Despite some of the uncertainties surrounding the Indian merger regime, one thing is certain that CCI has been learning from its experience. The three rounds of amendments have been carried out with the sole purpose of achieving workable & practical merger control review system in the country Merger Control Regime in India: The story so far ...
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Despite some of the uncertainties surrounding the Indian merger regime, one thing is certain that CCI has been learning from its experience. The three rounds of amendments have been carried out with the sole purpose of achieving workable & practical merger control review system in the country
On June 1, 2014, the merger control regime in India entered its fourth year of enforcement. India has come a long way since the merger control provisions of the Act were brought into force on June 1, 2011, amidst fear that the new regime could prove to be a dampener on the M&A activity. In these three years, the Competition Commission of India ("CCI" or "Commission") has gained the distinction of bringing in a rather seamless merger review process and allaying all fears of the industry by approving more than 150 combinations including four transactions notified in the longer Form II within the prescribed time-frame.
Within six months of introduction of the merger control regime, the CCI realised that the merger control rules needed some immediate changes. For example, the CCI noticed that a large number of intra-group re-organizations were getting caught in the net and were being notified. Intra-group transactions result in no changes to the market structure and hence, need not be reviewed by the CCI. The CCI addressed this situation by introducing amendments to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations issued in May 2011 ("Combination Regulations"), in February 2012. Thereafter, in April 2013, the CCI once again introduced certain changes to the Combination Regulations. Last month, the CCI introduced the third set of changes to the Combination Regulations. This article seeks to highlight the changes introduced by the CCI by the amendments to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2014 ("Amendment Regulations").
On March 28, 2014, the CCI in its continuous efforts of bringing in more certainty and clarity to the merger control regime issued the Amendment Regulations. At first sight, application of the Amendment Regulations may appear straightforward as most of them are procedural in nature. For instance, the CCI has increased the filing fees for Form I, from INR 1 million to INR 1.5 million and for Form II, from INR 4 million to INR 5 million. The Amendment Regulations have introduced a new disclosure requirement and filing parties are now required to specify the names of all the jurisdictions where their transaction is being notified. Most importantly, the Amendment Regulations have introduced a substantive test for ascertaining whether a transaction may require notification and have done away with the exemption available to entirely off-shore transactions with insignificant nexus to India from the prior notification requirement.
One change which seems to have stirred interest in the industry is the introduction of a new clause, Regulation 9(5) by way of the Amendment Regulations. It appears that the CCI would now have almost unfettered powers to look beyond the structure of a transaction and examine the 'substance' of a transaction while assessing whether it requires prior notification. More specifically, the regulations seem to imply that if a business transaction consists of a series of smaller individual transactions and one or more of these smaller transactions do not require notification on a stand-alone basis, these smaller steps can no longer avail of any exemptions to avoid notification. Consequently, while making an assessment of whether a transaction requires notification to the CCI, filing parties will now have to look at the overall intended effect of the smaller steps in the larger scheme of the transaction rather than making a technical assessment of whether each step amounts to a notifiable combination within the meaning of the Competition Act. This interpretation seems to be in line with the CCI's decisions, including in the Tech-Mahindra case1 and the more recent Jet-Etihad case2. In these two decisions, the CCI has indicated that transactions in a series, or transactions which are inter-related and inter-dependent, shall be considered as a composite whole, if the ultimate objective can be achieved only on successful completion of all such transactions in a series or inter-related or interdependent steps, even though some of these transactions/steps may ordinarily not be required to be filed on a stand-alone basis or may be exempt under the Act.
The CCI's decisions in the Tech-Mahindra and Jet-Etihad cases appear incongruous with the current text of Regulation 9(4) of the Combination Regulations which arguably give the filing parties flexibility to not notify the smaller steps/transactions that do not qualify as "combinations", on a stand-alone basis. A literal reading of Regulation 9(4) of the Combination Regulations suggests when a business transaction consists of a series of inter-related and inter-dependent transactions, one or more of such transactions amount to a "combination", a single notice covering these transactions may be filed instead of multiple notices. Given this, filing parties have at times interpreted that even if a business transaction involves a series of steps or smaller individual transactions, only those steps or individual transactions which meet the thresholds under Section 5 of the Act will be deemed to be a 'combination' and will require notification to the CCI.3 Most importantly, as per the scheme of the Act, there is no obligation on the filing parties to wait for the CCI approval before consummating the related transactions which do not amount to a combination.
Perhaps, to address the incongruity between the CCI's approach in Tech-Mahindra and Jet-Etihad cases and the text of Regulation 9(4) of the Combination Regulations, the CCI has introduced the new clause, Regulation 9(5) by way of the Amendment Regulations. The new Regulation 9(5) adds to the complexity of making a merger filing assessment, particularly with respect to transactions comprising a series of individual steps or smaller transactions. For instance, it is possible that in a deal involving a series of transactions, each of the individual transactions may be eligible for the target-based exemption on a stand-alone basis and do not require notification to the CCI. In practice thus far, if each individual step in a larger transaction did not trigger the notification requirement, the parties to the transaction could avoid notification.
