This article is written by Aswathy, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from Lawsikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho).
Any economy’s progress requires a lively and effective competition law framework. It aids in the regulation of a free and fair market and ensures market equilibrium. Competition law is the crucial instrument that ensures that the market provides an even ground for fair play by ensuring that a few key players do not dominate the market. It enables the market to function in such a way that any practices do not create barriers to entry for small enterprises or place an unfair burden on them which may force them to engage in unfair tactics to compete.
Competition laws in India are governed by the Competition Act, 2002 (the “Act”), which was introduced to protect appreciable adverse effects (AAEC) on trade-related competition in the relevant market, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade. Antitrust law, in general, has three focus areas, which are i) prohibition of anti-competitive agreements) prohibition of abuse of dominance; and iii) regulating mergers and acquisitions. The Indian laws cover all these essential aspects of competition law. Abuse of dominance is prohibited by the issue of orders by the Competition Commission of India (the “CCI”), whereas all proposed combinations are also regulated by the issue of orders.
Scope of the law
The merger control regime in India requires companies that propose to enter into a transaction to notify the CCI as a suspensory obligation if it is required to do so as per certain specified standards or thresholds. The notification must specify the nature of the proposed transaction, immediately post the approval of the board of directors of the companies. The transaction must not be consummated before receiving the approval of the CCI. Following are the main facets of the law:
- Mandatory notification of combinations that are required to be notified;
- Identifying the relevant product and geographic market to which the combination belongs to;
- Identification of the overlaps of goods and services of the parties involved in the combinations in that relevant market; and
- Using the considerations outlined in Section 20(4) of the Act, determining whether the combinations will have a significant detrimental effect on competition in the relevant market.
Abuse of dominance
A ‘dominant position’ is one defined to be a position of strength that is enjoyed by an enterprise due to which it can operate independently of competitive forces existing in the relevant, or due to which the enterprise can affect its competitors, consumers, or the relevant market in its favour. Any such practice would potentially result in changing or disturbing a prevailing market situation in India. Various factors play a role in a resultant dominant position such as size and assets of the company, reliance on customers on the undertaking, vertical combination or integration, countervailing purchase power, degree of section and exit barriers in the market, etc.
This is summarised and laid down in Section 4 of the Act. Section 4 seeks to prohibit such abuse of a dominant position by an entity or a group of entities. If an entity or group of entities are said to be abusing their dominant position if :
- It imposes unfair prices or unfair conditions on sale or purchase.
- Limits or restricts production or technical development in a way that detrimentally affects consumers.
- Denies market access to its competitors.
The CCI can issue an order to the enterprise for discontinuing such abuse and it may also impose a penalty which can go up to 10% of the relevant turnover for the preceding three financial years.
Agreements entered into between enterprises or persons or associations of enterprises or persons for the production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an AAEC in India, are prohibited and rendered void under Section 3 of the Competition Act. These include horizontal agreements including cartels which have the potential to affect the existing market prices, production, supply, technical development, investment, or provision of services as well as vertical agreements (agreements between enterprises or persons, or associations thereof, which are engaged at different levels of the production or supply chain) likely to cause an AAEC. In such circumstances, Section 27 of the Act grants the CCI the power to order the enterprises to discontinue or modify such agreement or impose a penalty which can go up to 10% of the average turnover of the preceding three financial years on each of the parties.
Factors considered by the CCI to determine AAEC
Section 20(4) of the Act enumerates the various factors that shall be considered by the CCI while inspecting any proposed combination or acquisition. These factors include inter alia, the actual and potential level of Section 20(4) of the Competition Act sets out certain factors that the CCI shall consider, while determining if a combination causes or is likely to cause an AAEC in the ‘relevant market’ in India, including inter alia, the actual and potential level of competition through imports in the market, entry barriers to the market (regulatory and otherwise), degree of countervailing buyer power in the market, availability of substitutes in the market, market shares of each of the parties to the combination (individual and combined), likelihood of foreclosure/removal of competitors, extent of vertical integration in the market, etc. e CCI is also required to consider three positive effects that a combination could potentially give rise to, i.e. possibility of saving a failing business, nature and extent of innovation and relative advantage through contribution to economic development brought about by any combination having or likely to have an AAEC in India.
Import competition in the market, market entry barriers (regulatory and otherwise), degree of countervailing buyer power in the market, availability of substitutes in the market, market shares of each of the parties to the combination (individual and combined), the likelihood of competitor foreclosure/removal, extent of vertical integration in the market, and so on. Any combination with or likely to have an AAEC must also evaluate three positive impacts that a combination might provide, namely the prospect of salvaging a failing firm, the type and amount of innovation, and relative advantage via contributing to economic progress.
