CCI Act: Regulation of Mergers and Acquisitions (Sections 5 and 6 of the Act)

And
The Implementing Regulations

The economic reforms process initiated by the Government of India in the last two
decades has undoubtedly shown a path to Indian corporate houses to attain global scale
and competitiveness. This has given rise to mergers and acquisitions activity in India on a
very large scale. It is understood that Merger & Acquisition (M&A) deals in India will
cross $100 billion this year, which is double last year’s level and quadruple of 2005. In
spite of today’s globalized and highly competitive environment, Indian Companies are
not only acquiring businesses in India but also globally. It is imperative in this scenario
that we create a conducive and enabling environment to boost M&A activity in India.
There is a need to further strengthen the policy change process rather than impose
curbs/slowing down combinations.

Recently, the new Competition Act 2002 was enacted to ensure free and fair competition
in the market by prohibiting anti-competitive agreements, abuse of dominant position and
combinations likely to have appreciable adverse effects on competition within the
relevant market in India.

While FICCI welcomes the new Competition Act that would help in bringing more
transparency and fair play for the companies, we believe that some of the provisions
regulating mergers and acquisitions in the new Act are inconsistent with the objectives of
the Act and the development of industrial and economic growth. In FICCI’s view, these
provisions can adversely affect the competitiveness of Indian Industry.

For the development of an effective competition policy, therefore, the Act’s provisions
regulating mergers and acquisitions must be modified. This calls for appropriate
amendments of the Competition Act.

In this context, FICCI would like to submit the following for the consideration of
Government and the Regulator:

I. Provisions of the Competition Act, 2002, as amended, Regulating

Mergers and Acquisitions.

A. Section 5 - - Combinations

1. The definition of “combinations” is unnecessarily repetitive and

gives rise to confusion. For example, Sections 5(b) and 5(c) are
subsumed under Section 5(a). But, from a competition law perspective
the only pertinent provision is Section 5(a), which regulates an
acquisition of “control”.

2. Section 5 defines “combinations” by reference to assets and turnover:

 (i) exclusively in India; and
(ii) in India and outside India.

The turnover thresholds, however, are biased against the Indian company. For
example, an Indian company with turnover of Rs. 3000 crores cannot acquire
another Indian company without prior notification and approval of the
Competition Commission. On the other hand, a foreign company with
turnover outside India of more than USD 1.5 billion (or in excess of Rs. 4500
crores) may acquire a company in India with sales just short of Rs. 1500
crores without any notification to (or approval of) the Competition
Commission being required.

It is suggested that Section 5 be modified and a single sales/turnover test be

adopted along the following lines:

(a) Combined world-wide turnover of the parties to the “combination” in

excess of Rs. ______________; and
(b) each of at least 2 of the parties to the “combination” must have turnover in
India in excess of Rs. ___________; and
(c) the “combination” gives rise to a market share in a relevant market in India
in excess of 25%.

This test admittedly will pick up conglomerate acquisitions, but the

implementing rules of the Competition Commission could then provide that
purely conglomerate transactions that do not give rise to any addition to
market shares of the parties in the relevant market in India will be assessed
and “cleared” within a 30 day period from notification.

Part (b) above will adequately address the issue of the Competition
Commission asserting jurisdiction over a transaction that has sales in India
and would exclude purely “foreign” transactions (example, General Electric
acquiring a coffee shop in Brazil). If, however, the “combination” does not
give rise to a market share in a relevant market in India in excess of 25%,
then, under part (c) above, it need not be notified to the Competition
Commission.

