India: Shifting sands

Author: | Published: 1 Oct 2010
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In May 2009, after a wait of over seven years, the Indian government, notified and brought into force the substantive provisions of the Competition Act 2002 (the Act) dealing with behavioural matters such as prohibition of anti-competitive agreements (including cartels) and abuse of dominance (sections 3 & 4). Since then the Indian industry and legal circles have been abuzz with talk of the impending notification of the remaining (and probably the most significant) part of the Act – regulation of combinations (sections 5 & 6). These provisions seek to bring about a sea change in the form and manner in which inorganic growth through mergers and acquisitions will be undertaken by the Indian Industry, thus changing the rules of the game forever.

The legal regime in relation to combination (or merger) regulation in India was earlier contained in Chapter III (concentration of economic power) of the erstwhile Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act). However, the government, aware that sections 20-26 were proving to be an impediment to economic growth and consolidation, amended the MRTP Act in 1991. It deleted these provisions and inserted the same in the Companies Act, 1956 (sections 108A-I). These provisions, which mandate prior central government approval or intimation for acquiring more than certain specified shareholding thresholds of an Indian company where it creates a dominant undertaking, have, barring a few instances, not been implemented.

The merger control provisions mooted under the Act are a departure from the previous approach founded on the license raj philosophy that big is bad. Rather, the focus under the Act is on determining the appreciable adverse effect (AAE) a proposed combination would have on the market and on finding ways and means to mitigate the same. The manner in which this is sought to be achieved is by prescribing a mandatory and suspensory pre-combination notification and approval process whereunder all combinations above certain asset and turnover thresholds would have to be compulsorily notified to the Competition Commission of India (CCI), the nodal authority for competition law in India. Failure to notify a combination would attract a penalty of up to 1% of the amount of turnover or assets of the combination (whichever is the greater).

The next section discusses some of the key issues arising out of and implications of the proposed merger control regime for business in India and outlines the progress made by the CCI thus far in implementing the substantive provisions notified and brought into force by the Indian Government.

Combination regulation

The combination regulation provisions of the Act have been criticised on several counts by industry and practitioners alike. The 210 days (extendable by 60 working days) long waiting period prescribed under the Act (as against the 90 day period mooted in the Report of the High Level Committee on Competition Law and Policy, which led to the enactment of the Act) before a proposed merger can be closed is perceived as too lengthy. No fast-track filing/approval process is envisaged under the Act. Thus, once the relevant provisions are notified, the timeline for completion of M&A transactions will have to be reworked and approval of the CCI (in addition to any other applicable approvals) will also have to be included as a condition precedent in the transaction documents. The asset and turnover based filing thresholds mentioned in the Act for determining notifiable combinations were prescribed in the year 2002 at the time of enactment of the Act and are: combined assets of the parties in India of Rs. 10 billion (approx $200 million) or a turnover of Rs 30 billion or combined worldwide assets of $500 million or turnover of $1.5 billion (including assets of at least Rs. 5 billion (or turnover of Rs. 15 billion in India); for a group, the combined assets of Rs. 40 billion or turnover of Rs 120 billion in India or the combined worldwide assets $2 billion or turnover of $6 billion of the group (including assets of at least Rs. 5 billion or turnover of Rs. 15 billion in India). The Act requires the government to revise the thresholds to be revised biennially.

The thresholds appear fairly low now given the exponential rise in the size and volume of transactions since then. This will cast the net very wide and bring many small-size M&As within the purview of the mandatory notification and approval process. From recent media reports it appears that the government is proposing to make an amendment to the Act to relax the filing thresholds before the combination regulation provisions under the Act are notified in their final form, which will be a big relief for the Indian industry.

Under Section 5, a combination can be a merger or amalgamation or an acquisition of control, shares, voting rights or assets. As the Act does not prescribe a de minimis transaction threshold (ie minimum percentage of share acquisition to trigger a merger filing), acquisition of even a single share in an entity that may independently meet the prescribed asset/turnover thresholds for the combination has the potential of triggering a merger filing. Absence of a local nexus test (ie a minimum asset/turnover base in India for each of the participating entities) under the Act will further widen the nature of transactions falling within the purview of the mandatory filing requirement. The asset and turnover basis is applied also at a group level, with a group being very widely defined, and may comprise of several undertakings irrespective of the commonality of their product market or the industry in which they operate. The low notification threshold, along with a wide definition of group, would have the effect of capturing many small M&As that will not have an impact on competition within its sweep.

