Tuesday, May 17, 2011

Combination Regulations Under Indian Competition Law

(The following post is contributed by Rahul Singh)
The Competition Commission of India (the "CCI") has on 11 May, 2011 notified the Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations, 2011 (No 3 of 2011) ("Combination Regulations") under the Competition Act, 2002 (the Competition Act).  
Background
The Competition Act was partially enforced on 20 May, 2009 whereby the provisions relating to anti-competitive agreements and abuse of dominant position were notified. Sections 5 and 6 of the Competition Act (the “combination provisions”) will regulate 'combinations', requiring prior notification and approval where such provisions are applicable. These provisions and the Combination Regulations are scheduled to come into effect on June 1, 2011. With the enforcement of the combination provisions and the notification of the Combination Regulations, all mergers, amalgamations and/or acquisitions falling within the thresholds indicated in section 5 of the Competition Act will require prior approval of the CCI. This post sets out the highlights of the Combination Regulations.
Salient features
I. Meaning of ‘combination’  
The term 'combination' for the purposes of the Competition Act is defined very broadly, to include any acquisition of shares, voting rights, control or assets or merger or amalgamation of enterprises, where the parties to the acquisition, merger or amalgamation satisfy the prescribed monetary thresholds in relation to the size of the acquired enterprise and the combined size of the acquiring and acquired enterprises[1] with regard to the assets and turnover of such enterprises.     
(a) Threshold for size of acquired enterprises
A transaction will be a ‘combination’ for the purposes of the Competition Act and attract Combination Regulations only if the size of the acquired enterprise is at least INR 250 Crores in terms of assets or INR 750 Crores in terms of turnover.[2] In other words, if the acquired enterprise has assets of less than INR 250 Crores or turnover of less than INR 750 Crores, based on the most recent audited financial statements of the entities involved, notification and approval requirements under the combination provisions of the Competition Act would not be attracted.
(b) Threshold for combined size of acquiring and acquired enterprises     
A transaction attracts the combination provisions of the Competition Act only if the combined size of acquiring and an acquired enterprise, upon completion of the transaction, meets the following thresholds:


ASSETS
TURNOVER
In India
No Group
INR 1,500 Crores (approximately  USD 330 million)
INR 4,500 Crores (approximately  USD 1 billion)
Group
INR 6,000 Crores  (approximately  USD 1,320 million)
INR 18,000 Crores(approximately   USD 4 billion)
In India or outside

ASSETS
TURNOVER
Total
India
Total
India
No Group
USD 750 million
INR 750 Crores   (approximately  USD 165 million)
USD 2.25 billion
INR 2,250 Crores (approximately  USD 500 million)
Group
USD 3 billion
INR 750 Crores (approximately  USD 165 million)
USD 9 billion
INR 2,250 Crores (approximately  USD 500 million)