3. The turnover/sales and assets tests of Section 5 should also pick up “salami”
styled acquisitions by a foreign acquirer where the acquirer structures its
transaction in parts so that each part is acquired separately to avoid
notification to the Competition Commission because the acquisition of each
part falls below the threshold of Rs. 1500 crores and, therefore, is not
notifiable to the Competition Commission under Section 6. In contrast, an
Indian company with a turnover of Rs. 3000 crores in India must notify the
Competition Commission if it acquires any Indian company, even a company
with a turnover of Rs. 10 lakhs!
4. The breadth of Section 5 is so wide that it would require notification of
transactions that constitute an increase in shareholding by a promoter of a
listed public company (including possible internal reorganizations within a
corporate group). It is important to note that these transactions are exempted
under the SEBI Takeover Code. While the objectives addressed by the SEBI
Takeover Code and the Competition Act are different, notification and
assessment under the Competition Act gives rise to serious cost consequences
under the SEBI Takeover Code. For example, Regulation 22(12) of the SEBI
Takeover Code provides that “where the acquirer is unable to make the
payment to the shareholders who have accepted the offer before the said
period of fifteen days due to non-receipt of requisite statutory approvals, the
Board may, if satisfied that non-receipt of requisite statutory approvals was
not due to any willful default or neglect of the acquirer or failure of the
acquirer to diligently pursue the applications for such approvals, grant
extension of time for the purpose, subject to the acquirer agreeing to pay
interest to the shareholders for delay beyond fifteen days, as may be specified
by the Board from time to time.” Furthermore, if the Competition
Commission’s assessment is delayed because the Commission seeks
additional information from the notifying party(ies), will this delay be
construed by the Board as “willful default or neglect” by the notifying
party(ies) resulting in forfeiture of the entire amount in escrow account under
the SEBI Takeover Code, Regulation 22(13)?

5. Is it the intention of the Act to require notification of firm allotments in a

public issue? If this is the case, then the Act is overreaching because these
acquisitions in any event do not give rise to an adverse impact on competition.

6. Section 6(2)(b) of the Act uses the term “other document” and, essentially, an
execution of such “other document” triggers an obligation to notify the
Competition Commission. It is important to clarify that the mere execution of
a non-disclosure agreement or a letter of intent or memorandum of
understanding (and other similar documents that do not constitute the
definitive acquisition agreement) will not trigger the notification requirement.
There are cost implications as well because if a non-binding letter of intent
were to trigger a notification requirement, the notifying parties would need to
pay filing fees of Rs. 20 lakhs, in addition to the devastating impact that such
a notification would cause in terms of loss of confidentiality in respect of such
a transaction.
II. The Competition Commission of India (Combination) Regulations, 200-

Comments:

Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into
a combination which causes or is likely to cause an appreciable adverse effect on
competition within the relevant market in India and such a combination shall be void.

In the draft Regulations, certain categories of transactions are treated as “NOT” likely to
have an appreciable adverse effect on competition in India.

Such combinations should not be made subject to the mandatory notification

procedure. This should be clarified by way of a suitable explanation in the
Regulations. In addition, the following categories of transactions should be
exempted from the mandatory notification requirements:

1. All types of intra-group combinations, mergers, demergers,

reorganizations and other similar transactions should be specifically
exempted from the notification procedure and appropriate clauses should
be incorporated in sub-regulation 5(2) of the Regulations. These
transactions do not have any competitive impact on the market for
assessment under the Competition Act, Section 6.

2. SEBI Takeover Regulations permit consolidation of shares or voting rights

beyond 15% up to 55%, provided the acquirer does not acquire more than
5% of shares or voting rights of the target company in any financial year.
[Regulation 11(1) of the SEBI Takeover Regulations] However,
acquisition of shares or voting rights beyond 26% would apparently attract
the notification procedure under the Act. It should be clarified that
notification to CCI will not be required for consolidation of shares or
voting rights permitted under the SEBI Takeover Regulations. Similarly
the acquirer who has already acquired control of a company (say a listed
company), after adhering to all requirements of SEBI Takeover
Regulations and also the Act, should be exempted from the Act for further
acquisition of shares or voting rights in the same company.

3. The definition of the term ‘shares’ should be modified to exclude

preference shares within its purview, as is the case in the SEBI Takeover
Regulations. It should also be clarified as to when the notification
procedure should commence in the case of issue of convertible securities
or warrants.

4. The draft Regulation 5(2) (x) exempts acquisition of shares or voting rights
pursuant to a bonus or rights issue or sub- division of shares. Drawing the
same analogy, cases of consolidation of face value of shares should also be
exempted. The only exception may be a situation where an acquirer acquires
 more than its percentage share in a rights issue or a consideration.

5. Conglomerate acquisitions or acquisition of assets by parties not in the same

line of business should benefit from the 30 day review procedure as they are
not likely to have an appreciable adverse effect on competition within the
relevant market in India.

6. Further clarification should be provided in respect of the draft Regulation

5(2)(vii) dealing with “renewed tender offer”, 5(2)(iii) dealing with
international combinations, and 5(2)(xii) dealing with an acquisition by the
Central Government or a State Government.