The CCI has sought to address some of these concerns by framing draft Combination Regulations (which are subject to change as they have not yet been notified and brought into force) which prescribe a 15% minimum share acquisition threshold, minimum assets of at least Rs. 200 crore or turnover of Rs. 600 crore of each of at least two of the parties to the combination and a fast-track approval process of 30-60 days depending on the nature of form filed by the applicant. However, the legality of prescribing exempted categories of transactions through regulations, which may go beyond the purview of the existing exceptions in favour of FIIs, PFIs, VCFs and banks (though not being a generic exception for purely financial investors) under the Act from the mandatory filing requirement, is open to debate.

The trigger event for making a filing with the CCI is board approval for a proposed transaction, or execution of any agreement or other document for acquisition, or acquiring of control over the target enterprise, within 30 days of which the transaction is required to be notified. Lack of clarity on what other documents (term sheet, MOU, etc.) may trigger filing further adds to the ambiguity. Cross-border transactions requiring multiple pre-merger filings may find the 30 day notification period difficult to comply with. Recognising the above dilemma, the International Competition Network (a global network of competition authorities including the CCI) prescribes that parties should be given the option of making a filing as early as possible – even prior to a formal board approval or signing of definitive documents. This option needs to be considered prior to finalizing the Combination Regulations.

Further, in the absence of transitional provisions under the Act, the treatment of transactions that may have been signed but not closed prior to notification of sections 5 & 6 is not very clear. In view of the uncertainty in the market, especially transactions involving multiple jurisdictions, about the timing of the combination regulation provisions of the Act coming into force, the notification bringing into force sections 5 & 6 should be prospective and provide for a future effective date (eg the effective date of the new Japanese Anti-Monopoly law was January 1 2010 but the new merger control regime was applied only to transactions closing after January 31 2010).

Treatment of restrictive covenants (eg non-compete, non-solicit, transfer restrictions, etc.) imposed on counterparties pursuant to business transfer and private equity investments also needs to be clarified in view of the same running the risk of being perceived as limiting or controlling production or supply and falling within the prohibition on anti-competitive agreements under section 3(3) of the Act.

With sector specific regulators such as the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (Irda), Telecom Regulatory Authority of India (Trai)/Department of Telecom (Dot), electricity regulatory commissions, etc. hitherto regulating M&A activity in their respective fields, there is a possibility of jurisdictional overlap between CCI and these sector specific regulators on M&A issues (and consequently forum shopping) if the scope of interactions between them is not clarified prior to notification of the merger control provisions. As the Act envisages only a discretionary reference mechanism (sections 21 & 21A) in case of conflict between CCI and other statutory authorities with no definitive guidance emerging from the Act as to which regulator would prevail in such situations, the potential for regulators crossing swords over regulation of M&As (à la the recent Sebi-Irda row over Ulips) cannot be ruled out. Further, certain sector specific Indian regulators (eg the RBI) have already raised objections to ceding M&A turf to the CCI on merger related issues. The challenge going forward would be to balance conflicting concerns without divesting the CCI of its merger control provisions as this would dilute the object behind the merger control provisions. Whilst industries which are in the midst of a consolidation wave (eg telecom) or going through difficult times (eg aviation) may require special exemptions, if the idea behind merger regulation is to protect consumers as a result of monopoly creation then providing sector specific exemptions for extraneous sans justifiable reasons may vitiate consumer interest in such sectors. Unfortunately, the Act does not enable the CCI to provide block exemptions (like in the EU) based on industry specific problems or issues or on the basis of generic assessment of the AAE of a practice or arrangement. Thus, it appears that any exemption (industry or practice based) will have to be introduced directly by the Indian government.

Lastly, predicting the timing of the notification and coming into force of the combination regulation provisions under the Act has been a holy grail type quest for lawyers and commentators alike. Media reports suggest that the revised draft of the Combination Regulations have been forwarded by the CCI to the concerned government ministry for approval. The expectation is for the draft regulations to be released by the CCI for public comments once they have been approved. Then they will be notified in final form along with sections 5 & 6 of the Act.

Agreements and abuse of dominance

Since the notification of sections 3 & 4 of the Act in May 2009, the CCI has been one of the biggest news-makers in India. The CCI has close to 120 cases (50 from its predecessor, ie, the MRTP Commission) pending before it involving some of the biggest business houses in India. Complaints have involved multiplex and film studios (including one of the biggest celebrities in India), state film chambers, banks and housing finance companies, travel agents, Indian Railways, airlines, power distribution companies, builders and developers, state-run oil companies, stock exchanges, direct-to-home service providers, sugar and cement firms, a global software giant, public sector coal and insurance companies. As per media reports the CCI has initiated an investigation and ordered an enquiry by the Director General (DG) of the CCI (its investigation wing) in most of the cases brought before the CCI.

We have already had a failed attempt in Kingfisher Airlines v. CCI (W.P. No. 1785 of 2009, Bombay High Court order dated March 31 2010) to preclude the CCI from investigating cases that may have the anti-competitive agreement in question coming into force prior to the notification of the substantive provisions of the Act (ie before May 20 2009). The rationale is clearly the undisputed mandate of the CCI to regulate the continuing effect of such agreements and practices on the market notwithstanding the date and commencement of such agreements and practices. Some defendants have also approached the Cat for relief against proceedings initiated by the CCI.

Further, there already seems to be a turf war brewing between the CCI and its appellate body, the Competition Appellate Tribunal (Cat), which recently reached the Indian Supreme Court in the case of CCI v. Steel Authority of India Limited (Order dated September 9 2010). The case inter alia involved issues such as whether (i) the prima facie opinion formed by the CCI before directing the DG to conduct an investigation was appealable before the Cat, and (ii) the parties were entitled to notice or hearing or reasons by the CCI before forming its opinion at this interim stage.

The case reached the Supreme Court after the Cat had stayed a DG investigation ordered by the CCI in a particular case. The Supreme Court, in a judgment that is likely to be a watershed in the evolution of competition jurisprudence in India, delineated the field of operation between the CCI and the Cat and held that the CCI is well within its rights to direct investigation into suspected anti-competitive behaviour by market players without giving any prior hearing to the affected party and no appeal could be filed against CCI's direction for starting a probe. The Supreme Court further issued certain directions in relation to the functioning of the CCI. This ruling reinforces the respective jurisdictions of CCI and the Cat and will reduce frivolous litigation at the interim stage of a CCI investigation.

However, the absence of a positive final order by the CCI in any of the cases before it, in spite of being invested with investigative powers for over 16 months now, has led to the criticism that the CCI may be a jinxed body created only in form rather than substance.

In the recent past the CCI has been on a massive recruitment drive hiring lawyers, economists and other executives. Further, the CCI is spending significant resources in capacity building of its staff including training by EU and US competition authorities on merger review process and investigative techniques. Once fully staffed (and trained), one of the strongest arguments made by the industry against notification of the merger control provisions (ie staffing concerns) would be obviated. Lest the industry is able to identify another chink in the CCI's armour, the notification and coming into force of the merger control provisions cannot be delayed by the Indian government any longer.

Recently the CCI has made public statements expressing its desire to set-up state-level competition commissions to safeguard the interests of small businesses and spread its reach to different parts of the country (presently the CCI is based out of New Delhi). This will spread competition law sensitization and lead to a spike in competition law complaints on account of wider access to CCI as a forum.

The road ahead

In the future, parties to all M&A deals (domestic, cross-border or even purely offshore – on account of jurisdictional nexus clauses in the new law) will have to assess whether the proposed transaction will trigger a CCI filing and the potential implications of the proposed deal on consumers and competitors, lest competition issues are raised by the CCI at the review stage. Given the above uncertainties, an effective mechanism is required for approaching the CCI for advance rulings and pre-merger consultation (recognised in the Raghavan Committee Report) to assist parties in deal structuring and to lend a sense of predictability to the filing and approval process. Though this is presently not envisaged under the Act, media reports indicate that the CCI is contemplating introducing the same in the final version of the combination regulations. This, coupled with interpretative guidelines from the CCI prior to notifying the merger control provisions, will go a long way in giving the necessary comfort to the Indian industry that implementation of the new merger control regime will not stymie inorganic growth and consolidation through M&A activity.

With all relevant stakeholders having given their comments on the successive drafts of the combination regulations and the CCI being on a major recruitment drive to alleviate staffing concerns acting as impediments to the implementation of the Act, the ball is now squarely in the government's court as regards the timing of the notification of the merger control provisions under the Act. However, given the implication of this new law for corporate India and the nature of penalties prescribed under the Act for failure to notify a combination, it would be worth considering if implementation of the merger control provisions should be in a phased manner with the CCI scrutinizing only the big ticket M&A transactions for the time being. This would be a means of testing and fine tuning the review and approval mechanism envisaged under the Act and the preparedness of the authorities for dealing with the volume of filings expected to be made with the CCI. Any undue delays in granting approvals, especially for benign transactions, or rejection of mergers for extraneous considerations (as has been the experience in China while implementing the new merger control regime), has the potential of nipping the nascent M&A activity and consolidation within the Indian industry in the bud.

The concerns identified in relation to implementation of the Act have been faced by most newly set-up anti-trust regulators. Whilst the initial period may be difficult with the CCI refining its application and implementation of the Act, the rationale behind having a merger control regime has been globally recognised and successfully implemented in over 80 countries now. A lot is expected in terms of most, if not all, concerns being addressed through the combination regulations, which are in the process of being finalized and are expected to be released soon.

In the coming few months, the CCI is expected to give its final verdict on several high-profile cases (including cartel cases) pending before it. This will set the tone for the road ahead for the CCI and determine how effective a body it is perceived to be by industry and consumers alike. Even a few orders with million rupee fines will surely force business to sit up and take notice that the CCI has arrived. However, the extent to which the CCI is able to emulate its peers in the EU and the US is anybody's guess.

About the author

Mr. Cyril Shroff is a managing partner of Amarchand & Mangaldas & Suresh A. Shroff & Co, India’s largest and foremost law firm with approximately 450 lawyers.

Amarchand Mangaldas has offices at Mumbai, New Delhi, Bangalore, Kolkata and Hyderabad. With over 25 years of experience in a range of areas, including corporate laws, securities markets, banking, infrastructure and others, Mr. Shroff is regarded and has been consistently rated as India’s top corporate, banking and project finance lawyer by several international surveys including those conducted by International Financial Law Review (IFLR), Euromoney, Chambers Global, Asia Legal 500, Asia Law and others.

Mr. Shroff has authored several publications on legal topics. He is a visiting lecturer of securities law at the Government Law College. He is a member of the Advisory Board of the Centre for Study of the Legal Profession established by the Harvard Law School, and a member of the Advisory Board of the National Institute of Securities Markets (NISM).

Mr. Shroff is a member of the Executive Council – Legal Practice Division (LPD) of the International Bar Association (IBA) and the Advisory Board of the Asia-Pacific Forum of the IBA. He is a member of the Media Legal Defence Initiative (MLDI) International Advisory Board. Also, a member of the Primary Markets Advisory Committee of the Securities and Exchange Board of India.

Mr. Shroff is also part of various committees of the Confederation of Indian Industry (CII) – the National Council on Corporate Governance, the National Committee on Commodities Markets, the Sub-Committee on Financial Investors, the National Committee on Regulatory Affairs and the National Committee on Capital Markets. He has also been a member of several governmental and other regulatory committees on law reform concerning the corporate and securities market, bankruptcy laws, commercialisation of infrastructure.

Mr. Shroff was admitted to the Bar in 1982 after receiving his BA, LLB degree from the Government Law College.

Contact information

Cyril Shroff
Amarchand & Mangaldas & Suresh A. Shroff & Co

Peninsula Chambers Peninsula Corporate Park
Ganppatrap Kadam Marg Lower Parel
Mumbai 400 013
India

Tel:  +91 22 6660 4455
Fax: +91 22 2496 3666
Email:cyril.shroff@amarchand.com


About the author

Mr Anu Tiwari is an associate of Amarchand & Mangaldas & Suresh A. Shroff & Co. His practice areas include corporate and competition law. He was admitted to the Bar after receiving his BA, LLB (hons) degree from the National University of Juridical Sciences, Kolkata in 2007.

Contact information

Anu Tiwari
Amarchand & Mangaldas & Suresh A. Shroff & Co

Peninsula Chambers Peninsula Corporate Park
Ganppatrap Kadam Marg Lower Parel
Mumbai 400 013
India