 (c) Meaning of ‘assets’ and ‘turnover’
The Combination Regulations clarify the term ‘assets’ to mean ‘total assets’. The Competition Act does not define ‘assets’ but provides for determination of value of assets to be based upon the book value of the assets as shown in the audited books of account of the enterprise, in the financial year immediately preceding the date of transaction. Under the Competition Act, value of assets includes brand value, goodwill, value of intellectual property but excludes depreciation. Further, while the Competition Act defines ‘turnover’ to include the value of sale of goods or services, the Combination Regulations clarify that indirect taxes will be excluded from the computation of turnover.   
II. Transitory Transactions
Under the Combination Regulations, the transactions agreed pursuant to definitive documentation prior to June 1, 2011 have been exempted.
(a) Acquisition/acquisition of control
For any acquisition of shares or control (resulting into combination), the CCI is required to be notified only if the ‘binding document(s)’ (i.e. a document conveying a decision to acquire control, shares or voting rights) in relation to such acquisition is executed on or after June 1, 2011. 
(b) Merger/amalgamation
For any merger or amalgamation (resulting into combination), the CCI is required to be notified only if the date of approval (i.e. final decision taken by the board of directors) of proposals is on or after June 1, 2011.
III. Trigger Events   
The requirement to file notice at the CCI is based upon certain trigger events.
(a) Acquisition/acquisition of control
The CCI is required to be notified within 30 days of the execution of any agreement or other document for acquisition or acquiring of control. 
The phrase ‘other document’ has been clarified under the Combination Regulations to mean any ‘binding document’ conveying an agreement or decision to acquire control, shares, voting rights or assets. In the context of hostile takeover, ‘other document’ means any document executed by the acquirer which conveys a decision to acquire control, shares or voting rights. Where no document has been executed but the intention to acquire has been communicated to the Central Government or State Government or any statutory authority, the date of communication will be deemed to be the date of execution of the ‘other document’ for acquisition.
(b) Merger and amalgamation
The CCI is required to be notified within 30 days of the approval of the proposal relating to merger or amalgamation by the board of directors of the enterprises concerned with such merger or amalgamation. The approval of the board of directors has been clarified under Combination Regulations to refer to the final decision of the board of directors.   
(c) PFI, FII, bank and venture capital fund
Any share subscription or financing 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 are exempted from merger control provisions under the Competition Act. However, the CCI is required to be notified within 7 days of such share subscription or financing facility or acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund in Form III.    
IV. Obligation to Notify
(a) Acquisition/acquisition of control
The acquirer has the obligation to file the notice in Form I or Form II (see V below), as the case may be.
(b) Hostile takeovers        
Where the enterprise is being acquired without its consent, the acquirer has the obligation to file the notice in Form I or Form II, as the case may be.   
(c) Merger/amalgamation 
Parties to the combination are required to jointly file the notice in Form I or II, as the case may be.
(d) Transaction in tranches  
Parties to the combination may file a single notice covering all the transactions where the ultimate intended effect of a business transaction is achieved by way of a series of steps or smaller individual transactions which are inter-connected or inter-dependant on each other, one or more of which may amount to a combination.
V. Notification to CCI
In cases where the prior notification and approval requirements under the combination provisions of the Competition Act are attracted, a notification in the prescribed form must be filed with the CCI and the combination cannot be effected unless prior approval is obtained from the CCI.
(a) Forms
1. Form I
The notice under the provisions of the Competition Act shall ordinarily be filed in Form I as specified in Schedule II of the Combination Regulations.
The instances where Form I is required to be filed include:
(i) where the parties to the combination are conglomerates (i.e. neither horizontally nor vertically situated);
(ii) where the parties to the combination are predominantly engaged in exports of goods or services from India (i.e. at least 75% of the turnover of the parties to the combination is derived from exports out of India) and the market share of the combined entity is less than 15% in the relevant market in India;  
(iii) where the acquisition or acquisition of control is by a liquidator, administrator or receiver through court proceedings or through a scheme approved under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or under the Sick Industrial Companies (Special Provisions) Act, 1985;
(iv) where an acquisition results from a gift or inheritance;
(v) where an acquisition is of a trustee company or arises from a change of trustees of a mutual fund established under the Securities and Exchange Board of India (Mutual Fund) Regulations 1996;
(vi) where the parties to the combination are horizontally situated and the combined market share is less than 15% in the relevant market;
(vii) where the parties to the combination are vertically situated and their individual or combined market share is less than 25% in the relevant market   
Form I is fairly simple and requires information such as the products/services of the enterprise and the relevant market in which the enterprise operates. Form I is sub-divided into two parts – Part I and Part II. Part I of Form I is to be filled by each combination. Part II of Form I is required to be filled under (vi) and (vii) above.   
2. Form II
Though the Combination Regulations categorize Form II to be filed at the option of the parties, it is reasonable to infer that all other cases where the pre-requisites for Form I are not fulfilled, Form II will be required to be filed. Further, where the parties to the combination have filed Form I and the CCI requires information in Form II to form prima facie opinion whether the combination is likely to cause or has caused appreciable adverse effect on competition within the relevant market, CCI will direct the parties to file notice in Form II. Form II is a very detailed form and besides basic information such as products/services of the enterprise and relevant market of operation of the enterprise requires information about the market structure, demand and supply structure, entry and exit conditions, innovation etc.   
3. Form III
Form III is required to be filed for acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund. Form III is a relatively straight forward and requires information about relevant product market, relevant geographic market, exercise of control etc.   
(b) Filing fee
The following table summarizes the filing fees:

Notice
Fee
Form I
INR 50,000
Form II
INR 1,000,000
Form III
      No fee

VI. CCI’s Review
(a) Combination Stopwatch   
The combination ‘stopwatch’ starts ticking from the date of receipt of notice by the CCI. The clock stops if the parties to the combination are required to file any additional information or rectify any information or carry out modification pursuant to the CCI’s direction.
(b) Timelines and fast track endeavour  
Under the Combination Regulations, the CCI has committed that it shall “endeavour” to pass an order or issue direction within 180 days even though under the provisions of the Competition Act, a combination is deemed to be approved only in the absence of a decision from the CCI within 210 days (excluding time taken in responding to clarifications sought by the Commission). Further, under the Combination Regulations, the CCI shall, within 30 days of valid and complete notice, formulate prima facie opinion whether the combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India.
The following table summarizes the timelines for the CCI:     

Nature of the timeline
# of days from receipt of valid and complete notice
Stage 0
Combination stopwatch starts ticking
0
Stage I
Formulation of prima facie opinion
30 days
Stage II
“Endeavour” to pass a final order or issue direction
180 days
Stage III
Final deadline beyond which combination will be deemed to be approved
210ys