7. Regulation 5(2)(ii) of the draft Regulation can be modified to read as

under: “An acquisition of assets by the parties, referred to in sub-clause (i) or
(ii) of clause (a) of Section 5 of the Act, not directly related to the business
activity of the party acquiring the asset or made solely as an investment or in
the ordinary course of business, not leading to control of the enterprise whose
assets are being acquired except where the assets being acquired represent the
entire business operations in a particular location or for a particular location or
for a particular product or service of the enterprise of which assets are being
acquired and such assets exceed ___% of the combined assets of the
acquirer irrespective of whether such assets are organized as a separate legal
entity or not;”

8. A person who is in control of a company (listed or unlisted) irrespective of his

shareholding in the company should be exempted from the notification
requirement if such person consolidates his holdings in the company either
under an IPO, preferential offer, market acquisitions or in any other
manner.The above proposal takes into account permitted consolidation of
shares or voting rights under SEBI Takeover Regulations and exemption
granted under SEBI Takeover Regulations [3(i)(a)] in the IPO.

9. Inter se transfer of shares by promoters or sale by one joint venture partner of

its shares in a joint venture to another joint venture partner should not trigger
notification or assessment under the Competition Act. This is because there is
no overall change in the competitive impact of the joint venture by such a
transaction.
10. Note: The expression ‘Promoter’ is to be defined and it could be adapted from
SEBI Takeover Regulations.

11. In a scheme of arrangement involving amalgamation or merger, the transferor

company(ies)’ shareholders are issued shares of the transferee company as per
‘share exchange ratio’ mentioned in the scheme. It is likely that post
amalgamation / merger, one or more party(ies) may happen to acquire / hold
more than 26% of the total shares or voting rights of the transferee company.
While the scheme of merger/ amalgamation per se would have received
 approval of CCI, no fruitful purpose would be achieved if the party(ies)
acquiring shares in such cases are required to secure CCI approval again.
Similarly, in a scheme of arrangement involving demerger, the shareholders of
the demerged company would be issued shares of the resulting company(ies).
This is not likely to cause an appreciable adverse effect on competition. In
view of the above, acquisition of shares or voting rights pursuant to a scheme
of arrangement or reconstruction including amalgamation or merger or
demerger under any law or regulation, Indian or foreign, should be included as
one of the categories of transactions under Regulation 5(2) of the Regulations.

12. Establishment of a new business as a joint venture by a person fulfilling the

assets/turnover criterion is also covered under the present scheme of the Act.
Accordingly, a business house will be required to notify under the Act if it is
contemplating to enter into a new line of business for a new product or service
as a joint venture with some foreign party. Such joint ventures might have
been conceptualized for products or services, which are not available in the
Country. Further, such joint venture may eventually not even materialize due
to various reasons. It may lead to a situation wherein a large company entering
into a Memorandum of Understanding with a foreign company for launching a
new product in the Country having to take approval of the CCI by paying fees
of Rs.20 lakhs even though the proposed company may not be having
significant volumes to start with. Worse still, the proposed joint venture may
not take off subsequently for various reasons. It is therefore suggested that
joint ventures with foreign entities for setting up a new business different from
the existing business of the Indian partner should be exempt from the
notification requirement.

B. Reduction of Maximum Turnaround Time of 210 Days:

Comments:

The time lines prescribed under the Act and the Regulations do not take
cognizance of the compliances to be observed under other statutory provisions
like the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 (‘SEBI Takeover Regulations’). SEBI Takeover Regulations require the
acquirer to complete all procedures relating to the public offer including payment
of consideration to the shareholders who have accepted the offer, within 90 days
from the date of public announcement. Similarly, mergers and amalgamations get
completed generally in 3-4 months’ time. Failure to make payments to the
shareholders in the public offer within the time stipulated in the SEBI Takeover
Regulations entails payment of interest by the acquirer at a rate as may be
specified by SEBI. [Regulation 22(12) of the SEBI Takeover Regulations] It
would therefore be essential that the maximum turnaround time for CCI should be
reduced from 210 days to 90 days. To compare anti-trust laws in effect in other
jurisdictions, either the notification is optional (as is the case in the UK and
 Australia) or mandatory (in which case, the review period is short, such as in
the EU and USA, where review period in each case is 30 days).

