This article is written by Khushnum Motafram, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.  Here she discusses “When does the Competition Commission of India need to be approached for Acquisitions?”.

Introduction

India is one of the fastest-growing economies in the world. The growth potential of the Indian economy has still not reached its point of saturation. Market players i.e. firms, entities or the sellers are opting into various competitive techniques to achieve their business objectives or goals such as higher profit margins, sales, greater market share etc. In this cut-throat competition in the business market, it would not be wrong to say those market players would not opt for anti-competitive practices in order to achieve their end needs. However, it is worth noting that free and fair competition guided by sound and effective competition law and policy would be one of the key catalysts in obtaining an efficient market economy. So with the growing economy, globalization and opening of the markets worldwide, establishment of an agency to control anti-competitive practices was essential to harness full growth potential in many critical aspects of the Indian economy in a prudent and efficient manner. The Indian legislature enacted the Competition Act, 2002 with a notion to prevent anti-competitive practices in the territory of India and to encourage and sustain competition, protect the interest of the consumers and ensure freedom of trade in the market. 

Competition and the Competition Act, 2002

Competition can be defined as an economic rivalry between two or more market players in order to attract more customer to attain their business objective. Further, the World Bank and OECD in its Report ‘A Framework for the Design and Implementation of Competition Law and Policy’, broadly defines the competition is “a situation in a market in which firms or sellers independently strive for the buyers’ patronage in order to achieve a particular business objective, for example, profits, sales or market share.” Domestic and multinational companies, distributors, shopkeepers, retailers or wholesalers qualifies within the meaning of market players. They may or may not indulge in anti-competitive techniques in order to wash away their competitor. However, in the interest of a welfare society and the economy, it was imperative to promote a market facilitating fair competitive outcomes in the market. Hence, the Competition Act, 2002 was enacted.

Chapter II of the Competition Act, 2002 provides for the substantive laws which prohibit anti-competitive practices in the Indian economy. Section 3 of the Act prohibits entering into anti-competitive agreements, Section 4 prohibits leading market player in the sector to abuse its dominance in the market over the other players. Section 5 and Section 6 prohibits and regulates the combination of two or more entities by way of merger, amalgamation or acquisition which would cause or likely to cause an appreciable adverse effect on the competition within the relevant market.

Further, Chapter III of the Act deals with provisions relating to establishment and composition of the commission, selection of committee for Chairperson and other members, terms of office of Chairperson etc. and Chapter IV elaborates duties, powers and functions of the commission. 

Regulation pertaining to combinations

1. Relevant meaning and definitions

Section 2(a) of the Act specifically defines acquisition to mean “directly or indirectly, acquiring or agreeing to acquire (i) shares, voting rights or assets of any enterprises; or (ii) control over management or control over assets of any enterprises”.

Section 2(h) of the Act defines enterprise to mean a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to production, control of goods or provisions of services, or in investment, or in the business of acquiring, holding, underwriting or dealing in securities whether such unit or division or subsidiary is located at the same place where the enterprise is located or at different places. 

Section 2(y) of the Act defines turnover to include the value of the sale of goods and services. As per the explanation is given under Section 5, assets shall be valued at book value as given in the audited financial statements of the entity for the financial year immediately preceding the financial year in which the date of proposed merger falls. The said book value has to be adjusted by reducing depreciation.

2. Notifying the Competition Commission of India

As per the provisions of Section 5 of the Act, any acquisition of one or more enterprises by one or more persons, or merger or amalgamation of enterprises, shall be a ‘combination’ of such enterprises and person or enterprises if the threshold prescribed under the said Section are met. The threshold has been enhanced by 100% pursuant to notification no. S.O. 675(E) dated March 4, 2016, which is given herein below:

Threshold
		Assets	Or	Turnover
Enterprise-level	India	Greater than INR 2,000 crore		Greater than INR 6,000 crore
	Worldwide	Greater than USD 1 billion with at least INR 1000 crore in India		Greater than USD 3 billion with at least INR 3000 crore in India
Or
Group level	India	Greater than INR 8,000 crore	Or	Greater than INR 24,000 crore
	Worldwide	Greater than USD 4 billion with at least INR 1000 crore in India		Greater than USD 12 billion with at least INR 3000 crore in India

Explanation b to Section 5 of the Act, group shall mean two or more enterprises which, directly or indirectly, has the power to exercise 26% or more of the voting rights in the other enterprises or has the power to appoint more than 50% of the members of the board of directors in the other enterprises or control the management or affairs of the other enterprises. 

