Introduction & background
This is a system of procedural reviewing of mergers & acquisitions deals under the competition legal framework. In India, the regime was introduced in the year 2011, which were Sections 5 & 6 of the Competition Act of 2002 under the heading of ‘Regulation of combinations’. It aimed to regulate all such merger or acquisition deals with regard to how they would be affecting the competition overall. In essence, these reviews under the competition law scheme checks and understand how these deals may affect an appreciable adverse effect on competition (AAEC). The main authority for regulation of merger control is the Competition Commission of India (CCI) which was set up by the Competition Act of 2002. The Ministry of Corporate Affairs (MCA) is also indirectly responsible for the governance of Merger control by way of different notifications issued in this regard. The other important legislation is the Competition Commission of India (Procedure in regards to the transaction of business relating to combinations) Regulations 2011 (Combination Regulations). A recent amendment to the Competition Act of 2002 was revealed which is the Competition (Amendment) Bill 2022. This was introduced in the Parliament and referred to the Parliamentary Standing Committee on Finance for a review.
Procedure
Section 5 of the Act lays down the definition of combinations as the acquisition, merger or amalgamation of one or more enterprises by one or more persons or enterprises with regard to a capital threshold differentiated as per the parties to the acquisition who are being acquired or the group which would have the control, shares, voting rights or assets of the entity(s) which are being acquired. The merger control regime is mandatory and suspensory in nature and cannot be completed without the requisite approval from the CCI. It is mandated that the CCI shall have to issue its final order within 210 days from the receipt of a notice, in the absence of which, it would be deemed to be approved by the CCI. This notice so mentioned above is a notification of either a merger/amalgamation which is to be made to the CCI jointly by both the parties merging, only after the approval of such merger or amalgamation is done by the board of directors of the parties to the merger/amalgamation transaction or a notification of an acquisition which is to be made to the CCI as decided by the acquiring party, only after the execution of a binding agreement relating to the acquisition event. These are the trigger events triggering the need for the notification to be submitted to the CCI. Moreover, in the case of listed companies acting in pursuance of SEBI (Substantial Acquisition of Shares and Takeover) Regulations 2011, (Takeover Code), the public announcement would be the trigger event triggering the need for submission of notification to the CCI. There are currently 3 types of notification forms that need to be filled out which are:
Form I (short form) is the usual form to be filled to notify the CCI of the merger/amalgamation.
Form II (long-form) is used in cases where (i) the parties to the notification are in direct competition with each other, or in other words, are part of the same business sector; (ii) are in relation with each other vertically or not in direct competition with each other and their individual or combined market shares exceed a cap of 25%.
Form III is a post-completion form issued to notify the CCI of transactions involving share subscriptions, financing facilities, or acquisitions done by public financial institutions, foreign institutional investors, banks, or venture capital funds.
The period of review to be initiated by the CCI is done in two phases. In phase, I, the CCI is under an obligation to form a prima facie opinion as to how or why a combination arrangement would lead to the causation of an AAEC within a period of 30 days from the filing of the notification. This 30-day period is excluding the time taken by the parties to provide additional information for the purposes of clarification. In case the CCI is of the opinion that the combination arrangement would cause an AAEC then it is required to issue a show cause notice mandating the parties to lay down their explanation as to how the arrangement would not cause AAEC, within a period of 30 days. In this period, the parties are given leeway to propose voluntary modifications to their combination arrangement in response to the CCI’s opinion. If this happens, the CCI is given a further period of 15 days to re-form its opinion after the response submitted by the parties to the combination arrangement. Now, if the CCI is still not satisfied with the parties’ response, it gains the right to initiate phase II.
In phase II, a detailed investigation is carried out. This investigation requires the CCI to approach third parties for their views on the combination arrangement. In addition to that, the parties to the arrangement are also required to publish their details of the combination arrangement so as to enable the general public to put forth their comments. In general, the CCI has a period of 210 days from the receipt of the notification to pass the final order either approving or disapproving the combination. This period is not fixed mandatorily at the 210th-day mark as an additional period of 60 days may be made available to negotiate the available remedies.
Penalty
The Act mandates a penalty of fine for the failure to notify of combination arrangements or if any part of the combination transaction is done before the approval from the CCI is given. This penalty may reach up to 1% of the total assets or turnover, whichever is higher, of the defaulting party, in the immediately preceding financial year.
The Green Channel Route
This is a route of automatic approval that was introduced in the year 2019. This was introduced so as to ease the compliance burdens for certain types of transactions where the acquiring group/party has no horizontal overlap, vertical or complementary relation with the business of the target entity. In this route, the CCI automatically approves the combination arrangement once the notification is received by it. In case the CCI is of the opinion that the transaction does not fit into the requirement of the green channel route, in other words, if there is horizontal overlap or vertical relation by the acquiring party with regards to the target business, it has the discretion to declare such a transaction or its approval thereof, void ab initio or not valid in law from the beginning. If this situation arises, the parties are required to re-file the notification.
Updates & Amendments
With the introduction of the Competition (Amendment) Bill of 2022, there are a variety of new improvements made to the Mergers Control Regime so laid down by Sections 5 & 6 of the Competition Act of 2002. Some of the main improvements have been laid down in brief hereinbelow: –
The earlier maximum period of review so granted to the CCI from the date of receipt of notification was a period of 210 days, which has now been changed to a shorter period of 150 days. This change may negatively affect the review process of the CCI as the timeline has been tightened despite the fact that real review processes take upwards of 210 days generally.
In the case of Form III applying to the transactions involving share subscriptions, financing facilities, or acquisitions by the public financial institutions, foreign institutional investors, banks, or venture capital funds, the Amendment Bill aims to exempt these transactions from the notification requirements in its entirety.
The approval of the CCI would, as per the Amendment Bill, not only depend on the basis of the assets and turnover of the entity but also on the basis of the transaction value or deal value. This deal value threshold proposes deals with a value greater than Rs.2,000 crores and situations where either party has ‘substantial business operations in India’ will have to be notified to the CCI.
The scope of the definition of ‘control’ has been widened. Before the Amendment Act of 2022, the definition of ‘control’ included controlling the affairs or management of the target entity. Now, it has been amended and there is no requirement to prove control over the affairs or management of the target enterprise or group. ‘Control’ now means the ability to exercise material influence, in any manner whatsoever, over the management or affairs or strategic commercial decisions of the target enterprise or group.
The definition of ‘turnover’ is proposed to be changed from the earlier definition which read as “value of sale of goods and services” to a more detailed definition that excludes certain sales and taxes when calculating the turnover. Exclusions in the new definition include intra-group sales, indirect taxes, trade discounts, and all amounts which are generated through the assets or business from customers outside India. Through the clarification regarding the exclusions, the definition of ‘turnover’ is made much more comprehensive.
References
Merger Control Wrapped 2022 And What’s In Store For 2023 – M&A/Private Equity – India (mondaq.com)
Merger Control Regime in India: 2023 Revisions to the Competition Law (India-briefing.com)
The Asia-Pacific Antitrust Review – Global Competition Review