, Competition Enforcement in an Innovative Economy).

In India, harmful anti-competitive conduct has historically remained free from government intervention, as the previous competition law, the Monopolies and Restrictive Trade Practices Act, 1969, was antiquated and rarely enforced. In May 2009, a modernized Competition Act, 2002 (the “Act”) came into effect, as did the provisions governing combinations, or mergers, on June 1, 2011.

Are India’s new competition laws and the enforcer of those laws, the CCI, equipped to deal with the nuances of protecting consumers, innovation and the economy, while still permitting the collaboration required for innovation to take place?

1. Competition Laws Relevant To Collaborative Innovation

Competition law is a policy lever to facilitate technological innovation; however, it is not of the same type as patent law, tax law, or other levers that provide an explicit incentive to innovate. Instead, much as property rights do, competition law is a way of protecting the marketplace, including participants in the marketplace, by seeking to avoid the deterrence or prevention of innovation that can be caused by a range of harmful behaviours.

The Act created the CCI and empowered it with wide powers of investigation and the ability to levy significant financial penalties. Two provisions are of particular relevance to collaborative innovation: anti-competitive agreements and dealing with business combinations. Similar provisions exist in Canada’s Competition Act (the “Canada Act”).

1. Anti-Competitive Agreements

Preventing conspiracy between competitors (the indicia of which are common in many countries, effectively consisting of competitors agreeing not to compete, typically through the fixing of prices, outputs or geographical markets) is a longstanding pillar of competition law. Whether referred to as a conspiracy or a cartel, the static economic effects are typically the same: prices are higher, output is reduced and consumer welfare is harmed. The dynamic effects, or the “impact on the optimal introduction or improvement of products and production processes” according to Canada’s counterpart to the CCI, the Competition Bureau (Competition Bureau, Efficiencies in Merger Review), are less well studied, but typically the static harm will outweigh any potential benefit created by increased innovation, and further, a competitor that is not competing has little incentive to innovate.

While conspiracy between competitors is almost always harmful, there are a wide range of agreements involving the sharing of, development of, or transfer of, technology between and among competitors. Some of these may be, on a net basis, anti-competitive. Many of them, however, are pro-competitive, owing to the technological innovation or dynamic efficiencies that are created. Policing these agreements correctly is an exceedingly difficult task.

Looking first to India, section 3 of the Act is the primary tool for stopping conspiracies. It provides that no person, enterprise or association thereof may enter into an agreement in respect of production, supply, distribution, storage, acquisition or control of goods or services, which causes or is likely to cause an appreciable adverse effect on competition within India. Sub-section 3(3) of the Act presumes that particularly harmful behaviour, such as price-fixing, satisfies this threshold.

This provision is similar to one of the two principal provisions of the Canada Act targeting anti-competitive agreements. The first is a flexible analysis similar to section 3 of the Act, in section 90.1 of the Canada Act. Instead of “appreciable adverse effect on competition”, the Canada Act imposes a similar threshold, although only of “competitors” of one another: whether an agreement “prevents or lessens, or is likely to prevent or lessen, competition substantially in a market…” (Canada Act, s. 90.1(1)). Under this flexible approach, this analysis considers a range of factors set out in the Canada Act, as well as an accompanying enforcement guideline created by the Competition Bureau (Competition Bureau, Competitor Collaboration Guidelines).

The Canada Act’s second principal provision combating conspiracy, section 45, requires no such flexible analysis. If a person is found to have engaged in the fixing of price, output or the production or supply of a product with a competitor, criminal sanctions will be applied. In a way, this is similar to section 3(3) of the Act, in that both target these particularly harmful activities and pay no regard to competitive effects, although section 3(3) carves out “joint ventures” from the presumption of an appreciable adverse effect.

1. Business Combinations / Mergers

A firm wishing to expand or acquire a new competency typically faces a binary choice: grow organically or acquire an existing firm. It is the latter that permits a firm to rapidly accumulate market power and potentially even monopoly power, which attracts the attention of an enforcement body such as the CCI. In any developed economy, business combinations are a frequent occurrence. As noted above, they have also increasingly become a common vehicle for acquiring technology and the talented people that create and commercialize that technology.

Business combinations occur so frequently, in fact, that much of the merger review provisions under the Act are procedural in nature (Act, s. 5), to enable the CCI to gather relevant information quickly and assess whether a proposed merger will have an appreciable adverse effect on competition within a relevant market in India (Act, s. 6(1)). The Canada Act is largely similar in structure, by setting out procedure of merger review and only requiring medium and large firms to submit to the merger review process and governing the timing of the merger review. Also similar is the test for whether to approve or challenge a merger, based on whether it prevents or lessens, or is likely to prevent or lessen, competition substantially in a trade, industry or profession in Canada. One difference is that in Canada, the Competition Bureau will analyze a range of factors, contained in both the Canada Act and in an accompanying enforcement guideline, to assess whether the transaction will pass the test.