As per Section 6(1), any person or enterprise entering into combination where the aforementioned threshold has been exceeded and which causes or is likely to cause an appreciable adverse effect on the competition within the relevant market in India shall be void. 

However, in case any person or enterprise proposes to enter into such a combination where the prescribed threshold is exceeded, such person has to approach the Competition Commission of India and file a notice in the prescribed form within applicable fees, disclosing the proposed combination as per Section 6(2) of the Act. The time limit for filing of the notice has been relaxed for a period of 5 years from the date of notification by way of a notification dated June 27, 2017, issued by the Central Government.

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3. Procedure for notifying Competition Commissioner of India (CCI)

1. A notice has to be filed with the CCI specifying the details of the proposed combination upon execution of the agreement or other document pertaining to the acquisition;
2. The notice has to be given in Form I with a fee of INR 15,00,000. However, in case the horizontal overlap between the parties is more than 15% in the relevant market, or if the vertical overlap between the parties is more than 25% in the relevant market, the notice has to be given in Form II with a fee of INR 50,00,000;
3. In case the parties do not file notice as stated above, the CCI may suo moto take cognizance and order such parties to file a notice and may impose a penalty for non-filing of said notice with the CCI;
4. The CCI shall within 30 working days of submission of notice, pass an approval order, with or without modifications in case the said combination is not likely to have an appreciable adverse effect on competition;
5. In case CCI is of the opinion that such a combination would cause appreciable adverse effect on competition, it would commence an in-depth investigation into the said combination and may call for a report from the Director-General;
6. In the end, the CCI may either grant unconditional approval or condition approval or require that such a combination shall not take effect; and
7. As per Section 6(3), such combination shall be deemed to be approved at the end of 210 days from the date on which the notice has been given to the Commissioner in case CCI does not pass an order either approving or denying the grant of approval to the combination.

4. Penalty

In case the parties to the combination consummate any part of the combination before the approval of CCI, then the CCI can impose a penalty up to 1% of the total turnover or the assets, whichever is higher.

5. Exception

The provisions contained in Section 5 and Section 6 shall not be applicable in case of share subscription or financial facility or any acquisition, by a public financial institution, foreign institutional investor, bank or venture capital fund pursuant to any covenant of a loan agreement or investment agreement. 

Cases

In the event of non-disclosure of the combination in the prescribed forms in accordance with Section 6(2), the Competition Commissioner has the power to impose a penalty under Section 43A of the Competition Act, 2002. Given below are few of the cases in which the Competition Commissioner has taken strict actions against the defaulters of law.

1. Case pertaining to imposition of a penalty for non-compliance with the provisions of Section 6 of the Competition Act, 2002 (May 7, 2018)

In the matter of Intellect Design Arena Limited (IDAL), Polaris Financial Technology Limited (PFTL) demerged its “product business” by a board resolution dated March 18, 2014, on a going concern basis. The said demerged product line was then purchased by Intellect Design Arena Limited. In the instant case, as per the books of account, a total turnover of PFTL in India for the financial year 2012-13 was INR 1,853.90 crore. Thus, based on the book value, assets and turnover of PFTL exceed the De Minims Exemption threshold applicable at that point of time. The Commission observed that prima facie the transaction does not fall under de minimis exemption and the parties satisfy the jurisdictional threshold, in terms of combined assets and turnover of the parties, as provided in Section 5 of the Competition Act, 2002 making the said combination a notifiable transaction. In light of the said contravention, the Commission chaired by Mr. Devender Kumar Sikri imposed a penalty of INR 10,00,000 in the exercise of its power under Section 43A. 

