THROUGHOUT the last century, there was a proliferation of competition laws in countries across the globe and, as of 2008, there were more than 111 of these. Almost all of these have merger control provisions. Such large number overwhelmingly demonstrates the necessity of having a competition law, including provisions of merger control, which India got in 2011.
It is a proven theory that competition brings about lower prices, better quality and spurs innovation. It is widely acknowledged that competition benefits both the consumers and enterprises.
Enterprises have an innate desire to acquire monopoly position or substantial market power, even if for a brief period. This desire leads to expansion of business, either through organic or inorganic growth. As for the latter, while most M&As bring about efficiency and are thus beneficial, some can have anti-competitive effects through unilateral or coordinated effects. If the combining enterprises come to wield substantial market power, they can raise prices or reduce outputs or do both, without bothering consumers and competitors. Sometimes, a combination of enterprises can transform market structure to facilitate concerted or collusive action. The former results in unilateral effect and the later in coordinated effect.
International experience shows that 80-85% of mergers and acquisitions do not raise competitive concerns and are generally approved between 30-60 days. The rest tend to take longer time and, therefore, laws permit sufficient time for looking into complex cases. The International Competition Network, an association of global competition authorities, had recommended that the straightforward cases should be dealt with within six weeks and complex cases within six months. The Indian competition law prescribes a maximum of 210 days for determination of combination, which includes mergers, amalgamations, acquisitions etc. This, however, should not be read as the minimum period of compulsory wait for parties who will notify the Competition Commission. In fact, the law clearly states that the compulsory wait period is either 210 days from the filing of the notice or the order of the Commission, whichever is earlier. In the event the Commission approves a proposed combination on the 30th day, it can take effect on the 31st day. The internal time limits within the overall gap of 210 days are proposed to be built in the regulations so that the overwhelming proportion of mergers would receive approval within a much shorter period.
All proposed combinations need not be notified to the Commission. The law prescribes threshold limits, in terms of the value of assets or turnover, which are indeed very high in comparison to limits provided in the laws of other countries. The Indian threshold limits are twice as that of the UK and are even higher than the EU’s. Since cross-border M&As are the order of the day, the law takes care to provide domestic nexus as a pre-requisite for notifying the Commission in terms of assets or turnover in India of the combined entity.
OECD, in its Economic Survey India Report of 2007, has stated that the Indian competition law is state-of-the-art.
Let’s discuss the thresholds for notifying the competition commission regarding a merger or an amalgamation.
Meaning of Combination for this purpose
The acquisition of one or more enterprises by one or more persons or merger or Amalgamation of enterprises shall be a combination of such enterprises and Persons or enterprises, if –
- Acquisition of control, shares, voting rights or assets by one person of another enterprise.
Exemptions :- Direct/ indirect acquisition of non-controlling stake (15%) or additional stake acquisition by an existing majority shareholder (already holding 50%)Acquisition of shares/ voting rights solely as investment or in the ordinary course of business, where no control is acquired, would be eligible for
relaxation. Accordingly, minority investments in shares of listed companies would be covered under the relaxation. However, there is no provision, which
deals with situations falling within the 15%-50% range, and even insignificant stake acquisitions by a shareholder with existing shareholding of 15%-50%
could potentially require pre-acquisition approval under Competition Law, even though Securities Laws permits such creeping acquisitions, subject to
prescribed conditions.Example:
Suppose A ltd has 15% shares in Company B ltd. Suppose it acquires 1% more stake today, then it will be required to Notify CCI subject to exemptions as mentioned in schedule 1 and notifications issued by CCI.
- Corporate actions – Acquisition of shares or voting rights pursuant to following corporate actions, not leading to acquisition of control :
- Bonus issue
- Stock split
- Consolidation of face value of shares
- Rights issue (to the extent of proportionate entitlement)
This would imply that acquisition of additional shares, over and above proportionate entitlement in a rights issue could trigger approval under Competition Law, even though there would not be any acquisition of control.
- Asset acquisitions – Relaxation has been provided for certain asset acquisitions:
- Acquisition of assets, where there is no change in control, and does not represent substantial business operations for a location, product or service, provided asset acquisition is:
- Acquisition of assets where there is no change in control;
- Not directly related to the business activity of acquirer, or
- Solely as an investment, or in the ordinary course of business. So if the capital asset or any other asset is purchased in the ordinary course of business it will be excluded from these provisions
- Acquisition of current assets, in ordinary course of business
- Acquisition of stock-in-trade, raw materials, stores and spares, in an ordinary course of business.
- Acquisition of assets, where there is no change in control, and does not represent substantial business operations for a location, product or service, provided asset acquisition is:
- Intra-group combinations – Intra-group transfers of control, shares, voting rights or assets would not be subject to Combination Regulations.
Example:
Company A has 2 fully owned subsidiaries. For some business purposes Company A decides to merge subsidiary C in subsidiary B. Will it be required to notify CCI?The merger or amalgamation is not covered by this by the above exemption clause. Hence if there is a merger or amalgamation between intra group companies then there is a requirement to notify CCI.
- Direct/ indirect acquisition of non-controlling stake (15%) or additional stake acquisition by an existing majority shareholder (already holding 50%)Acquisition of shares/ voting rights solely as investment or in the ordinary course of business, where no control is acquired, would be eligible for
- 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 second type of combination referred to in the Act is acquiring of control. Here the law talks of acquiring of control by 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 plain reading of this section leads to conclude that if the acquirer doesn’t have under his direct or indirect control another enterprise in the same line of business, it is the combination regulation prescribed under Section 5 of the Act. That means an enterprise has to be part of a group in order to be covered under acquiring of control route to the combination.However, a careful reading of the provision of Section 5(a) and 5(b) of the Act gives a different interpretation. Though Section 5(b) talks about acquiring control by an enterprise already having under its control another enterprise in the same line of business, Section 5(a) encompasses acquisition of another
enterprise engaged in an unrelated line of business by a standalone enterprise or by an enterprise belonging to a group (acquirer).