III.       Is India Equipped For Nuances In This Analysis?

The law relating to conspiracies and merger reviews is quite similar in Canada and India, subject to some subtle differences. However, applying these laws is the difficult part of safeguarding the marketplace, and doing so requires economic analysis of a given situation.

Unfortunately, the economic tools available to analyze the nuances of whether a particular arrangement or merger is pro-competitive or will increase technological innovation, are not nearly as well established as they are for static price or output effects, according to Gwill Allen and Alan Gunderson (19). As both the Act and the Canada Act are relying on this common body of economic theory, these challenges are common to both the CCI and the Competition Bureau.

In seeking to ensure that the CCI is best able to effectively enforce the Act, I offer three suggestions which may be of assistance.

1. Insulate Non-Cartel Type Agreements From Serious Penalties to Avoid a Chilling Effect on Innovators

Currently, section 27 of the Act enables the CCI to apply onerous financial penalties, among a range of other remedies, against any type of agreement it determines to have an appreciable adverse impact on competition in India. While the ability to levy significant penalties may be desirable on occasion, the threat of penalties as significant as criminal sanctions in other countries can discourage firms from engaging in potentially beneficial alliances. This was a recognized shortcoming in Canadian competition law relating to anti-competitive agreements, which until 2009, was a regime built around criminal sanctions. In 2009, it was revised such that most agreements are analyzed under a flexible framework, considering a broad range of factors, usually with no potential criminal sanctions. The new framework acts to (i) prevent any chilling effect on most collaboration, since they don’t involve problematic behaviours, such as price-fixing, and (ii) identify and protect specific positive arrangements, including commercialization and joint selling agreements, research and development agreements, information sharing agreements and joint production agreements. Accordingly, while creating a flexible analysis, it retained a provision for criminal sanctions against serious conspiracies, in recognition that the harmful effects of such an arrangement will outweigh the benefits potentially created.

The CCI’s broad discretion in applying section 3, including levying significant penalties for a common technology transfer transaction, can create uncertainty amongst firms in arranging their affairs. An interpretive or enforcement guideline to provide similar safeguards could inspire confidence among firms, such as reserving serious penalties permitted by section 27 of the Act for serious anti-competitive conduct addressed in sub-section 3(3) and outlining types of agreements presumed to be beneficial, such as certain types of joint research and development agreements.

1. Address The Shortcomings of Economic Analysis for High-Technology Industries

Competition law relies on economic theory to identify anti-competitive harm. However, in rapidly changing high-technology industries, traditional economic tools, such as an analysis of static price and output effects, can be misleading. For example, by focusing on traditional price or output effects, an analysis could entirely miss the dynamic effects of an arrangement, either positive or negative, and intervention by the CCI could significantly harm innovation (Rosch). Unfortunately, at the same time, the potential for anti-competitive harm is still very much a reality.

Various studies have identified that to better analyze high-technology industries, one should consider: (i) dynamic efficiencies, as defined above, (ii) qualitative factors, perhaps including incentives for innovating, and (iii) the presence of vigorous, innovative competitors, known as “mavericks”, who are generally beneficial to consumers because they often create downward pressure on prices, innovate and come up with new products, which disrupts the power of incumbents in a particular market.

With respect to combinations, encouragingly, the Act refers the CCI to a list of factors when determining whether a combination will result in an appreciable adverse effect on competition in the relevant market (Act, s. 20(4)). Explicit reference is made to considering the “nature and extent of innovation” likely to be generated or destroyed by the combination, as is any removal of “vigorous and effective competitors” (Act, ss. 20(4)(l) and (m)). The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (No. 3 of 2011) (the “Regulations”) note that information must be disclosed by the combining parties to speak to these considerations, including any new technologies in an industry, research and development and intellectual property rights (Regulations, ss 11.10(d) and (e), 11.18-11.20). Finally, just as Canadian merger review provisions provide for a “defense” if pro-competitive efficiencies outweigh anti-competitive effects (Canada Act, s. 96), the Act includes such considerations by analyzing the contribution to economic development and any outweighing of adverse impact (Act, s. 20(4)(n)).

With respect to anti-competitive agreements, the Act is similarly equipped to incorporate these factors into the analysis of whether harm has occurred. Sub-sections 19(3)(e) and (f) of the Act address the consideration of “improvements in production or distribution of goods or provision of services”, a functional definition of innovation, and “promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services”, which also captures innovation and broader dynamic and qualitative effects.

The CCI should make full use of these provisions, in conjunction with the latest in economic theory, as the result will be a much better analysis of competitive benefits and harm.

1. Provide Explicit Guidelines Around Patents and the Use of Patents

Intellectual property, and in particular, patent law, is a core component of a nation’s innovation policy. A patent is the statutory incentive for innovation, offering a temporary monopoly on an invention in exchange for disclosure of that invention into the public domain. However, as it is charged with protecting the economy, partially through hostility towards monopolies, competition law is inherently in tension with patent law. At the same time, keen management of this tension is in order, as both patent law and competition law have goals of promoting innovation.

The use of patents engages competition law in a variety of ways. As a contemporary example, for a hardware manufacturer in the information and communications technology industry, a major aspect of a firm’s business is the accumulation of patents to protect the ability to sell products and the incorporation of technological standards, such as 3G wireless technology, into their products. Building a product that is compatible with a standard often involves the declaration of patents covering that particular standard standard to the particular standard setting organization (“SSO”). There are a number of competition law issues with SSOs, some owing to the fact that a SSO is a collection of competitors or firms in similar industries agreeing to adopt particular technologies and engage in other conduct which can sometimes look like a conspiracy and the fixing of prices for key inputs. Typically, however, SSOs are pro-competitive.

Similarly, a firm participating in a standard can “ambush” that standard by not informing the SSO about a relevant patent which covers part of the standardized technology, then suing the other firms using the standardized technology afterwards for patent infringement, for a much higher amount than would otherwise be possible.

Another way that patent law is increasingly engaging competition law around the world is in considering how to deal with an increasing amount of “patent troll” litigation, particularly in the United States. A patent troll is an entity which does not produce products and instead acquires and holds patents simply to assert them for royalties or settlements in court. It is far from clear that such patent assertion is pro-competitive or that it encourages innovation, and indeed, many academic authors suggest this behaviour is likely harmful to innovation.

Unlike Canadian competition law, with a set of enforcement guidelines which provide limited direction to firms (Competition Bureau, Intellectual Property Enforcement Guidelines), or United States competition law, with a set of enforcement guidelines and a substantial body of relevant court decisions and, there is little guidance offered to firms operating in India under the Act. In fact, sub-section 3(5) of the Act offers protection for anti-competitive conduct simply because it “restrain[s] any infringement of… [an intellectual property right]”. This provision, and the lack of other applicable guidance, does not appear to equip the CCI with the ability to thoroughly identify competitive effects caused by certain uses of patents, analyze whether harm is occurring, and intervene accordingly. The CCI may find it helpful to refer to the body of analysis in other jurisdictions, especially Canada and the United States to remedy this shortcoming in the Act.

1. Conclusion

Technological innovation is imperative to national development. The tricky question for the CCI is that collaboration is increasingly required for maximum technological innovation, yet collaboration may very easily cause anti-competitive harm. India’s new competition laws generally provide the tools necessary to successfully navigate around discouraging innovation, between the Scylla of “heavy handed” enforcement, and the Charybdis of no enforcement at all. For the particularly difficult problems, drawing upon experience with these issues in Canada and in the United States is helpful, and in particular, Canada’s recent amendments and enforcement guidelines offer the CCI guidance when applying the Act to novel situations.

Chris Hannesson is a Student-at-Law, Davies Ward Phillips & Vineberg LLP.

Chris graduated from the University of Western Ontario, Faculty of Law, in 2011 and from the Beedie School of Business at Simon Fraser University in 2008. Chris currently resides in Toronto, Ontario, Canada. Chris can be contacted at channesson@dwpv.com.

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Canada, Competition Bureau, Efficiencies in Merger Review (Ottawa: Supply and Services Canada, March 2009), online: <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/Bulletin-Efficiencies-Merger-Review-2009-03-02-e.pdf/$FILE/Bulletin-Efficiencies-Merger-Review-2009-03-02-e.pdf&gt; (accessed 13 December 2011).

Canada, Competition Bureau, Intellectual Property Enforcement Guidelines (Ottawa: Supply and Services Canada, September 2000), online: Competition Bureau <http://strategis.ic.gc.ca/pics/ct/ipege.pdf&gt; (accessed 13 December 2011).

OECD, Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3^rd Edition, online: Organisation for Economic Cooperation and Development <http://www.oecd.org/document/23/0,3746,en_2649_34409_35595607_1_1_1_1,00.html/&gt; at 46.

Gwill Allen and Alan Gunderson, “Innovation and Competition Policy: An Economic Perspective” (Paper delivered at the CBA National Competition Law Section, Annual Fall Conference, 11 October 2007) at 19-20.

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By Chris Hannesson