It has been written by Vinay Yerubandi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Following the Economic policy of 1991, a great challenge placed in front of India is to establish a fresh and less restrictive competition policy. Because of this, the restrictive provisions of the existing Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) required a replacement. This came in the form of the Competition Act of 2002. The Competition Commission of India (CCI) is established and empowered under the act to function as a regulatory body for competition law aspects in the country. Competition law in India mainly focuses on three important aspects namely prevention of anti-competitive agreements, prevention of abuse of dominant position and merger control.
What is Merger Control
When two or more businesses decide to combine their capabilities to achieve economies of scale, there is a possibility that this transaction may impact adversely on the market or other players in the market. This may be in the form of creating entry barriers, virtually establishing a monopoly by capturing the entire market or pricing the products at a very lower price than competitors.
To avoid situations like these and to maintain healthy competition, governments lay down the laws related to merger control. Merger control refers to reviewing the impact of the transaction on the competition in the relevant market by the competition regulator of the country. So, any M&A transaction which is triggering the applicability of those laws due to it crossing certain thresholds or for various other reasons is required to get the approval of the anti-trust regulator of that country before consummating with the transaction. In India, this review is conducted by the Competition Commission of India and the touchstone for this review is called the “Appreciable Adverse Effects on Competition” doctrine.
CCI considers various factors like:
(i) creation of barriers to new entrants in the market;
(ii) driving out existing competitors from the market;
(iii) foreclosure of competition by hindering entry into the market;
(iv) accrual of benefits to consumers;
(v) improvements in production or distribution of goods or provision of services;
(vi) promotion of technical, scientific and economic development through production or distribution of goods or provision of services
For determining the Appreciable Adverse Effect on Competition of a combination. Out of these six factors, the first three are negative effects and the remaining three are positive effects. CCI balances both the positive and negative effects of the combination while assessing the appreciable adverse effect on competition.
The term ‘combination’ refers to those transactions which require CCI’s approval. The European Commission and some other regulators refer to these transactions as concentrations or concentration acts. Combinations in India are regulated by the “Competition Act, 2002”. “Competition Commission of India (Procedure in regard to the transactions of business relating to combinations) Regulations, 2011 (Combination Regulations)” provides for the procedure and mechanism for the implementation of provisions under the act.
Section 5 of the Competition Act defines combinations. As per the definition, any acquisition of one or more enterprises or merger or amalgamation of enterprises that is crossing the jurisdictional thresholds prescribed by the CCI shall be considered as a combination. Section 6(2) of the act states that any transaction which is qualified as a combination under Section 5 is required to file a notice of the transaction and can consummate the transaction only after getting clearance from CCI. CCI in many combinations like Hindusthan Colas/SIMPL, Baxter/Baxalta penalized the parties for consummating the transaction before it was approved by CCI.
To check whether a particular transaction qualifies as a combination under section 5, it should meet any of the criteria mentioned in the following tests:
1. Parties test: The acquirer and target enterprise, along with its units, subsidiaries and divisions on a consolidated basis or the merged enterprise, post-merger has either: (a) assets of more than INR 2000 crore in India or turnover of more than INR 6000 crore in India; or (b) world-wide assets of more than of USD 1 billion, which includes a minimum of INR 1000 crore in India or worldwide turnover of more than USD 3 billion, which includes a minimum of INR 3000 crore in India; or
2. Group test: The group to which the target entity or the merged entity will belong post-transaction has either: (a) assets of more than INR 8000 crore in India or turnover of more than INR 24000 crore in India; or (b) worldwide assets of more than USD 4 billion, which includes a minimum of INR 1000 crore in India or worldwide turnover of more than USD 12 billion, which includes a minimum of INR 3000 crore in India.
If any of the above conditions are met, then the transaction is considered a combination and triggers the obligation to notify to CCI subject to the following two exemptions:
1. Target Exemption: If the target entity has assets in India of not more than 350 crores or turnover in India of not more than 1000 crores. Then the transaction can get exemption from notifying CCI. However, this exemption can be claimed only until 26 march 2022.
2. Schedule 1 Exemption: Schedule 1 to the Combination Regulations specify certain combinations which are not considered by CCI as combinations causing an appreciable adverse effect on competition and therefore exempt from notification to the CCI.
