alerts & publications
Indian Government Announces New Merger Control RegulationsMay 23, 2011
Long awaited rules will impact most cross border M&A involving India
On May 11, 2011, the Competition Commission of India (“CCI”), the government body created under the Competition Act 2002 (“Competition Act”), released regulations entitled “The Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations” (“Combination Regulations”) that set out additional provisions to the Competition Act, which take effect on June 1, 2011 (“Effective Date”).1
Prior to the Competition Act, only direct acquisitions in Indian companies were notifiable and a large number of M&A transactions in India were not subject to a formal review and approval process. The merger control provisions of the Competition Act and the Combination Regulations define a dramatically different regulatory environment for business combinations. Parties to mergers and acquisitions, including international private equity investors and companies wherever domiciled, may now have to make filings with and receive the consent of the CCI to complete transactions with an effect in India.
This alert sets out some highlights of the Combination Regulations, including which transactions are more likely to be subject to filing requirements, which may be exempted from filing requirements, and information on the specific filing requirements and time involved for the CCI review.
Combinations Subject to the Merger Control Rules
Section 5 of the Competition Act states that any acquisition of an enterprise by one or more persons, or merger or amalgamation between two enterprises, shall be a combination (“Combination”) that triggers a filing requirement if certain financial thresholds are met. The thresholds refer to different types of transactions, namely:
(i) the acquisition of control, shares, voting rights or assets;
(ii) the acquisition of control over an enterprise where the acquirer already controls another enterprise engaged in providing similar or identical or substitutable goods or services; and
With respect to the acquisition of shares or assets, the Competition Act remains unclear as to when this would constitute an “acquisition of an enterprise” under the law. Schedule I of the Competition Act indicates a number of transactions which will normally not need to be filed, including the acquisition of less than 15 % of the shares in another enterprise. This implies that an acquisition of more than 15 % of the shares may well constitute a notifiable transaction. Additional clarification may be required to establish the exact scope of filing requirements.
A Combination requires filing if it meets either one of two alternative jurisdictional thresholds. These refer to turnover or assets of the individual parties to the transaction or the “Group” they form (i.e. the group to which the acquirer belongs and the target and its subsidiaries).2 The tests are set forth in the following table3:
|Individual parties||Notification to CCI required if combined enterprise the proposed transaction, would have:|
|Assets of INR 1,500 crore (approximately USD 333 million) in India or revenue of INR 4,500 crore (approximately USD 1 billion) in India||OR||Worldwide assets of USD 750 million of which INR 750 crore4 (approximately USD 167 million) are located in India, or worldwide revenues of USD 2.25 billion) of which INR 2,250 crore (approximately USD 500 million) are generated in India. |
|Group||Notification to CCI required if the Combined Group (formed by corporate group of the acquirer and the target and its subsidiaries),5 would have:|
|Assets of INR 6,000 crore (approximately USD 1.33 billion) in India or revenue of INR 18,000 crore (approximately USD 3.99 billion) in India||OR||Worldwide assets of USD 3 billion) of which INR 750 crore (approximately USD 167 million) are located in India, or worldwide revenues of USD 9 billion) of which INR 2,250 crore (approximately USD 500 million) are generated in India.|
Certain Filing Exceptions are Available
For an initial period of five years, a de minimis exemption exists from filing for business combinations where the value of the assets of the target enterprise does not exceed INR 250 crores (approximately USD 55.5 million) or the revenues of the target enterprise do not exceed INR 750 crores (approximately USD 167 million).6 The exemption does not specifically refer to the value of assets or revenues in India or world-wide; a clarification of the scope of this exemption is expected in the future. Transactions with targets of this size are not subject to the filing requirements or review by the CCI.
An acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to a covenant of a loan agreement or investment agreement, is also not subject to the filing requirements.7 However, such transactions still need to be brought to the attention of the CCI within 7 days from the date of the acquisition.8
The Combination Regulations provide a list of transactions which ordinarily are not likely to cause an appreciable adverse effect (“AAE”) on competition in India. Therefore, a merger control notification ‘need not normally be filed’.9 These include acquisitions of up to 15% of the shares in the target, group internal restructurings, acquisitions of stock-in-trade, raw materials, stores and spares in the ordinary course of business, and a combination taking place entirely outside India with insignificant local nexus and effect on markets in India. These were newly introduced under the final version of the Combination Regulations which, if not included, would have made various ordinary course transactions between companies with large assets or turnovers in India subject to the unnecessary burden of the filing requirements. Additional clarification as to what constitutes “insignificant local nexus and effect on markets” as well as the conditions under which such transactions do need to be filed (the Combination Regulations do not provide a formal exemption) is expected in the near future.
Under the Combination Regulations, the obligation to file rests with the acquiring party (or with both parties in the case of a merger or amalgamation) which must provide detailed information to the CCI. The relevant notifications must be made within 30 days of the trigger event.10 This is triggered when the Board of Directors of the parties have approved the transaction (in cases of mergers), or the execution of legally binding purchase agreements (in cases of acquisitions).
There are two forms provided for meeting the filing requirements, a short form and long form. As an example, a short form may be used for combinations where the parties to the transaction are not present in the same market (no horizontal overlap) nor are present on a market upstream or downstream from one another (no vertical relationship). This should allow for an expedited review process (although this is not clear in the Combination Regulations). The more extensive long form requires additional information concerning, among other things, details about the main products or services offered by the parties, information about market demand, supply structure and market entry, market efficiency and other market information.
Both short and long forms filed to the CCI need to be accompanied by the requisite filing fee. For Form I the fee is INR 50,000 (approximately USD 1,100) and for Form II is INR 10 lakh (approximately USD 20,000).
Parties that are required to notify combinations to the CCI must brace for a significant expenditure of time and resources to comply with the filing requirements. They should also be aware that materials which may have previously been seen as purely for internal use, such as diligence reports, will need to be provided to the CCI, which will review them as part of its investigation into the transaction.
The CCI is required by the Competition Act to maintain the confidentiality of the notification and the information it contains.11 Under the Combination Regulations, any request for confidentiality can be made to the CCI to highlight particularly sensitive issues.12 However this will not fully prevent the CCI from sharing information filed with other agencies and authorities, as long as they obtain consent of the parties in advance.
What is deemed “Appreciable Adverse Effect” on Competition?
No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition in India. Through its investigation the CCI will determine whether the transaction causes or is likely to cause an AAE on competition.13 Unfortunately, the Competition Act fails to provide a statutory definition of AAE, and the relevant standard has yet to be established by the Indian courts. The statute does contain a non-exhaustive and rather vague list of factors that the CCI will take into account, such as the level of barriers to entry into and the nature and extent of innovation in the market.14 In an explanatory memorandum, the CCI distinguishes two broad categories: unilateral effects and coordinated effects.15 Unilateral effects occur if the combined entity will, after completion of the transaction, be able to make business decisions such as pricing and output without having to take into account its competitors’ or customers’ reactions. Coordinated effects occur if a combination increases the likelihood of tacit anti-competitive coordination of competitive behaviour. In terms of practical guidance for the business community, as a rule of thumb the parties can expect the CCI to raise concerns where a transaction would under similar circumstances would also meet opposition in the EU or the US. However, the CCI is likely to independently develop its administrative practice with reference to the situation in India, so that a reliable assessment of specific issues is not possible at present.
The final Combination Regulations do not call for an informal, non-binding consultation with the CCI before the official submission; thus the merger control process is reduced to two phases:
- Phase I, which consists of up to 30 calendar days, wherein the CCI will decide to clear a transaction or subject it to further detailed scrutiny (45 calendar days if modifications are offered by the parties);
- Phase II, which can last up to an additional 180 calendar days where a detailed investigation will take place of those transaction which the CCI in its prima facie opinion believes are likely to cause an AAE
In practice, the time to obtain approval can be significantly longer, given that the CCI may stop the clock by asking for more information. A standstill obligation applies during the review period. It is unclear whether the bar on closing the transaction is global or applies only within India. There are no provisions that explicitly allow a carve-out of the Indian aspects of global transactions, but the CCI could address this issue by allowing such carve-outs as a matter of practice.
The length and uncertainty of the review process are likely to introduce completion risks, especially when compared to other countries, where the full initial waiting period of a review may be much shorter.16 Transactions will have to be meticulously assessed and preparations will need to be made for various possible outcomes.
The penalty for failing to make the required filing to the CCI is a fine of up to 1% of the total turnover or the assets of the relevant enterprises.17 Failure to comply with an order or direction given by the CCI after the filing may result in a fine of up to INR 100,000 (approximately USD 2,220) per day until it is rectified subject to a maximum of INR 1 crore (approximately USD 222,000).18
Effective Date for Merger Control Provisions
Transactions approved by the Boards of Directors (in cases of mergers) or where binding agreements have been signed (in cases of acquisitions) before June 1, 2011 will not be subject to the new rules.19 After June 1, 2011 the CCI has the authority to initiate inquiry on any Combination up to one year after taking effect.20
With the effective date of the Combination Regulations now imminent, a new regulatory era is set to begin in India. Although the Competition Act and the implementing regulations are quite comprehensive and thoughtfully drafted, necessarily the true impact will only be understood once the CCI begins implementing the rules and interpreting them.
1. MCA Notification March 4, 2011, http://www.mca.gov.in/Ministry/notification/pdf/Notification_4mar2011(3).pdf.
2. Section 5 (a)-(c) Competition Act 2002; amended by MCA notification March 4, 2011, http://www.mca.gov.in/Ministry/notification/pdf/Notification_4mar2011(4).pdf.
3. Exchange rate as used throughout this client alert: INR 1=USD 0.022; INR 1 crore=USD 222,000; USD 1= INR 45
4. Unless described as “approximately,” currency values herein are specific references from the statutes.
5. Section 5 (Explanation to Section 5 (b)) Competition Act; "Group" means two or more enterprises where one (i) holds at least 50% of the voting rights in the other enterprise (increased from twenty six (26%) for a period of five years by the MCA Notification); or (ii) can appoint more than half of the board of directors;or (iii) controls the management or affairs of the other enterprise.
6. MCA Notification March 4, 2011, http://www.mca.gov.in/Ministry/notification/pdf/Notification_4mar2011.pdf.
7. Section 6(4) Competition Act.
8. Section 6(5) Competition Act.
9. Schedule I Combination Regulations/
10. Section 6(2) Competition Act/
11. Section 57 Competition Act/
12. Section 30 Combination Regulations/
13. Section 20 (1) Competition Act.
14. Section 20 (4) Competition Act.
15. CCI website, http://www.cci.gov.in/menu/combinations.pdf.
16. See, e.g., Section 7a, 15 U.S.C. § 18a.
17. Section 43A Competition Act.
18. Section 42 (2) Competition Act.
19. Section 31 Combination Regulations.
20. Section 20 Competition Act.
|Antitrust and Competition|
|Pooja Sinha |
O’Melveny & Myers is not licensed to practice Indian law, and nothing in this Client Alert should be deemed to be an opinion on or advice concerning Indian law. The above is summarized from publicly available sources and is prepared as a convenience to our clients and friends outside of India.
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