The Competition Commission of India (CCI) finally notified the regulations titled “The Competition Commission of India (procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Merger Regulations).” These regulations, due to come into force on June 1, 2011, regulate all acquisition of shares, voting rights, control, merger or amalgamation (collectively ‘combinations’) which cause or are likely to cause an appreciable adverse effect on competition in India (AAEC). To evaluate the AAEC, monetary thresholds have been prescribed by The Competition Act, 2002 (Act). Hence, starting June, all combinations which create combined assets of Rs 1,500 crore or turnover of Rs 4,500 crore will require approval of the CCI and such obligation vests predominantly on the acquirer, but in cases of mergers and amalgamations, jointly on the parties. Approval is also required where the assets of a group, consisting of two or more enterprises which hold more than 50 percent or more of the voting rights or have the ability to appoint more than 50 percent of the directors of the other enterprise, exceeds Rs 6,000 crore or the turnover exceeds Rs 18,000 crore post the acquisition.
An overall exemption for five years is given to transactions where the target’s assets are less than Rs 250 crore or the turnover is less than Rs750 crore. Exemption is also given to acquisition or share subscriptions by public financial institutions, registered foreign institutional investors and venture capital funds which are covered by a covenant in a loan agreement or an investment agreement. However, even these transactions require to notify the CCI, although in a simplified form and without the payment of any fees.
Other transactions have also been identified as not likely to have an AAEC, and are therefore exempt from the merger regulations. These include the acquisition of shares or voting rights in the ordinary course of business or purely as an investment, provided that total shares or voting rights acquired do not exceed 15 percent of the total shares of the company and further provided that it does not lead to acquisition of control of the enterprise whose shares or voting rights are acquired. Also exempt is the acquisition of assets not directly related to the business activity of the acquiring party, except where the assets being acquired represent substantial business operation in a particular location or for a particular product or service of the enterprise of whose assets are being acquired. Exemption is also given to the acquisition of shares or voting rights pursuant to a bonus issue or stock splits or subscription to rights issue not leading to acquisition or control.
Notably, the merger regulations only cover the acquisition of an enterprise and therefore strictly speaking do not cover joint ventures since enterprise has been defined under the Act as being “engaged in any activity”. A newly created joint venture is also not going to meet the monetary thresholds, but matters would be different where an existing venture or a going concern is being acquired. Given the penal provisions under the Act, a clarification from the CCI on this matter is necessary.
Additionally, the Act provides CCI the power to inquire into combinations which take place outside India if they have or are likely to have an AAEC or cross the prescribed monetary thresholds. However, the merger regulations exempt acquisitions which take place entirely outside India with ‘insignificant’ nexus and effects on markets in India. Regrettably, no parameters are given to determine the significance of the nexus with India. Hence one wonders if the next Bharti’s Zain acquisition, where Zain has no operations in India, but Bharti is a market leader in India, would require CCI approval.
Remarkably, the merger regulations are a vast improvement from the draft regulations issued earlier this year. But some issues continuously raised during the consultative process still seem to be missing. And while CCI’s intention to minimise impediments to business can’t be questioned, one wonders why the merger regulations contain no provision for pre-merger consultations for which the industry chambers were pleading. Such a provision would undoubtedly have helped during the nascent stages of implementation of these regulations. In fact, pre-merger consultation is a practice followed in several countries including the USA, UK and South Africa and has always helped facilitate compliance. Markedly, pre-merger consultations are almost always non-binding and are informal. In some ways, the bulletin board of the FIPB was a consultative process by which even anonymous queries would get answered and although it was ridden with its own set of contradictions and had little binding effect, at a minimum, it allowed the niggles to be answered. The advance ruling process followed by the income tax department is another example where companies can obtain views of the government on laws where there is lack of clarity or little precedence.
Post the merger regulations and perhaps responding to the hue-and-cry of industry, the CCI website now has an insipid link which states that “in keeping with its facilitative approach, as envisioned earlier and in accordance with international best practices, soon to be issued guidelines for ‘consultation prior to filing of notice of the proposed combination under sub-section (2) of section 6 of Act’ will also offer the option of consultation with the staff of the commission before filing notice of combination.” As a practitioner, one is aware that the CCI is working hard to provide clarity and one hopes that the sooner this happens, the faster will the concerns get alleviated.
Another area of concern is the time it can take to obtain approval of the CCI. The merger regulations prescribe that the CCI shall form its prima facie opinion within a period of 30 days from receipt of notice seeking its approval. However, where the CCI feels that it requires additional time for forming its prima facie opinion, it can direct the parties to furnish additional information or make suitable amendments to its proposed combination. The time taken to furnish such additional information gets excluded from the overall time of 210 days the Act prescribes. But where the CCI is of the prima facie opinion that a combination will have an AAEC, it can direct the parties to publish details of their proposed combination, with the view to bringing the proposed combination to the knowledge or information of the public or any person affected or likely to be affected by such combination. In such a situation, the CCI can also invite any other enterprise or members of the public to inquire whether the combination will have an AAEC. Thus, if a competitor of the original applicants is called to comment on a proposed transaction, there is strong likelihood of this regulation being misused. And where this happens, the clock on the overall time period is put on hold, but if the CCI does not issue an order within 210 calendar days, the combination is deemed to have been approved. Hence, under all circumstances, the CCI will be well advised to use its discretionary powers judiciously and with the sole objective of promoting economic democracy.
From a practical perspective, the maximum time of 210 calendar days will act as a deterrent to business and can even have an adverse effect on M&A activity, where the window between the start and finish line is critical. Regulatory consents have always been conditions precedent to transaction completion and going forward one is sure to see most transactions containing break fees provisions (normally payable to the target) in the event regulatory approval is not obtained. One example of this is the ongoing AT&T/ T-Mobile acquisition where it is believed that AT&T has promised a break fee of $6 billion (over 15% of the total transaction value of $39 billion) if US regulators reject its proposed takeover of T-Mobile. In the Indian context, the validity, enforceability and triggers of such break fees provisions are going to present their own set of challenges and let’s just hope they don’t open the flood gates to litigation.
In the final analysis, the time has come to finally put behind all the controversies that have followed the introduction of competition legislation in India. One needs to accept that any new legislation or regulations are bound to encounter initial hiccups. But their long-term success depends on the manner and process by which the enforcement authority addresses the initial hurdles and implements what the legislation intends to safeguard. As the preamble to the Act states, the role of the CCI is to “promote and sustain competition in markets” and “to ensure freedom of trade carried on by other participants in markets, in India”. So far, the CCI has followed an extremely consultative and collaborative process. Going forward, one hopes that in its implementation of the merger regulations, the CCI does not adopt a ‘protecting the turf' approach but instead continues to promote market efficiency and consumer welfare by judiciously merging commercial considerations with the ethos of competition law.