Wednesday, March 16, 2016

Ease of Doing Business: merger control rules; vessel sharing agreements

[The following guest post is contributed by Karan Singh Chandhiok, Practice Head, Competition Law and Dispute Resolution, Chandhiok & Associates (New Delhi). He can be reached at]

Furthering the Government of India's agenda of relaxing rules related to doing business in India, on 3 and 4 March 2016, the Ministry of Corporate Affairs (MCA) issued several notifications bringing about changes to merger control rules in India; and, separately, extending the exemption granted to vessel sharing agreements.

The first part of this short post discusses changes to merger control, and how these may affect proposed transactions. The second part discusses the MCA’s notification on vessel sharing agreements.   

PART – I: Changes to Merger Control Rules

Merger Control Thresholds Increased

The Competition Act, 2002 (Competition Act) requires the prior notification and approval of the Competition Commission of India (CCI) for certain mergers and acquisitions based on the “size of parties”. India being a suspensory jurisdiction, parties cannot consummate the transaction until they have received the approval of the CCI.

In its notification dated 4 March 2016, the MCA has decided to increase the merger control thresholds by 100% (to those set out in section 5 of the Competition Act).

The new merger control thresholds are set out below:

Direct Parties Test:  India
Combined Indian assets > INR 20 billion
(approx. USD 298 million/EUR 271 million)
Combined Indian turnover > INR 60 billion
(approx. USD 814 million/EUR 895 million)

Direct Parties Test: Worldwide & India
Combined worldwide assets  > USD 1 billion
Combined Indian assets  > INR 10 billion
(approx. USD 149 million/EUR 135 million)
Combined worldwide turnover > USD 3 billion
Combined India turnover  > INR 30 billion
(approx. USD 447 million/EUR 407 million)

Acquiring Group Test: India
Combined India assets > INR 80 billion
(approx. USD 1.19 billion/EUR 1.08 billion)
Combined India turnover > INR 240 billion
(approx.  USD 3.58 billion/EUR 3.25 billion)

Acquiring Group Test: Worldwide & India
Combined worldwide assets > USD 4 billion
Combined Indian assets > INR 10 billion
(approx. USD 149 million/EUR 135 million)
Combined worldwide turnover > USD 12 billion
Combined India turnover > INR 30 billion
(approx. USD 447 million/EUR 407 million)

Small Target Exemption

The MCA has decided to not only continue the small target exemption for a period of five years, but has also increased the financial thresholds.

The small target exemption (also known as the ‘De Minimis Exemption’) was introduced in 2011 for a period of five years. During the operation of the de minims exemption, merger control rules did not apply to transactions where the target enterprise (whose control, shares, voting rights or assets were being acquired) had either assets less than INR 2.5 bn (~USD 37 million) or turnover less than INR 7.5 bn (~USD 111 million).

As per the notification, the small target exemption will continue up to 3 March 2021. Notably, the MCA has also increased the financial thresholds. As per the notification, transactions where the target has assets less than INR 3.5 bn (~USD 52 million) or turnover less than INR 10 bn (~USD 149 million), will not require the prior notification and approval of the CCI. These thresholds refer to the financials of the target enterprise (i.e., the legal entity) and not to the value of the assets being transferred.

It is believed that the MCA decided to continue with the exemption on the basis of recommendations received by the CCI. 

Critically, the notification misses clarifying the position of mergers and amalgamations; and continues to be limited to acquisition of control, shares, voting rights or assets.

Definition of Group

In 2011, the MCA issued a notification exempting enterprises from the calculation of the ‘Group’ thresholds, where the ‘Group’ exercised less than 50% in such enterprises. This exemption has now been extended for another five years.

Under the Competition Act, "group" means two or more enterprises which, directly or indirectly, are in a position to:

(i)  exercise twenty-six percent or more of the voting rights in the other enterprise;

(ii) appoint more than fifty percent of the members of the board of directors of the other enterprise; or

(iii)            controls the management or affairs of the other enterprise  (including by way of negative control).

The effect of the MCA notification is to increase (i) above to fifty percent from twenty-six percent. However, the CCI has consistently taken the view that holding twenty-five percent or more of the total shares or voting rights amounts to ‘controlling the management or affairs of the other enterprise’ (see (iii) above). As such, this exemption has been rendered nugatory; and caution should be taken before relying on the exemption in the calculation of thresholds.

Corporates and the legal community were waiting for these notification with bated breath. No doubt, the notifying parties will appreciate the Government’s move. More importantly, it will also bring some relief to the Competition Commission of India’s stretched Combination Division, which has been inundated with merger notifications.

PART – I: Exemption for Vessel Sharing Agreements to continue

The Government of India has extended the exemption granted to Vessel Sharing Agreements for a period of one year. The 2016 exemption, like its predecessors, excludes the application of section 3 of the Competition Act, 2002 (the Act) to Vessel Sharing Agreements. Section 3 of the Act proscribes enterprises from entering into anti-competitive agreements. The exemption also requires all existing agreements to be notified to the Director General, Ministry of Shipping by 3 April 2016; and all new agreements to be notified within ten days of signing.
Vessel Sharing Agreements allow carriers to optimise ship utilization rates by allowing parties to share vessel capacity with their partners. The exemption allows carriers operating out of Indian ports to enter into such agreements on the condition that such agreements should not include practices involving fixing prices, limitation of capacity or sales and the allocation of markets or customers. 
The exemption for the liner shipping industry was originally introduced in 2013 and has been regularly extended, with time lags, by the Ministry of Corporate Affairs after a joint review by India's antitrust regulator, the Competition Commission of India and the Directorate of Shipping. A similar exemption, granted in 2015, had expired on 4 February 2016. Interestingly, the 2016 exemption does not talk about any retrospective application implying that the exemption may not be available during the intermittent period between 4 February 2016 and 3 March 2016. 

- Karan Singh Chandhiok 

No comments: