The authors would like to acknowledge the contribution of Shruti Aji Murali, associate in the Mumbai Competition Law Practice at Amarchand Mangaldas.
Introduction
India’s highly anticipated merger control regime (Sections 5 and 6 [1] of the Competition Act, 2002 (“Act”) [2] and the accompanying Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 as amended (“Combination Regulations”)) came into force on 1 June 2011, after initial resistance from the business community. Despite the nascent regime, the Competition Commission of India (“CCI”) has already brought about significant substantive and procedural amendments to the Combination Regulations in February 2012, providing clarity and responding to industry feedback, positioning itself as a progressive regulator. Nevertheless, the CCI has some way to go in streamlining the merger control process in India. Since June 2011, the CCI has reviewed mergers across a wide variety of sectors such as steel, realestate, entertainment, banking, information technology, insurance, mutual funds, etc.
The Merger Control Framework
The Indian merger control regime is a mandatory, suspensory regime and any acquisitions, mergers or amalgamations of enterprises, where the prescribed jurisdictional thresholds are met (“Combinations”), require prior approval of the CCI. The Act provides for a 210 day period for the CCI to review a notified Combination, failing which the Combination is deemed to be approved. The 210-day review period is split into Phase I, i.e. a period of 30 days [3] from the date of notification when the CCI is required to provide its prima facie opinion as to whether the Combination will cause an appreciable adverse effect on competition (“AAEC”) in the relevant market in India; and Phase II, i.e. 180 days after the CCI passes an order instituting a Phase II investigation, wherein the CCI is required to pass a final order either approving, disapproving or proposing modifications to a notified Combination.
The merger regime comprises a three-step procedure comprising the Target Exemption, [4] Parties Test [5] and Group Test [6] in order to evaluate notifiability of Combinations. For a Combination to be notifiable, it should meet the prescribed thresholds under the Target Exemption and also fulfill either the Parties test or Group test. Apart from the Target Exemption, Schedule I to the Combination Regulations provides for a list of exemptions from notification.
A merger notification is required to be filed with the CCI within 30 days from the trigger date, which in the case of acquisitions is the date of execution of the first binding agreement or other document [7] and in the case of mergers or amalgamations is the date on which final board approval is granted. The merger notification may be filed in either Form I (short form, including information pertaining to the combining parties, relevant market, competitors, etc.) or Form II (detailed long form, including information about the group, competitors, imports, exports, research and development in the relevant market, analysis, reports, surveys or studies relied on to enter into the Combination). The Combination Regulations provide for a self-assessment regime and recommend that a Form II be “preferably” filed in instances where the combined market share of the parties (where they are competitors) post-Combination is more than 15% or when the parties operate in vertically linked markets and their individual or combined market share is more than 25% in the relevant market(s). In all other instances, a Form I may be filed.
Further, the Act imposes a penalty of up to 1% of the combined assets or turnover of the parties to the Combination, whichever is higher, on parties for nonnotification of Combinations. The CCI has in 9 instances instituted penalty proceedings for belated notification of Combinations as well, but has not imposed any penalty as it was the first year of implementation of the merger control regime.
The Experience Thus Far
The CCI has reviewed 85 Form I merger notifications to date. India’s first long form merger notification was filed on 1 November 2012 and is under review by the CCI.
The substantive test for merger control under the Act is AAEC and the factors to determine AAEC are listed under Section 20(4) of the Act. [8] Some of the factors that the CCI has considered are market structure, the number of competitors in the market, market shares of the parties, level of maturity and growth in the market and the presence of a sectoral regulator.
The pedantic and literal interpretation of the Act and the Combination Regulations has resulted in the CCI adopting positions contrary to international competition law principles, such as in the case of intra-group mergers and amalgamations, asset acquisitions and slump sales, etc. Other interpretational issues persisting in the merger control regime include the treatment of joint ventures under Section 5 and the insignificant local nexus exemption.
However, the CCI has in a recent slew of reviews provided much-needed clarity on its stance in relation to the concept of “control” [9] for the purposes of the Act. In Alok Industries/Grabal Alok Impex [10] the existence of common promoter group, directors and management was said to constitute common control. Further, in MSM India/SPE Holdings/SPE Mauritius [11] the CCI concluded that the right to block special resolutions (through a more than 26% equity stake) amounts to “negative control”, which is “control” for the purposes of the Act. The CCI stated, “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.” The CCI also noted that certain actions, such as engaging in any new business, opening locations in new cities, hiring and termination of key personnel, etc. could not be undertaken without the consent of the minority shareholders and held, “It is observed that the collective shareholding of the sellers to the extent of 32.39% is sufficient to block/ veto any action that requires special resolution… Further, the actions for which consent/approval of… [the minority shareholders]… is required…includes certain strategic commercial decisions of MSM India and the same cannot be considered as mere minority investor protection rights.” Recently, in Century Tokyo Leasing Corporation/Tata Capital Financial Services Limited [12] the CCI concluded that the approval of business plans, annual operating plan (including the annual budget plan), commencing a new line of activity and discontinuing any existing line of activity or business, appointment of key managerial personnel and their compensation constitutes control. Thus, the CCI is adopting the position that control can be positive control and negative control.
Another contentious issue has been the possible jurisdictional overlap between the CCI and other sectoral regulators, which is proposed to be resolved by the proposed amendments to the Act. The other proposed amendments to the Act include the introduction of different thresholds for merger notification for any class of enterprises by the Central Government, in consultation with the CCI, as well as a reduction in the merger review timelines from 210 to 180 days. [13] While the proposed amendments to the Act are a positive signal, the Indian merger control regime still has some way to go in adopting international competition principles. The international cooperation agreement signed between the CCI and the US is a first step in this direction.