Since quantitative threshold limits being same in both types of combination, only the test of combination shifts from acquiring of control mode to acquisition mode. Whether an operation gives rise to an acquisition of control depends on a number of legal and/or factual elements. The acquisition of property rights, control over management and voting rights are important but are not the only elements involved; purely economic relationships may also play a decisive role. Therefore, in exceptional circumstances, a situation of economic dependence may lead to control, where, for example, very important long-term supply agreement or
credits provided by suppliers or customers, coupled with structural links, confer decisive influence.Example:
Suppose Tata Motors Ltd which is engaged in manufacturing of automobiles. It also has one of its 100% subsidiary engaged in manufacturing of alloy wheels. Suppose Tata Motors Ltd enters into a long term agreement with Ms Mahalaxmi Pvt Ltd owned by Mr Ruturaj Walia for supply of alloy wheels for period of 5 years. Now as per section 5(b) TataMotors will be said to have acquired control over Ms Mahalaxmi Ltd and will result to a combination for this act but as per the notification issued if the assets size or turnover of Mahalaxmi Pvt Ltd is not greater than 7.5 Billion and 2.5 billion respectively it will not have to notify CCI even if it meets the joint threshold limits which it does.
- Merger & Amalgamation of Any Enterprise
Threshold Limits :- Jointly assets- more than 1000 crore or turnover more than Rs. 3000 crore if Indian companies.
Example:
As mentioned in the above example Tata motors has acquired control over Ms Mahalaxmi Pvt Ltd on 26 April, 2010. Suppose the assets of Tata Motors Ltd were 50,000 Crores and assets of Ms Mahalaxmi Ltd were only Rs 251 crore as on 31/03/2010. The joint assets will be more than 1000 crore and Tata Motors Ltd will be required to notify CCI about this combination. Also tata Motors will have to pay Rs 50,000 or Rs 10,00,000 depending upon the type of notice filed. Thus even though there is no adverse effect on competition the company will have to notify CCI.
- Jointly assets- more than $500 million(Rs. 500 crores in India) or turnover more than$1500 million (Rs. 1500 crore in India) if one company in India and other outside India.
Example:
Suppose Indian company Infoyses acquires a company in US. The turnover of Infoyses is 3000 Crores and the turnover of US company is 50 Crores. Now this is a combination as per competition act and also it satisfies the threshold limits. But as per the notification if the company which is getting acquired has assets less than 2.5 billion and turnover less than 7.5 billion then this combination is exempt from the requirement of notification. This notification even applies to foreign companies.
Another Example:
Suppose Oracle of USA acquires a Indian Company. The turnover of Oracle is suppose 20000 Crores and the turnover of the Indian Company is suppose 1499 crores. Then this will be a combination according to the competition Act. But this combination does not satisfiy the threshold limit and will not have to notify the CCI.
- In the case of the group in India – more than Rs 4000 crore assets or more than Rs 12000 crore turnover.The group has a very wide definition in Competition Act. We will understand this through a pictorial representation
As per the definition the group will include:- The Enterprise concerned
- Its subsidiaries B and their own subsidiaries i.e.B1 and B2
- Its parent companies and their own parent companies i.e.C1 and D
- Other subsidiaries of the parent companies of the enterprise concerned
- Companies jointly controlled by two or more companies of the group
- The company in which it holds 26% indirectly.
Example:
Suppose United Beverages a a company of group UB holdings acquires greater than 50% voting power( groups acquiring less than 50% voting power is exempt for period of 5 years as per the notification mentioned below) a local wine manufacturer in Nasik. Now for calculation of the joint turnover or joint assets the turnover of all the UB group companies including Kingfisher Airlines, Manglore Chemicals And Fertilisers and UB engineering which all fall under the definition of group. Suppose the total turnover of a group is 20000 Crore and the Nasik Wine manufacturer has turnover of greater than 750 crores and assets greater than 250 crores(if less than 750 crores and 250 crores respectively it will be exempt), the joint turnover will be 20750 Crores and it will be required to notify CCI.
- In case of group companies in India or outside India- Assets more than $2 billion or turnover more than $6 billion
Example:
Suppose Bosch India, a company engaged in manufacturing of Automobile components, acquires a small company Kaya Energy Pvt Ltd engaged in production of wind energy. While calculating the joint assets or joint turnover of both the companies the turnover of Bosch, Germany will also be included in the joint turnover of both the above company as Bosch Germany controls Bosch India.
- Jointly assets- more than 1000 crore or turnover more than Rs. 3000 crore if Indian companies.
Exemptions as per Notifications:
- An enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than Rs. 2.50 billion or turnover of not more than Rs. 7.50 billion is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011.
- A “Group” exercising less than 50% of voting rights in another enterprise is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011.
So this was a brief about Competition Act and its threshold limits. Still, this act is in a preliminary stage and needs to address many questions. The act, for example, does not specify a date on which the turnover for purposes of threshold should be considered as is in the case of assets. But in near future we expect these issues to be addressed.
With the enactment of the new law, the competition regime in India has undergone a complete overhaul. Though it is difficult at this early stage to tell how effective or efficient the new legislation will be, it is certainly a sincere attempt to meet the needs of the global business community. CCI has been proactively carrying out the work of competition advocacy since its establishment but now faces a huge challenge and task ahead. It is hoped that the CCI shall be able to overcome any shortcomings in the Act and iron out any difficulties in enforcement. Thus, many developments in this field are expected.
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