[The following post is contributed by Karan S. Chandhiok, who is the Managing Associate of the Competition Law Team at Luthra & Luthra Law Offices. Karan graduated from Amity Law School followed by a BCL at Oxford. He currently serves as a Member Executive of the Competition Law Bar Association.
These views are personal.
Karan may be contacted at email@example.com or firstname.lastname@example.org]
The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (the Combination Regulations) came into effect from 1 June 2011. These represent the substance of the merger control regime in India. in order to address some of the reservations that were expressed by the industry and antitrust practitioners alike, the Competition Commission of India (the CCI) introduced a list of exempted transactions, which according to the CCI would “ordinarily not cause an appreciable adverse effect on competition”. These transactions are listed at Schedule I to the Combination Regulations.
Laudably, the CCI has continued its efforts of consulting with stakeholders and has already amended this list twice in the past 15 months to bring it closer to practical realities. The first set of amendments wase introduced in February 2012 (the 2012 Amendments) and can be accessed here.
The latest amendments to the Combination Regulations came into force on 4 April 2013 and the further reduce the regulatory burden of seeking the prior approval of the CCI. These amendments are summarised below:
The 2012 Amendments aligned the Combination Regulations with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code) increasing the limit of exempted shareholding from 15% to 25% so long as such shareholding was acquired as an investment or in the ordinary course of business and did not result in a change of control of the target enterprise. The new category 1A brings the Combination Regulations and the Takeover Code further closer to each other by exempting creeping acquisitions. The new Category 1A now exempts transactions where the acquirer:
- already holds 25% or more but less than 50% of the shares or voting rights in the target enterprise; and
- acquires not more than 5% of the target enterprise in one financial year on a gross basis,
provided that, such acquisition does not lead to the acquisition of sole or joint control.
The CCI has not provided any guidance on the meaning of ‘gross acquisition’, but the Takeover Code states that in the determination of “gross acquisition” any intermittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights on account of any fresh issues of shares, shall be disregarded.
The definition of ‘control’ still remains somewhat of an elusive concept. In the SPE/Grandway/Atlas combination (C-2012/06/63), the CCI has offered some guidance on this concept:
Joint control over an enterprise implies control over the strategic commercial operations of the enterprise by two or more persons. In such a case, each of the persons in joint control would have the right to veto/block the strategic commercial decision(s) of the enterprise which could result in a dead lock situation…
Intra-group mergers and amalgamations
The requirement of seeking approval for transactions that are essentially internal restructurings has been debated by stakeholders and practitioners in various forums in India and abroad. The 2012 Amendments provided a limited relief to such transactions by exempting mergers and amalgamations involving enterprises that were wholly owned within the same group.
The new Category 9 broadens the scope of this exemption. Under the new Category 9, exemption is available for mergers or amalgamations involving enterprises, where:
· one enterprise holds more than 50% of the shares or voting rights of the other enterprise; or
· enterprise(s) within the same group hold more than 50% of the shares or voting rights of each enterprise,
provided that, such transactions do not lead to the transfer of joint to sole control.
This exemption is certainly a welcome step. However, it glosses over the fact that family owned companies are often held through various intermediate companies that represent the shareholding of each promoter; and collectively, these intermediate holding companies form part of the ‘promoter group’. The Competition Act, 2002 (the Act) does not recognise the concept of ‘persons acting in concert’ as under the Takeover Code. Under the Act, a single individual is an ‘enterprise’. Therefore, a restructuring amongst the promoter group companies will still require the approval of the CCI as these entities (despite forming part of the same ‘promoter group’) would not be held within the same ‘group’, as defined under the Act.
Note that the original Category 9 exempting the acquisition of ‘current assets’ has now been moved and included in category (5) along with stock-in-trade, raw materials, stores and spares, trade receivables and other similar current assets in the ordinary course of business.
Clarifications on intra-group acquisitions
The Combination Regulations exempted acquisitions of control, shares, voting rights or assets within the same group. It is now clarified that this exemption will not be available where the target enterprise is jointly controlled by enterprises not falling within the same group.
It is hoped that in the next set of amendments, the CCI relooks at the obligation to file a notice with the CCI within the statutory period of 30 days (see section 6(2) of the Act). In a jurisdiction such as India, where a transaction cannot be consummated till it receives the prior approval of the CCI, a time limit for the filing offers limited value. One hopes that the CCI would take a lenient view where parties have not closed a transaction, but have made a belated notice to the CCI for operational reasons or otherwise.