Impact on offshore transactions having insignificant local nexus
Interestingly, whether an offshore transaction requires notification to CCI or not is determined only by the jurisdictional thresholds laid under section 5 of the act. Irrespective of the nexus of the transaction to the competition in India, a transaction that satisfies the jurisdictional thresholds are required to notify the CCI. Many such offshore transactions didn’t affect competition in Indian markets but ended up being notified to CCI only on a purely technical filing basis. This resulted in additional costs and an extension in the transactional timeline.
Notwithstanding anything, Section 32 of the act which is a non-obstante clause also gives CCI the power to conduct an enquiry into any transaction which had taken place outside India and did not trigger the jurisdictional thresholds, if it is satisfied that the transaction may cause Appreciable Adverse effects on competition in India.
While assessing whether an offshore transaction is notifiable or not, it appears that CCI seems to ignore the substantive test (effect on competition in India) and rely only on the test of jurisdictional thresholds which analyses only financial information. This application for offshore transactions seems to be wide off the mark and superfluous. There exists a requirement that CCI should establish additional qualifications and requirements while extending its jurisdiction to transactions happening outside India. Until 2014, schedule 1 of the combination regulations has an item that provides an exemption to the combinations made outside India with insignificant local nexus and effect on the market in India. But, CCI deleted this item in the 2014 amendment of Combination Regulations. By deleting this CCI had appeared to only rely on the objective test of thresholds to determine whether an offshore transaction is notifiable.
Also, the computation of an enterprise’s assets and turnover for the application of jurisdictional thresholds needs to be more mature. As per the act, we are required to consider the audited financials of the immediately preceding financial year. According to this, if an enterprise is located in India and is deriving maximum revenue from exporting its products overseas, the turnover derived from the sales outside India shall also be considered as turnover in India. Therefore, the merger control in India does not refer to local turnover while computing the domestic turnover. The same stand was expressed by CCI in its order in Mylan/Agila Specialties. Unlike Indian Merger control, European Merger Control legislation allocates the turnover based on the geographical location where the sale of the product took place. Generally, this will be the place where the customer is located. This seems to be the on the mark approach because the primary intention of any merger control law is to protect competition in the relevant market. Here, the market is situated where the customer is present but not where the enterprise is present. So, taking the turnover from the financials of the enterprise and not allocating turnover to the geographical markets may be a simplistic and easy process but it seems to be not in the true spirit of merger control.
In Tata Chemicals Limited/Wyoming I, Wyoming I was an overseas wholly-owned subsidiary of Tata Chemicals Limited which is being merged into its Indian holding company. In this transaction, the parties claimed offshore exemption under schedule 1 (which was deleted in an amendment in 2014) stating that it was an “entirely outbound stream of acquisition”. However, CCI didn’t agree with the claim as the transaction is breaching jurisdictional thresholds. In Tetra Laval/Alfa Laval, CCI held that if the transaction triggers the jurisdictional threshold, then it will have a significant local nexus in India and requires notification.
Many such offshore transactions like Nestle/Pfizer, Silver Lake/Dell, Titan International/Titan Europe, Zulia Investments Pte Ltd/Kinder Investments Pte Limited have filed a notice to CCI, even though these transactions didn’t have any nexus with the competition in India. This had resulted in extended transactional timelines and an increase in costs. In the transaction between Titan International and Titan Europe through which Titan International, Inc is acquiring the entire share capital of Titan Europe PLC, Titan International is indirectly acquiring 35.91 percent of equity in Wheels India Limited which is an associate company of Titan Europe PLC. Since the assets and turnover of Wheels India are exceeding the thresholds, CCI held that the transaction requires notification to CCI before consummation.
The author of this article tried to analyse the impact of Indian competition law on combinations that are taking place outside India. The jurisdictional thresholds which are calculated based on the financial statements fail to identify the actual impact of the transaction in the relevant market. This creates a necessity to modify the thresholds by emphasising more on the relevant market where the competition can have a potential impact. There is also a clear need to establish an additional qualifier while obligating offshore transactions to notify CCI. The lack of such additional qualifiers is creating superfluous delay in the transactional timeline and an increase in transactional costs for offshore transactions which don’t have any nexus with competition in India.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: