Combination under Competition Act 2002 Role and Impact in M & A

The M&A game and the concept of Combination are, after the coming into force of the Competition Act, 2002, intertwined with each other. There is a growing need amongst M&A professionals to understand the basics of its impact on the M&A game. In the past the Competition Commission of India (“CCI” or “Commission”) has been active in levying penalties on combinations which were not notified to the Commission. There have been instances where mega transactions like Sun Pharma Ranbaxy merger or the PVR’s acquisition of DT Cinemas which have been required by the Commission to undertake divestitures or undergo modifications. This may have a serious impact in some cases and therefore it becomes important to pre-empt an anti-trust issue in the M&A game and therefore this paper intends to familiarise with the need to know aspects and the interplay of the M&A game and competition law.

“Combination” a term used under the Competition Act, 2002 (“Act”) is explained in section 5 of the Act.

Types of Combinations

The Act defines Combination as any of the following if the Combination at the combining entity level or at the combining group level exceed the thresholds (i.e., value of asset or value of turnover) as laid out in Section 5.

1. Any acquisition (Section 5(a)) or
2. Acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service (Section 5(b)) or
3. Any merger or amalgamation (Section 5(c))

PROCEDURE FOR INVESTIGATION OF COMBINATIONS

As per the Combination Regulations, the Commission shall form its prima facie opinion as to whether the combination is likely to cause or has caused appreciable adverse effect on competition within the relevant market in India within 30 days from the receipt of the notice. If the Commission is prima facie of the opinion that a combination has caused or is likely to cause adverse effect on competition in Indian markets, it shall issue a notice to show cause to the parties as to why investigation in respect of such combination should not be conducted. On receipt of the response, if Commission is of the prima facie opinion that the combination has or is likely to have appreciable adverse effect on competition, the Commission shall deal with the notice as per the provisions of the Act.

Regulation of Combinations

Section 6 of the Act provides for the law relating to regulating Combinations. It prescribes that all transactions qualifying as a Combination should be notified to the Competition Commission of India in Form I (short form application) or Form II (long form application) as applicable. Section 6 further provides that a Combination shall not be given effect to until approved by the Commission or until 210 days have passed from the date of notifying to the Commission whichever is earlier. The CCI may either approve the Combination or may approve subject to modifications in the structure of the Combination or not approve the Combination.

Over the past few years CCI has suggested ‘modifications’ i.e., a change in structure of the Combination or a requirement of divestiture of certain products prior to approving a Combination only in three out of the 500 odd notifications received by the Commission till date.

The Central Government has powers to exempt certain transactions from the applicability of Section 5 and Section 6 and pursuant to that the Central Government has notified certain exemptions from time-to-time by way of notifications. Certain exemptions are also provided by the Competition Commission in schedule I of the Competition Commission of India (Procedure in regard to The Transaction of Business Relating to Combinations) Regulations, 2011 (“Combination Regulations”). We shall discuss some of these in the later sections of this paper.

Section 5, Thresholds,

Exemptions

Before we jump onto the threshold figures let us understand the basics of how the thresholds are to be calculated.

1. Enterprise level calculation.

In enterprise level calculation, the calculation is based on summation of the assets / turnover of the buy side legal entity and the sell side legal entity. Until as recently as March 2017 even in case of a slump sale/business transfer of a miniscule undertaking of the seller the size of sell side legal entity was to be considered for the purposes of summation with the buy side legal entity assets and turnover leading to multitude of filings before the regulatory authority. Realising the futility of the exercise the Ministry of Corporate Affairs (“MCA”) in March 2017 permitted calculation of assets/turnover of only portion of the assets/turnover attributable to the portion of the enterprise or division or business being transferred instead of the total turnover of the Sell Side legal entity (“Calculation Concession”). It is important to note that for transactions covered under Section 5(b) (i.e., Acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service) the relevant buy side entity for enterprise level calculation will not be the buying legal entity but will be entity over which the buying legal entity has direct or indirect control and which is engaged in similar or identical or substitutable goods or provision of a similar or identical or substitutable service.

2. 
   Group level calculation.

In group level calculation, the calculation is based on summation of the assets / turnover of the buy side group and the sell side legal entity. In case where only a portion of an enterprise or division or business is being acquired the Calculation, Concession will apply and instead of sell side legal entity only the proportionate assets and turnover of the sell side legal business shall be considered for summation with the buy side group size. It is important to understand the meaning of the term “group” as used in the Act. By definition “group” means two or more enterprises which, directly or indirectly, are in a position to- exercise twenty-six per cent1 or more of the voting rights in the other enterprise; or appoint more than fifty per cent of the members of the board of directors in the other enterprise; or control the management or affairs of the other enterprise. Further, the Central Government vide a notification has exempted a ‘group’ exercising less than 50 % of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years from the date of notification i.e., 4-3-2016. This effectively means that the twenty-six per cent in the definition of “group” is increased to more than 50 % (fifty percent) as per the exemption notification by Central Government.

With the aforesaid background in mind let us now understand the current thresholds for treating an M&A transaction as a Combination.

1. i) Enterprise Level Calculation India Assets test (i.e., India Asset summation exceeds INR 2000 crore)
2. ii) Enterprise Level Calculation India Turnover Test
   A transaction will be a combination by definition (unless falling in the exemptions) if it fulfils any of the following

iii) Enterprise Level Calculation Worldwide (with India Leg) Assets test

1. iv) Enterprise Level Calculation Worldwide (with India Leg) Turnover test
2. v) Group Level Calculation India Assets Test vi) Group Level Calculation India Turnover Test

vii) Group Level Calculation Worldwide (with India Leg) Assets test

viii) Group Level Calculation Worldwide (with India Leg) Turnover test

Small Target Exemption. The Ministry of Corporate Affairs has vide notification dated 4th March, 2016 provided an exemption for certain combinations where the target being acquired is small and is below the thresholds given below

Apart from the above there are additional instances where exemption has been given as follows (see schedule I of Combination Regulations for details)

• An acquisition of shares or voting rights solely as an investment or in the ordinary course of business does not entitle the acquirer to hold twenty-five per cent (25%) or more. Presumption of less than 10% being solely for investment subject to non-existence of special clauses in agreement and non-existence of board seat.
• An acquisition of shares or voting rights where the acquirer, prior to acquisition, has fifty per cent (50%) or more shares or voting rights in the enterprise.
• An acquisition of assets 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.
• An acquisition of stock-in-trade, raw materials, stores and spares, trade receivables and other similar current assets in the ordinary course of business.
• Bonus issue or stock splits or consolidation of face value of shares or buy-back of shares or subscription to rights issue of shares, not leading to acquisition of control.
• Any acquisition of shares or voting rights by a person acting as a securities underwriter or a registered stock broker of a stock exchange on behalf of its clients.
• An acquisition of shares or voting rights or assets within the same group
• A merger of two enterprises where one of the enterprises has more than fifty per cent (50%) shares or voting rights of the other enterprise or if such entities are part of the same group.

Having regard to the above it will be worthwhile to throw light on the industry sector wise number of combinations handled by the CCI till date. Refer Figure 1.

Figure 1 : Sector wise distribution of combination notices received

LONG FORM APPLICATION VS. SHORT FORM APPLICATION

The notice of a Combination, shall ordinarily be filed in Form I (“Short Form Application”) as specified in Schedule II to the Combination Regulations. In cases where the parties to the combination have filed notice in Form I and the Commission requires information in Form II to form its prima facie opinion, it shall direct the parties to the combination to file notice in Form II (“Long Form Application”). Alternatively, the parties to the Combination may, at their option, give notice in Form II, as specified in Schedule II to the Combination Regulations, preferably in the instances where –

(a) The parties to the combination are engaged in production, supply, distribution, storage, sale or trade of similar or identicalor substitutable goods or provision of similar or identical or substitutable services and the combined market share of the parties to the combination after such combination is more than fifteen per cent (15%) in the relevant market;

(b) The parties to the combination are engaged at different stages or levels of the production chain in different markets, inrespect of production, supply, distribution, storage, sale or trade in goods or provision of services, and their individual or combined market share is more than twenty-five per cent (25%) in the relevant market.

The Short Form Application (Form I) is the most commonly used format for filing notifications of Combinations to the Commission. In rarely any case has the Competition Commission required filing in Long Form Application Form II by the parties.

Form I is a relatively simple, relatively short & relatively user friendly form requiring basic information on the Combination whereas the Form II is a comprehensive and extremely detailed form requiring significant level information from the parties making the application.

The total number of notices filed with the CCI and the speed with which they are disposed of are summarised below to give the readers an overview of the filing statistics.

Figure 2 : Receipt and disposal of Combination notices 2011-17

HOW HAND-IN-HAND CCI WORKS WITH OTHER REGULATORS

There are many areas where the role as CCI and the role of other areas may overlap or may require regulators working in tandem to achieve the object of the various statutes under which such regulators have come to life. Competition Commission like the SEBI is an economic regulator and does not deal specifically with any particular industry unlike the TRAI or the IRDA or the RBI.

Other regulators ability to make a reference to CCI. Section 21 of the Act provides for a situation where if in the course of a proceeding before any statutory authority an issue is raised by any party that any decision which such statutory authority has taken or proposes to take, is or would be, contrary to any of the provisions of the Competition Act, then (or even suo motu) such statutory authority may make a reference in respect of such issue to the Commission. The Commission is duty bound to address such references and provide an opinion thereto. However, in practice we have observed that there are negligible references made officially to the Commission by other statutory authorities under the official. Below is an extract from the annual report of the CCI on the year wise number of references received by CCI from other statutory authorities.

Figure 3 : References received from statutory authorities

CCI’s ability to make reference to other statutory regulators. Similarly section 21A of the Act provides for a situation where if in the course of a proceeding before the Commission an issue is raised by any party that any decision which, the Commission has taken during such proceeding or proposes to take, is or would be contrary to any provision of this Act and whose implementation is entrusted to a statutory authority, then (or even suo motu) the Commission may make a reference in respect of such issue to the statutory authority. The statutory authority or regulator is duty bound to respond to such references to CCI by giving its opinion.

Case in point is the case of Shri Neeraj Malhotra, Advocate vs. North Delhi Power Ltd. & Ors. [Case No. 6/2009 where the Delhi Electricity Regulatory Commission categorically stated in its communication to the CCI that although all matters pertaining to electricity tariff have to be decided as per the provisions of the Electricity Act and DERC Regulations, allegations of anti-competitive behviour, including abuse of dominant position by the discoms fall within the jurisdiction of the CCI.

Below are the statistics of the number of formal references made by CCI to other statutory authorities.

Figure 4 : References made to statutory authorities

As can be seen from the above there are limited formal interactions between CCI and the other regulators. However increased co-ordination is needed between CCI and various regulators as there could be various complicated situations while assessing combination cases that need to be dealt in a cohesive manner by the regulators. The definition of “control” is one such example. How CCI deals with definition of “control” and how SEBI looks at it could be different in a same combination and will have different implication for the companies who are parties to the combination. Needless to say another example, of the recent CCI action on National Stock Exchange holding NSE guilty of abuse of dominant position on a compliant filed by a certain commodities exchange, is a case of CCI intervening in the jurisdiction of the entity governed by SEBI.

Piyush Goyal the Central Government minister was recently quoted as follows

“The one very, very serious crisis that the nation is facing today is the accountability of regulators. There is almost no accountability of regulators. And in the garb of independence of regulation, it occasionally goes to another extreme,” the Union Minister of State for Power, Coal, New and Renewable Energy and Mines said in a recent gathering of regulators. He was speaking at a seminar on ‘Ease of Doing Business – Regulators as Facilitators’ at Vibrant Gujarat Global Summit 2017 in Gandhinagar.

I will leave it at that quote and let the readers form their own opinion on the need to co-ordinate between regulators.

Some of the suggestions that experts give to improve the situation are as follows

1. Formal schemes for co-ordination can be considered, as is done in various countries, for example:
2. a)   The right to participate/observe proceedings before the other;
3. b)  Formal referrals;
4. c)   Appeal to a common authority;
5. d)  Non-interference in other’s jurisdiction;
6. e)   Delineation of jurisdiction; and
7. f)    Presence of competition authority on sectoral regulator agency.
8. As a matter of policy, formal and informal exchanges between various sectoral regulators and CCI should be encouraged.The consultation process could be at two levels, one, at the policy level and two, in respect of individual cases. A forum should be created where the CCI and the sector regulators could meet on regular basis with a view to promote policy level co-ordination and make sector regulation as much competition driven as possible. This mechanism could also help in evolving principles for sharing information and determining the jurisdiction in different categories or types of cases.
9. Other mechanisms for co-ordination should also be explored such as:
10. a)   Use of experts from each other for facilitating enquiry/investigations.
11. b)  Exchange of personnel on deputation or internship basis.
12. c)   Participation in each other’s training programs, workshops, seminars, etc.
13. d)  Conducting regular training programs by CCI for representatives of the sector regulators so that they are in abetter position to appreciate various competition issues.

COVERAGE OF DEMERGER, RECONSTRUCTION, ENTITY SET-UP UNDER COMBINATION

Whether a demerger/reconstruction is required to be notified to the CCI?

The term demerger (forget defining) is not used in the Competition Act, 2002 and therefore it leaves us to interpret whether a demerger will fall under the term “acquisition” as used in Section 5(a) of the Act or will it fall under the term “merger” under Section 5(c) of the Act. The prevailing view derived implicitly from some of the judgments by CCI seems to suggest that the demerger transactions are covered under Section 5(c) (i.e. merger of two enterprises). Therefore, a demerger (which is not covered in the exemptions) will be required to be notified to the Commission. While reading the exemptions in Schedule I (discussed above) it will be worthwhile to note that certain exemptions are applicable only for acquisitions and not for mergers and it will be prudent to not include the term ‘demerger’ under the term ‘acquisition’ for the purposes of interpreting the exemptions.

However, the short answer to the question above is “yes” a demerger if not exempted is required to be notified to the CCI.

As regards general restructuring is concerned, it will need to be evaluated on a case by case basis whether a particular restructuring exercise will require notification to the Competition Commission. But a broad brush idea to have would be that generally intra group restructurings are exempted unless there is a transfer from joint control to sole control.

