Merger control and takeover harmony desired

Author: | Published: 1 Aug 2012
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The 2002 Competition Act marked the introduction of a comprehensive competition regime in India. The provisions of the merger control regulations, which came into effect on June 1 2011, are however in conflict with the new Takeover Code that was notified in September 2011. In an effort to address the implications of this on M&A transaction costs, legal practitioners have requested further alignment of the merger control regulations with the Takeover Code.

The merger control regulations regulate any significant acquisition activity that involves the transaction of Indian assets. Any M&A transaction that results in a 'combination' and breaches the specified asset or turnover threshold will need prior clearance and approval by the Competition Commission of India (CCI) before coming into effect.

The Competition Act states that the CCI has 30 days to form a prima facie opinion following the date of filing the relevant form. The CCI is allowed up to 210 days to pass its final order, while the regulations governing combinations say that the CCI shall endeavour to pass an order or issue directions within 180 days from the date of filing.

The CCI decided, in its final notification on merger control regulations released on May 11 2011, that the regulations will only be applied to transactions that occur after June 1 2011. This was in contrast to its earlier draft, which stated that transactions that occurred before June 1 2011 would also need CCI clearance.

In addition, the final notification also states that transactions below 15% and the transfer of assets internally within the same group are exempt from notification. Previously, in its draft issued in March 2011, the CCI requested companies to seek CCI clearance even for intra-group combinations. This raised concerns among investors as this was an extra regulatory burden for corporations.

There is a degree of satisfaction about the efficiency of the CCI in handling cases. While the CCI is allowed 210 days to come up with a formal decision, companies normally receive responses on their transactions within a few weeks of filing. Some legal practitioners have said that they do not see the introduction of a merger regime to be a great problem for companies because they only need to comply with the new regulations and they can then continue with their transactions.

But J Sagar Associates partner Somasekhar Sundaresan says: "This is an uninformed opinion. The conflict between merger control and takeovers is yet to be overcome. The multiple regulations have complicated the compliance process, and a lot of extra work needs to be done. The conflict just causes too much unnecessary trouble for merging activities."

Sundaresan adds that it is extremely important for the regulators to resolve such inconsistencies before they have to face more complicated filings in the future.

Under the new takeover regulations, notified on September 23 2011, acquirers that have reached the open offer limit of 25% will need to make an open offer to public shareholders within four days. An acquirer is required to pay interest to the shareholders if their tendered shares are not paid within 15 days after offer. However, the CCI is allowed up to 30 days for a non-binding prima facie opinion and 210 days to come up with a final decision. This means that if the CCI is not able to come up with a decision within 15 days after an open offer is made, an acquirer in an M&A transaction would need to bear the extra costs until a final decision is made.

"While the Takeover Code makes an open offer mandatory as acquirers go beyond a certain threshold, the Competition Act holds acquirers back from doing that for a certain period of time," says Sundaresan. "This has put companies in very complex situations. Much more will need to be done to harmonise the regulations."

India introduces merger control

The merger control provisions, which came into effect on June 1 2011, require the following categories of proposed 'combinations’. This is as defined in the 2002 Competition Act and satisfying the 'asset/turnover’ test below.

  • Acquisition of control, shares, voting rights or assets of an enterprise.
  • Acquisition 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.
  • Merger or amalgamation.

The table below displays the thresholds* to be satisfied by combinations in order for the merger control provisions to apply:

In India
In India or outside India

Assets** Turnover*** Assets** Turnover***
(i) Acquirer + Target (ii) Existing Enterprise + Target (iii) Merged Entity more than INR1,500 crores (US$331 million) more than INR4,500 crores (US$994 million) more than US$750 million (including at least INR750 crores in India) more than US$2.25 billion (including at least INR2,250 crores in India)
Group to which the Target/ merged entity would belong to after the acquisition more than INR6,000 crores (US$1.3 billion) more than INR18,000 crores (US$3.98 billion) more than US$3 billion (including at least INR750 crores in India) more than US$9 billion (including at least INR2,250 crores in India)

* 'Assets’ or the 'Turnover’ thresholds have to be met.
** The value of assets shall be determined by taking the book value of the assets as shown, in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed merger falls, as reduced by any depreciation, and the value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trade mark, registered user, homonymous geographical indication, geographical indications, design or layout design or similar other commercial rights.
***'Turnover’ includes value of sale of goods or services.
Source: The Competition Commission of India Regulations 2011

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