Section 5 and 6 of the Act are the provisions governing combinations in India. Section 5 of the Competition Act provides that an acquisition of enterprise(s) by one or more persons, a merger, or an amalgamation exceeding the prescribed thresholds under the Act would require a prior filing to the CCI as well as receiving of its approval. Section 6 of the Act inter alia provides that ‘combinations’ are required to be mandatorily notified by the parties to the CCI and prohibits combinations that cause or are likely to cause an AAEC within the relevant market in India. Section 5 defines a “combination” as one which entails:
- The acquisition of control, shares, voting rights, or assets of an enterprise by a person;
- Acquisition of control of an enterprise wherein the acquirer already has direct or indirect control of another enterprise engaged in an identical business;
- A merger or amalgamation between or amongst enterprises that crosses the financial thresholds set out in this Section.
The financial thresholds laid down under this Section are based on the following:
(i) in the event of an acquisition, the combined asset value and the turnover of the acquirer and the target, and in the event of an amalgamation or merger the combined asset value and the turnover of the combined resultant company.
(ii) if the target/resultant company will belong to a “group” pursuant to the proposed merger, then the combined asset value and turnover of that “group”.
Further, Section 32 of the Act confers extra-territorial jurisdictional powers on the CCI, which allows the CCI to scrutinise any acquisition wherein the assets/turnover are in India and exceed the specified thresholds, even if the buyer and the target are both based outside of India.
Regulation of combinations : jurisdictional thresholds and exemptions
The obligation to file a combination notification is only triggered when a combination crosses the minimum thresholds prescribed in the Act. Therefore, the first step to determining whether the combination can be exempted from notification to and approval of CCI would be to conduct a preliminary analysis of the books of accounts of the acquirer entity and the target entity to identify whether their assets and turnover cross the prescribed threshold. The Act however provides certain exemptions to proposed transactions and if any of these exemptions become applicable to the transaction, then it need not be notified. The exemptions are as follows-
The target exemption
This is an exemption available to transactions that involve a small target company. As per this exemption, in the event of an acquisition of a target company, including its decisions, units, and subsidiaries, has either total assets (total assets as reflected in preceding financial year consolidated balance sheet) not exceeding a value of INR 350 Crores in India or revenue (total revenue as reflected in profit and loss account of the consolidated annual report) not exceeding INR 1000 Crores in India, then the proposed transaction will be exempted from the requirement of filing a notice before the CCI. In the case of merger/amalgamation of a small target company, then the financials of the resulting final enterprise are considered during this preliminary assessment. If any one of these above two thresholds is met, then the notice need not be filed. If the target is a specific portion/unit/division of the target entity, then only the value of assets and turnover of that specific division need to be considered for determining the applicability of target exemption.
The parties test/group test
In the event that a transaction cannot avail target exemption, it is required to mandatorily notify the CCI if any of the following jurisdictional thresholds are breached by it –
- The parties test – The standalone acquirer and the target enterprise (including its divisions, units, and subsidiaries) i.e. the merging entities jointly have either (i) assets in excess of INR 2000 crores (INR 20,000 million) in India or a turnover in excess of INR 6000 crores (INR 60,000 million) in India; or (ii) worldwide assets in excess of USD 1 billion, including at least INR 1000 crores (INR 10,000 million) in India or worldwide turnover in excess of USD 3 billion, including at least INR 3000 crores (INR 30,000 million) in India; or
- The group test – The group to which the target entity will belong post-acquisition has either :
(i) assets in excess of INR 8000 crores (INR 80,000 million) in India or turnover in excess of INR 24,000 crores ( INR 240,000 million) in India; or
(ii) worldwide assets in excess of USD 4 billion, including at least INR 1000 crores (INR 10,000 million) in India or worldwide turnover in excess of USD 12 billion, including at least INR 3000 crores (INR 30,000 million) in India.
If the transaction breaches the Parties Test thresholds, then the notification will have to be made. Similarly, if the parties’ test is not breached, then it must be checked whether the group test is breached. If the group test is breached, then the notification will have to be made.
Exemptions under Combination Regulations, 2011
Regulation 4 of the Combination Regulations provides for certain categories of transactions that are enumerated as not likely to have an AAEC in India and are therefore exempted. The ten categories of transactions as enlisted in Schedule 1 are as under:
i) Solely in the investment and ordinary course of business – Investment for less than 25% of the voting rights need not make a notification to the CCI as these will be deemed to be “investment-only” transactions.
ii) Creeping acquisition between 25-50% – This refers to situations wherein an existing acquirer who already holds 25% further acquires a percentage that is less than 50% of the shares, assets, or voting rights.
iii) Joint control/sole control – In an acquisition wherein an acquirer has 50% or more shares or voting rights in the target enterprise prior to acquisition and proposes to increase that share, there is no requirement to notify this transaction unless this will result in the acquirer taking sole control of the target.
iv) Not directly related to any business activity – An exemption from notification is provided wherein there is an acquisition of fixed assets that are not directly related to the business activity of the acquirer company, and only made for investment purposes. The acquisition would not result in any exercise of control by the acquirer.