VII. Transactions where notice need not be filed  
Schedule I of the Combination Regulations enumerates categories of combinations that are unlikely to cause an appreciable adverse effect on competition and therefore need not ordinarily require notification:    
(a) an acquisition of shares or voting rights solely as an investment or in the ordinary course of business (in so far as the total shares or voting rights held by the acquirer, directly or indirectly, do not exceed 15% and does not lead to acquisition of control);
(b) an acquisition of shares or voting rights, where the acquirer, prior to the acquisition, has 50% or more of share or voting rights (except where the transaction results in change from joint control to sole control);
(c) an acquisition of assets, not directly related to the business activity of the acquirer or made solely as an investment or in the ordinary course of business, not leading to the control of the enterprise (except where assets being acquired represent substantial business operations in a particular location or for a particular product or service of the enterprise)
(d) an amended or renewed tender offer where a notice to CCI is filed by the party making the offer, prior to such amendment or renewal of the offer;
(e) an acquisition of stock-in-trade, raw materials, stores and spares in the ordinary course of business;
(f) an acquisition of shares or voting rights pursuant to a bonus issue or stock splits or consolidation of face value of shares or subscription to rights issue (not leading to acquisition of control);
(g) any acquisition of shares or voting rights by a person acting as a securities underwriter or a registered stock broker;
(h) an acquisition of control or shares or voting rights or assets by one enterprise of another within the same group; 
(i) an acquisition of ‘current assets’[3] in the ordinary course of business; and   
(j) A combination taking place entirely outside India with insignificant local nexus and effects on markets in India[4].  
However, the notification of such transactions will be necessary where they are likely to cause appreciable adverse effect on competition.
VIII. Independent Monitoring Agencies
Where the CCI is of the opinion that the modifications proposed by it and accepted by the parties to the combination require supervision, the CCI may appoint independent agencies (i.e. accounting firm, management consultancy, law firm, professional organization or independent practitioners of repute) who/which have no conflict of interest. These agencies shall submit their report to the CCI and will be paid by the parties.
IX. Compliance Report
Where the CCI is of the opinion that combination has or is likely to have appreciable adverse effect on competition but such adverse effect can be eliminated by suitable modification to such combination, it may propose appropriate modification to the combination to the parties to the combination. The modifications shall be carried out by the parties to the combination within the period specified by the CCI. The parties to the combination shall, upon completion of modification, file a compliance report with the CCI.  
X. Confidentiality
The CCI is obligated under the Competition Act to maintain confidentiality. The parties to the combination requesting confidentiality are required to clearly state the reasons, justifications and implications for the business so that CCI may consider the request for confidentiality.
XI. Cooperation with other agencies or statutory authorities
The CCI may seek the opinion of any other agency or statutory authority in relation to a combination.
Concluding observations 
From June 1, 2011, with the notification of the Combination Regulations, the CCI will have full power to review acquisition, acquisition of control, mergers and amalgamation under the Competition Act. Where the parties to the combination fail to notify the CCI (in spite of an obligation to do so) and the CCI initiates investigation on its own, the CCI shall direct the parties to the combination to file notice in Form II. Further, the failure to notify and obtain required approval attracts penalties (up to 1% of total turnover or the assets, whichever is higher) under the Competition Act, and in such cases, the transaction would be rendered void, if the CCI subsequently determines that the combination has an 'appreciable adverse effect on competition in India'.  
- Rahul Singh


[1] An enterprise for the purposes of the Competition Act includes all entities within a ‘group’, defined to mean controlling entities, controlled entities and entities under common control.  In this context, 'control' means exercising at least 50% of voting rights, appointing at least 50% of directors or management control.
[2] This threshold is prescribed by government notification dated March 4, 2011. Presently, this threshold is not restricted in its express terms to assets/turnover in India. However, the Central Government is considering a proposal to restrict the assets/turnover of the acquired enterprise to India. 
[3] Schedule VI, Companies Act, 1956 defines ‘current assets’ to include (i) interest accrued on investments; (ii) stores and spare parts; (iii) loose tools; (iv) stock-in-trade; (v) works-in-progress and (vi) sundry debtors.
[4]  The Competition Act prescribes the monetary thresholds of INR 750 Crores (approx. USD 165 million) of assets or INR 2,250 Crores (approx. USD 500 million) of turnover in India as local nexus requirement for a combination taking place outside India.

5 comments:

Anonymous said...

what is meant by the 'final decision' of the bod?

Rajvendra Sarswat said...

The first and foremost setback will be to the deals which are at the finalized stage, and would have consummated in a month or so had the combinations provisions not become effective from 1 June 2011.

it is still ambiguous as to whether these values are to be computed on a standalone basis for the target company for combination or on a consolidated basis for the target company along with its subsidiaries.

even acquisition of 1% stake in a company may constitute “combination” and may require the CCI approval if the asset and turnover figures of the acquirer and/or the transferee, whether in India or globally, meet the prescribed thresholds.

Further, a transaction involving acquisition of shares, voting rights or control of a listed company will now be subject to multiple regulators, namely the Securities and Exchange Board of India (the “SEBI”) and the CCI.

. It is pertinent to note that the time period of 210 days is lengthy time for the approval, and by the time the approval is sought, it is likely that dynamics of the proposed transaction may change, be it pricing, any material adverse effect or any other commercial affecting the transaction on the whole.

Me said...

Does this mean that Private equity transactions will fall under point III (c) and hence will have to file Form III or under VII (a) & (j) ?

Please clarify

Also very well written article.

allcsclub said...

I have some doubt with the threshold limits u have prescribed.

instead of INR 1,500 Crores (approximately USD 330 million) its INR 1000 Crores

Anonymous said...

are there any relevant landmark case laws in which notification for combinations have not been made mandatory when the acquired enterprise is situated outside india?