2. Case pertaining to imposition of a penalty for non-compliance with the provisions of Section 6 of the Competition Act, 2002 (July 3, 2018) 

On October 26, 2012, the Competition Commission of India received a notice under Section 6(2) of the Competition Act, 2002, given by Lakshdeep Investments & Finance Private Limited (“Lakshdeep”) for the proposed acquisition of shares of Telewings Communications Services Private Limited (now Telenor (India) Communications Private Limited, hereinafter referred to as “Telewings” / “Telenor India”) filed pursuant to the execution of a Share Subscription and Shareholders’ Agreement (“SSHA”) dated October 26, 2012 between Telenor South Asia Investment Pte Limited (“Telenor South Asia”), an indirect wholly-owned subsidiary of Telenor ASA (“Telenor”, the ultimate holding company of Telenor Group), Lakshdeep and Telewings. However, Lakshdeep claimed that one transaction (i.e. Telenor increasing its shareholding to 74% and consequently Lakshdeep buying 26% in Telewings (“Telenor Share Transaction – Tranche 1”)) was an intra-group asset transfer in terms of Regulation 4 read with Item 8 of Schedule I of the Combination Regulations and need not be filed with the Commission. Further, on March 23, 2017, the Commission received another notice under Section 6(2) for 100% shares transfer from Telenor India to Airtel through a court driven scheme of merger. However, during the review the Commission observed that Telenor has consummated the Telenor Share Transaction – Tranche 1 and subsequently increased its shareholding in Telenor India from 74% to 100% (“Telenor Share Transaction – Tranche 2”) without notifying the Commission. Hence, violating the provisions of Section 6(2) of the Competition Act, 2002. In light of the said contravention, the Commission chaired by Mr. Sudhir Mittal imposed a penalty of INR 5,00,000 in the exercise of its power under Section 43A. 

3. Case relating to no appreciable adverse effect on competition (June 3, 2019)

In the matter of CVI CVF IV Master Fund II LP and others, a notice under Section 6(2) of the Competition Act, 2002 was jointly filed by CVI CVF IV Master Fund II LP, CVI AA Master Fund II LP, CVI AV Master Fund II LP, CVIC Master Fund LP, Carval GCF Master Fund II LP, CarVal GCF Lux Securities S. à r. l., CVI AA Lux Securities S. à r. l., CVI AV Lux Securities S. à r. l., CVI CVF IV Lux Securities S. à r. l., CVIC Lux Securities Trading S. à r. l and Nithia Capital Resources Advisors LLP (hereinafter collectively referred to as the “Acquirers”). They proposed to acquire up to 100% of the total issued and paid-up share capital of each of Uttam Galva Metallics Limited (“UGML”) and Uttam Value Steel Limited (“UVSL”) (UGML and UVSL are collectively referred to as “Targets”) by participating in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (“IBC”). During the review of the proposed combination by the Commission, it was noted that the said combination pertains to steel sector in India and that Carval Funds and its affiliates held 0.7% in Tata Steel BSL Limited and does not have any other right over and above those conferred upon ordinary shareholders. Further, as regards Nithia’s, neither Nithia nor any of its affiliates have made investments in any entity in India and were not engaged in any business in India. Based on the above-stated facts, the Commission was of the view that proposed combination is not likely to result in a change in competitive dynamics in any market in India and is thus not likely to result in an appreciable adverse effect on competition in any of the markets in India. Hence, the said combination was approved by the Commission subject to the condition that the said approval shall stand revoked in case the information provided by the Acquirers are found to be incorrect.

4. Case relating to no appreciable adverse effect on competition (January 31, 2019)

A notice under Section 6(2) of the Competition Act, 2002 was filed by Royale Partners Investment Fund Ltd. (“Royale Partners/Acquirer”) relating to a proposed acquisition of EPC Constructions India Ltd. (“EPC Constructions”) with the Competition Commission of India. Royale Partners proposes to indirectly acquire EPC Constructions by amalgamating the special purpose vehicle, a proposed wholly-owned subsidiary of Royale Partners in India, with EPC Constructions. The Commission during its review noted that Royale Partners / RPMG Group and EPC do not produce/provide similar or identical or substitutable products or services and are not engaged in any activity relating to the production, supply, distribution, storage, sale and service or trade-in products or provision of services which is at different stages or levels of the production chain in India. Relying on the said facts, details provided in the notice and the assessment of the combination, the Commission was of the opinion that the combination is not likely to have an appreciable adverse effect on competition in India.

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