v) Amended tender offer – This is an exemption from making a fresh/new combination notification if and where there is a renewal with the open offer filed with the SEBI in terms of the takeover code, as the combination notification with regards to the original open offer is already filed with the SEBI.
vi) Acquisition of stock-in-trade and raw materials – Exemption from filing notification where an acquisition is of raw materials, stores and spares, and other current assets in the ordinary course of business.
vii) Acquisition of shares, voting rights pursuant to bonus issue/stock split/buy-back/consolidation of the face value of shares/rights issue – When the acquisition of shares is due to any of the above-mentioned circumstances, then notification is exempted.
viii) Acquisition of shares or voting rights by underwriters or stockbrokers – Wherein voting rights/shares are being acquired by a person acting as a registered underwriter or registered stockbroker of a stock exchange on behalf of his clients, no notification is necessary.
ix) Acquisition of shares of voting rights by a person within the same group – This refers to intra-group acquisitions, these combinations need not be notified.
x) Merger/amalgamation of two or more enterprises wherein one enterprise holds more than 50% shares or voting rights of the other enterprise – In such a case, notification is exempted subject to the condition that the transaction should not result in a transfer from joint control to sole control.
xi) Acquisition of shares, control, voting rights, or assets by a purchaser approved by CCI – In complex transactions, CCI may contemplate AAEC concerns, and to eliminate such concerns, CCI sometimes proposes modifications to transactions. These may be structural or behavioural modifications.
Apart from this, there are a few other exemptions that are also provided under the Act and allied rules and regulations, which are as follows:
- Specific exemptions are granted to regional rural banks and transactions pertaining to reconstruction/amalgamation of public sector banks, the regulation under competition law shall not apply to them.
- Specific exemptions from CCI approval are also granted to Central Public Sector Enterprises (CPSE) operating in the oil and gas sector.
- Any acquisition of shares of financing facility which is entered into under a loan agreement or investment agreement by registered FIIs, banks, or public financial institutions, are exempted from obtaining prior approval from the CCI.
Notifying the Commission : process of filing
The Combination Regulations [(The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011] provides for three different types of forms, to be used for notifying a combination to the CCI.
- Form I – This is a short form which requires the parties to provide basic information about the proposed combination. The filing fee for this form is INR 20 lakhs.
- Form II – This form is longer and more detailed, which includes technicalities. The parties can opt to file this form for a filing fee of INR 65 lakhs.
- Form III – This is a form for intimation post completion of the proposed transaction, and it is to be filed within 7 days of the acquisition/share subscription/ financing facility entered into by a public financial institution, registered FII, bank, or registered VCF.
In the case of an acquisition, the obligation to notify the CCI lies with the acquiring company and in the case of a merger or an amalgamation, the parties are to jointly make the filing.
Case study : the Jet- Etihad deal
In 2013, Etihad Airways PJSC, which is UAE’s national airline, sought to acquire a 24% stake in Jet Airways (India) Limited and also certain rights under a Shareholding Agreement (SHA) and a Commercial Cooperation Agreement (CCA). This acquisition was crossing the thresholds in terms of the value of the deal as prescribed under the Act and therefore the parties filed a notice with the CCI.
CCI had to determine whether the combination resulted in creating an ‘appreciable adverse effect on competition’ (AAEC).
The CCI in its order approved the combination subject to the condition that if at any time the information provided by the parties were found to be incorrect, then the order would be revoked. Following factors were considered to determine the deal’s potential AAEC –
Since Etihad is not operating in Indian domestic air transportation services i.e. between two airports within India, the domestic market was excluded from consideration of any competition concerns. In the international cargo market, there are more players and therefore, the combination of Jet and Etihad is not likely to impact competition in the international cargo market.
Market share and sustainability
Even if Jet and Etihad were to combine and not compete with each other on the India UAE routes, the combined market share was below 36%. Further, the combination would be easily substituted since many other players already existed in this route and since the demand was dependent upon the price, and any attempt to increase the price would impact the market share of the combination unfavourably. Therefore, there was clearly no dominance, and the chances of price increase were less.
Types of passengers
The CCI observed that the passengers in the routes covered by the flights were more price-sensitive than time-sensitive. And the customers had a lot of choices and therefore the CCI believed that the combination would not be able to create a dominance to raise the prices in this segment and that competitive prices would continue to be offered.
Apart from the above, the CCI also considered the beneficial effects of the combination such as an increased scale of passenger traffic enabling the provision of service at lower cost and the benefits of the combined network being available to Indian passengers. We can observe from this case that parties that are able to present the transaction to the CCI in such a manner that it is convinced about no significant impact on competition, the acquirers may be successful in securing an approval.
The competition law regime in India is certainly comprehensive and carved out to meet the requirements of the new era of market economy and growth that the country is witnessing. The CCI’s activism in regulating markets with fairness and good consideration, while protecting the interests of the consumers and the economy, definitely shows hope to bring more growth and stability to Indian markets.
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