C. Regulation 6 Form of notice for the proposed combination

Comments:

1. The draft Regulation 6 provides that a proposed combination must be

notified to the CCI within 30 days from the date of execution of any
agreement or “other document” or acquisition of share/voting rights or
control of an enterprise. The definition of “other document” is very wide
and will include any document which reflects an “intention to acquire”
including merely a confidentiality or non-disclosure agreement. Therefore,
even if the acquisition does not materialize and if the concerned parties
withdraw from the transaction, the parties would, under the current
regulation, be required to go through the mandatory notification process,
coupled with the application fee of Rs. 20 lakhs.

2. The event that triggers the notification requirement under Section 6(2) of
the Act should be clearly described in the Regulations.

D. Regulation 11 Void combination

Comments:

1. The suspensory regime created by the amended Act and sub-regulation 11

provides for a 210 day waiting period after notification. This period is
very long and will lead to significant transaction costs for the parties
concerned. Notably, the Raghavan Committee report had suggested a 90
day waiting period for a reasoned order from the Commission.

2. It is crucial that the Commission establish the 30 day self-imposed time

limit for a prima facie assessment and determination for a wide variety of
transactions to facilitate efficiency. We suggest that the Commission
clearly state that acquisitions or mergers that do not give rise to an
increase in market power in the relevant market in India (such as the case
with conglomerate mergers and acquisitions) or that give rise to market
shares in the relevant market in India not exceeding 25% be either exempt
from the notification requirement or benefit from the 30 day review
period.
E. Regulation 12 Fee

Comments:

1. The Rs. 20 lakh additional fee requirement, as imposed under Regulation

12(2)(b), required to be met by the parties at the time of filing a response
to a show cause notice is unfair and excessive. The Commission’s view
seems to be based upon the assumption that the alleged combination is
likely to cause an appreciable adverse effect. This additional fee (on top of
the initial filing fees of Rs.20 lakhs), even prior to the conduct of an
investigation by the Commission, amounts to a penal sanction. Imposition
of such a penalty prior to the conduct of a detailed investigation by the
Commission is contradictory to the principles of natural justice and
procedural fairness.

2. The proviso to the Regulation 12(2)(b) requires a filing fee of Rs 40 lakhs

together with a Notice in Form 1 and response to show cause, if notice has
previously not been filed under Section 6(2) of the Act. In addition, the
Commission is empowered under Sec. 43A to penalize the parties if the
notice is not filed by them under Sec. 6(2) of the Act. Thus, a case may
arise where a party would be called up to pay excessive amounts as
penalty even prior to the completion of a full scale investigation by the
Commission and a determination of the merits of the transaction.

3. The entire fee amounts must be revisited and revised.

F. Regulations 16 Scrutiny of notice, 17 Consequences of not removing defects, 18

Permitting additional time on the request of the parties to the combination and
21 Computation of time limits

Comment:

The aforesaid Regulations propose to further extend the 210 day period (which
already is too long) by excluding the time given by the CCI for curing defects,
etc. should be included within the 210 day period. The exclusions must be strictly
and clearly circumscribed. As currently drafted, they allow for arbitrary
extensions and delay.
G. Regulation 27 Opinion on the existence of a prima facie case

Comments:

1. Regulations 27(2) specifies time periods for formulation of the prima facie
view by the Commission but does not specify the time period, by
reference to the date of filing of the notice, within which the show cause
notice is required to be issued by the Commission. The Commission has
30 days to formulate its prima facie opinion upon the filing of Notice in
Form 1 and 60 days to do so on the filing of Form 2. The different time
periods prescribed is unclear as most short form notifications call for
quick clearance.

2. The two different types of notification and the different time periods raise
issues as to their need and purpose – it is ironical that a short form
notification to assess a pro-competitive transaction should lead to a 60 day
review.

3. It is submitted that a single review window of 30 days for both Forms 1

and 2, and failure to provide a decision within such period, should be
“deemed clearance/approval”. We, however, would request the
Commission that, while this may be expressly stated in the Regulations, as
a practical matter, the Commission should not adopt this option as a matter
of general practice because it could raise issues for challenge by third
parties (see below).

