this article has been written by Aditya Trivedi, pursuing a Certificate Course in Competition Law, Practice And Enforcement from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
On 20th May, 2021, while the Competition Commission of India (“CCI”) was celebrating its 12th Annual Day, Union Finance Minister Nirmala Sitharaman stated that CCI should take “extra care” and ensure that no “omission or commission” result in undermining of market processes as business enterprises would opt for revival after the pandemic. The remarks are important as CCI rigorously reviews various Mergers and Acquisitions (“M&A”) transactions to check if the proposed entity would cause ‘appreciable adverse effect on competition’(“AAEC”).
With the advent of globalization, privatization and liberalization in India since 1991, mergers and acquisitions have increased with the advantages to scale up operations. When two companies merge or when an Acquirer takes over a Target Company, the principle of ‘economies to scale’ is utilized. It leads to access to global markets, access to technology, limited use of resources, access to funds, and managerial powers, et al.
On the merger control side, CCI has reviewed more than 800 cases on merger control.
Section 6(2) of the Competition Act, 2002 (“Act”) provides for mandatory notification of combinations that are required to be notified for review of the Commission. It is only after the approval of the CCI that the combination can take place. In CCI v. Thomas Cook (India) Ltd., (2018), it was held that structuring of transactions should not be to avoid mandatory provisions of the Act. In SCM Solifert Ltd.v. CCI, (2018), Justice Arun Mishra stated that the proposal to enter into combination is required to be notified to the Commission and the legislative mandate is that the notification has to be made before entering into the combination. Further, the intent being that the Commission has an opportunity to assess whether the proposed combination would cause an Appreciable Adverse effect on Competition and in case, the combination is to be notified ex post facto for approval, it would defeat the very intent of the provisions of the Act.
Schedule 1 exemptions
Pursuant to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011, commonly known as ‘Combination Regulations’, certain transactions, need not be notified as it is presumed that they will not cause an AAEC in the relevant market in India. Section 4 of Combination Regulations provides for the categories of transactions not likely to cause AAEC and thus, not required to notify the Commission about the proposed combination for its approval. This is done to ease the business of the Commission and focus on more relevant transactions which are likely to cause AAEC. These transactions are mentioned in Schedule 1 of the Regulations. There are 10 such categories:
Solely in the investment and ordinary course of business.
This item states that if an acquisition of shares or voting rights, referred to in sub-clause (i) or sub-clause (ii) of clause (a) of Section 5 of the Act, solely as an investment or in the ordinary course of business, and holds less than 25% of an enterprise’s shares or voting rights need not make a notification before the CCI. These are regarded as “investment-only” transactions and such relaxation is usually given to investment holding companies or private equity entities.
In the Alibaba/Jasper Infotech Case, acquirer Alibaba.com Singapore E-commerce Pvt. Ltd. had a non-controlling stake of less than 5% in Jasper (Target Company). Item 1 exemption was denied on the ground that the acquirer and target were competitors and hence, likely to cause AAEC.
The concept of control is an important factor while examining minority investments, for instance, board seats, control to manage or influence affairs of the target company. In other words, Item 1 exemption doesn’t allow strategic investments.
Item 1 -A
Creeping acquisition between 25-50%.
It requires a pre-existing acquirer already holding 25% and is now planning to acquire a percentage less than 50% of shares, assets and voting rights.
In Sanlam Engineering Markets/Shriram Life Insurance Co. Ltd, the acquirer Sanlam engineering Markets had a 25.37% stake in the target company Shriram Life Insurance and wished to increase it to 42.39%. Due to no material change in control, CCI observed that there is no adverse effect on competition.
Joint Control /Sole Control (prior control of 50% or more).
This item deals with situations where the acquirer has 50% or more shares and wishes to increase its stake. This is exempted from notification until the acquirer takes sole control of the entity, i.e., 100% stake.
Not directly related to business activity or made solely as an investment or in the ordinary course of business
This includes transactions not directly related to the business activity of the parties or made in the ordinary course of business as an investment or otherwise. Asset acquisition like intellectual property is exempted under this item unless the asset or intellectual property represents substantial business operations of the target company.
In the Jet/Etihad case, there was a sale and leaseback arrangement of three pairs of Heathrow airport slots. The parties did not notify this transaction on the ground this is a very common transaction in the aviation industry. CCI did not agree and held that the exemption was not available as the 3 pairs of Heathrow slots formed the basis for Jet’s entire services between India and London and hence, impacted substantial business operations, causing AAEC.
Amended tender offer
This item exempts from making a notification where there is a renewal with the open offer filed with the SEBI in terms of the Takeover Code because the combination notification has already been filed with CCI for the original open offer. Repeated notification is not necessary.
Acquisition of stock in trade and raw materials
Acquisition of raw materials, stores and spares, trade receivables, current assets etc. in the ordinary course of business is exempted from notification as they are least likely to impact competition in the economy.
Acquisition of shares, voting rights pursuant to bonus issue, stock split, consolidation of the face value of shares or buy-back etc.
This exemption is with respect to the acquisition of shares or voting rights pursuant to bonus issue or stock splits or consolidation of the face value of shares or buy back shares or subscription to the rights issue of share. This is exempted from notification as it doesn’t lead to the acquisition of control.
Acquisition of shares or rights by underwriters or stockbrokers
No notification is necessary when shares are acquired by underwriters or registered stock brokers in the ordinary course of business and in the process of stockbroking.
Acquisition of shares of voting rights by a person within the same group
This item refers to intra-group acquisitions. This is exempted from notification as these acquisitions are made within the same group like transactions involving wholly owned subsidiaries and their parent companies. Unless it is a joint venture with another enterprise, this item is exempted.
This is the exemption for intra-group mergers and amalgamations.
Merger or amalgamation of two enterprises where one of the enterprises has more than 50% shares or voting rights of the other enterprise
This item refers to transactions where mergers and amalgamations that involve two entities. Where one has 50% or more stake in the other. Unless this transaction results in sole control of the entity, it is exempted from notification.
Acquisition of shares, control, voting rights or assets by a purchaser approved by the Commission pursuant to and in accordance with its order under Section 31 of the Act
Section 31(3) of the Act allows the CCI to propose some modifications to the transaction to deal with AAEC concerns. CCI can ask for structural modification, for instance, divestment. Once such modifications are done, the acquisition need not be notified before the Commission as the CCI has already analyzed the case and given the green signal subject to modifications.
It is an important role played by the CCI as a regulator to review the mergers, acquisitions and amalgamations taking place in the economy. If a party fails to furnish information related to combinations, Section 43A of the Act empowers CCI to impose a penalty upto one percent of the total turnover, or the assets of the combination, whichever is higher. CCI had cleared the vast majority of combinations in industries such as telecommunications, agrochemicals, pharmaceuticals, aviation, manufacturing, information technology, financial services, banking and broadcasting, etc. CCI has also fined the parties for violating the ‘gun-jumping’ provisions of the Act. In 2019, CCI introduced a ‘green channel notification’ amendment to Combination Regulations.
The Amendment allows the parties which are breaching the monetary thresholds of notification exemption and don’t involve any form of ‘overlaps’ in the activities of the parties to be notified before the Commission under Green Channel. Such transactions will be deemed approved on receiving acknowledgement of filing. The Competition (Amendment) Bill, 2020 provides for derogation from the standstill requirement of Section 6(2A) of the Act. The provision says that no combination can take place until CCI passes an order under Section 31 of the Act or 210 days have passed since the notification. CCI, in December 2019, issued a draft notification for public comments, seeking to implement this change. If the Competition Bill passes in Parliament, this amendment will be codified.
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