Having said that the policy to be adopted in dealing with interpreting Combination Regulations and the Act is that when it doubt whether a Combination will be covered under the requirement to notify to the Commission, you may request for a pre-filing consultation with the CCI and as per the Act the CCI is duty bound to provide the pre-filing consultation if sufficient notice is given to CCI.

Do I need to notify the creation of a joint venture?

This question is directly answered by one of the FAQs published by the Commission and the answer reads as follows

“Yes, if one or more enterprises transfer its assets to a joint venture company, then the formation of joint venture is treated as a notifiable Combination, provided that jurisdictional thresholds are met.”

However, a new incorporation of entity without transfer of any assets or turnover by the joint venture partner would not generally be covered in the requirement to notify the Commission under section 6 of the Act.

1. EVALUATION OF ‘APPRECIABLE ADVERSE EFFECT ON COMPETITION’

The Act envisages appreciable adverse effect on competition in the relevant market in India as the criterion for regulation of combinations. To evaluate appreciable adverse effect on competition, the Act empowers the Commission to evaluate the effect of Combination based on factors mentioned in sub section (4) of section 20.

Factors to be considered by the Commission while evaluating appreciable adverse effect of Combinations on competition in the relevant market:

(a) actual and potential level of competition through imports in the market;

(b) extent of barriers to entry into the market;

(c) level of concentration in the market;

(d) degree of countervailing power in the market;

(e) likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

(f) extent of effective competition likely to sustain in a market;

(g) extent to which substitutes are available or are likely to be available in the market;

(h) market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

(i) likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

(j) nature and extent of vertical integration in the market;

(k) possibility of a failing business;

(l) nature and extent of innovation;

(m) relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;

(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any

2. Relevant Case Laws

1) SML Isuzu, Isuzu Japan and Sumitomo:

SML Isuzu was engaged in the business of manufacturing and sale of four wheeled commercial vehicles, earlier known as Swaraj Mazda Limited. Sumitomo, holding 54.96% equity shares in SML Isuzu, supplied power trains and chassis components to SML Isuzu. After the proposed combination (acquisition), Sumitomo and Isuzu (Japan) would hold 43.96% and 15% equity shares respectively in SML Isuzu. According to the Notification No S.O. 481 dated 4th March 2011 issued by the Government of India, group exercising less than 50% of the voting rights in other enterprises are exempt from the provisions of section 5 of the Competition Act. The Commission took note of the said notification and decided accordingly. As there was no horizontal overlap as assessed by the Commission, it opined that the present acquisition is not likely to have an appreciable adverse effect on the competition in India and therefore, was approved by the Commission.

2) GS mace Holding acquisition of shares of Max India:

Another case that requires a mention here is the acquisition filed by GS Mace Holdings Limited, a Mauritius based sub account of the Goldman Sachs & Co which is a Foreign Institutional Investor, for acquisition of the shares of Max India Limited. The details of the said acquisition were filed in form III and till date is the 13 only case filed so. Because of the acquisition of shares in Max, the acquirer’s shares had increased to 15.602% of the issued and the paid-up equity share capital of Max. The Commission observed that the provisions of sub section (4) of section 6 of the Act apply to share subscription or financing facility or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, only if it is made pursuant to any covenant of a loan agreement or investment agreement. In pursuant to the amended Combination Regulations, acquirer holding 25% of the voting rights or shares, is not likely to cause an AAEC in India, and now in respect of such acquisitions, notice under section 6 (2) need not normally be filed. Therefore, in view of the amended regulations the Commission was of the view that the proposed merger was not likely to have any AAEC on competition in India.

3. Please find below the link of a news article w.r.t M & A deals in digital economy:-

https://www.livemint.com/Opinion/R2jJb12xH9BX9heTYleESK/How-CCI-should-look-at-MA-deals-in-digital-economy.html

CONCLUDING REMARKS

I hope the above will give you a fair overview of the need to know things relating to “combinations” under Combination law. This article just gives a tip of the ice berg idea on Combinations under Competition Law and there are various nuances and issues which I would have liked to discuss but neither do the publishers of this article have more space for me, nor you have any more time but all of us definitely have a next time!

REFERENCES

http://www.cci.gov.in/sites/default/files/annual%20reports/CCI_AR-2016-17_English.pdf. (n.d.).

http://www.cci.gov.in/sites/default/files/speeches/interface.pdf?download=1. (n.d.). Competition Commission of India Website.

(n.d.). http://www.rediff.com/business/report/accountability-of-regulators-a-serious-crisis-in-india-goyal/20170111.htm.

1 Further, the Central Government vide a notification has exempted a ‘group’ exercising less than 50 % of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years from the date of notification i.e., 43-2016.