4. The rights of third parties (members of the public and others) and their
“standing” to challenge a decision of the Commission must be clearly
specified. Decisions that constitute “deemed clearance” may easily be
challenged by third parties and struck down for failure to provide reasons.
Also, because a prima facie review order would be treated as an “order”
under Section 31 of the Act, such an order could become the basis for an
appeal to the Appellate Tribunal. If third parties are permitted to
challenge such orders, then it will be used by competitors and members of
the public to give rise to considerable delays and destroy transactions.
Nowhere does this provision become more destructive than situations
where there is a tender offer or where speed is “of the essence” in a
transaction.
H. Regulation 30(2) Meeting of the Commission to consider responses from the
parties; 31(2): Extension of time to submit report and 32: Time given to the
Director General to submit the report

Comment:

Under Regulation 32, the time given to the Director General to submit his report
may be extended up to 105 days. It is further noteworthy that such additional time
periods will add to the transaction costs for the parties. It is difficult to
understand why the Director General cannot submit a report in a shorter time such
as 30 days or 45 days.

I. Regulation 33 Report by the Director General and Sec. 26(4) of the Act: Role
of the Director General and the report prepared by him

Comments:

1. Prior to the Amendments to the Act, the Director General’s Report was
made available to both the Parties. With the amendment to Sec 26(4) of
the Act, however, the Director General’s report can only be made
available on a discretionary basis. This will lead to an exclusion of the
parties right to review the Report and comment on the same and violates
the principles of natural justice.

2. Regulation 33 does not provide for making available the Report of the
Director General mandatorily to the parties. Also, the procedure for
acquiring the report in such circumstances is also not laid out in the
Regulations.

J. Regulation 35 Meeting of the Commission to form prima facie opinion under

sub section (2) of section 29

Comment:

The provisions of Regulation 35 are inconsistent with the mandate expressed

under Section 29(1) of the Act. Under Section 29(1) of the Act, the Commission
will issue the show cause notice only after the Commission has formed an adverse
prima facie view. Regulation 35, on the other hand, provides for the tabling of the
Director General’s Report together with the responses made by the Parties to the
show cause notice before the Commission on the basis of which the commission
then proceeds to formulate its prima facie view. There is, therefore, an
inconsistency between Section 29(1) of the Act and Regulation 35 – specifically
whether the tabling of the Director General’s Report before the Commission
would be made to enable the Commission to formulate the prima facie view or to
reach a final decision on the merits.
K. Regulation 42 Meeting to consider the effect of combination on competition

Comment:

The parties at present under the aforesaid Regulation are precluded from viewing
or raising defenses to any objection raised from a member of the public. This is
against the rules of procedural fairness and the parties to the combination must be
given an opportunity to be heard.

L. Regulation 44 Modification proposed by the Commission

Comment:

Appropriate guidelines must be enacted in order to understand the scope and

impact of the modifications that could be proposed by the Commission.

The Regulation must in this regard, provide for the adjustments in the
modifications proposed by the Commission in the event of changes in the
structure/ details of the combination or upon the occurrence of other unexpected
changes.

M. Regulation 54 Appointment of independent trustees to oversee modification

Comment:

Implications of appointment of independent trustees to monitor implementation of

the modifications should be reviewed. Already sufficient procedure is in place to
ensure implementation and therefore the remuneration of the trustees so appointed
leads to additional transactional cost burden being imposed upon the parties.

N. Regulation 55 Request for confidential treatment

Comment:

The confidentiality provision should be reviewed and elaborated with regard to

possible public disclosure if any to be made and the manner in which this is to be
made.

Any rejection to afford confidentiality treatment upon a party involved in such a

transaction must be followed up with reasoning in writing by the Commission,
setting out reasons for the same. Appropriate amendments in this regard must
follow in relation to Regulation 38 of the Draft CCI (General) Regulations.

Any information coming forth from third parties must also be subjected to
confidentiality norms and provisions in this regard must be included in the draft
Regulations.
O. Forms 1 and 2

Comment:

It is suggested that the Forms be divided into separate sections under different
sub-heads as it would allow for a more meticulous and quick review.

P. Miscellaneous

Comments:

1. There is a serious risk that the regulator will “buy” time and M&A
transactions will be delayed. For example, under Regulation 30, the
Director General is given 60 days to submit his report. But under
Regulation 32, this time may be extended to 105 days. In this time period,
a transaction with no adverse competitive impact would be unnecessarily
jeopardized and be jettisoned by the parties.