For example, in a transaction involving acquisition of 4 different subsidiaries of an enterprise, where each of the 4 subsidiaries have assets below INR 250 crores or turnover below INR 750 crores, each sub-acquisition would be exempt from the filing requirement. Filing to the CCI could be avoided even though the cumulative value of assets and turnover of the 4 target subsidiaries crosses INR 250/750 crore limits.
The introduction of the substantive test vide the new Regulation 9(5) may now mean that the transaction would require notification, despite the fact that each step in the transaction, individually does not satisfy the notification thresholds.
The new Regulation 9(5) would also impact the ability of the parties to a transaction involving a series of sub-transactions, which is notified to the CCI because at least one of the sub-transactions satisfies the notification thresholds. It would no longer be possible for the parties to consummate the sub-transactions that individually do not satisfy the notification thresholds, unless the CCI has cleared the entire transaction.
In the absence of any clear guidelines on the application of the 'substance' test contained in the new Regulation 9(5), it would be incumbent upon the parties to a transaction, involving a series of interconnected or interdependent steps to evaluate the overall objective/substance of the transaction and not just the notification requirement with respect to each constituent step in the transaction.
The CCI has done away with the Item 10 of Schedule I to the Combination Regulations which exempted combinations 'taking place entirely outside India with insignificant local of nexus and effect on markets in India' ("Item 10 Exemption") from the prior notification requirement. The transactions listed in Schedule I to the Combination Regulation need not normally be filed with the CCI as they are ordinarily not likely to cause an adverse effect on competition ("Adverse Effect") in India.
The application of Item 10 Exemption has always been unclear. The CCI had dealt with the applicability of Item 10 Exemption in its decisions in the TCL-Wyoming case4 and the Nestle-Pfizer case. From these decisions, it appeared that if (a) the parties to the transaction are present in India (either on their own or through their subsidiaries) and (b) the transaction met the India nexus thresholds prescribed under Section 5 of the Act, the transaction cannot be said to be "taking place entirely outside India" and therefore the exemption would be inapplicable.
Arguably, the CCI's decisions in the TCL-Wyoming and Nestle-Pfizer cases had rendered Item 10 Exemption. That said, the simple fact that the CCI retained Item 10, Schedule I even after two rounds of amendment added to the confusion on applicability of the Item 10 Exemption.
By deleting with the Item Exemption, the CCI has put all speculation to rest. Perhaps with this amendment, the CCI seeks aligning itself with the approach that most competition authorities appear to have adopted i.e. to rely largely on 'objective' criteria in the form of turnover and/or asset thresholds to determine whether a wholly-offshore combination requires notification.
The CCI is not alone in taking a turnover/asset-focussed stance when assessing the need for prior notification. Under the European Union Merger Regulations, a 'concentration' must have a 'community dimension' in order to be notified. This translates into monetary thresholds in the form of a combined turnover of the undertakings having to exceed €5000 million worldwide, provided that, at least two of the undertakings have a turnover within the EU of at least €250 million, and their business isn't primarily restricted to the same Member State.
Other competition authorities have taken similar stands on the point of local nexus. For instance, emerging jurisdictions like Brazil simply rely on the achievement of turnover thresholds in the country.
The recent amendment by the CCI however seems to be in contradiction with the best practices recommended by the International Competition Network ("ICN") on the issue of 'local nexus' in its Recommended Practices for Merger Notification Procedure. It refers to the thresholds that should be taken into account to determine whether notification is necessary and suggests that, 'the relevant local activities of the acquired party should generally be limited to the local sales or assets of the business(es) being acquired'. Canada adopts a more effects-based test whereby the transaction must involve an 'operating business' in Canada, where employees ordinarily report for work. The US also looks for a connection to US commerce and has devised several situations in which the acquisitions of either foreign assets or voting securities of a non-US issuer will be exempt from notification.
Despite some of the uncertainties surrounding the Indian merger regime, one thing which can be asserted with certainty is that the CCI has been learning from its experience. The three rounds of amendments have been carried out with the sole purpose of achieving a more workable and practical merger control review system in India. We hope that the uncertainties brought in by the new set of changes will be resolved through the CCI's decisional practice without undue delay.
Footnote:1 Para 9 of order dated April 26, 2012 in Notice for amalgamation jointly filed by Tech Mahindra Limited, Satyam Computer Services Limited and C&S System Technologies Private Limited, Combination Registration No. C-2012/03/48. 2 Order under Section 43A dated December 19, 2013 in Combination Registration No. C-2013/05/122. 3 Section 5 of the Competition Act defines a combination as a transaction (irrespective of whether it is in the form of an acquisition, merger or amalgamation) which satisfies the asset or turnover thresholds prescribed in Section 5 of the Competition Act. Further, only such 'combinations' are subject to the prior notification requirement to the CCI under Section 6 of the Competition Act. 4 Order dated December 28, 2011 in Notice for merger filed by TCL and Wyoming I Combination Registration number C-2011/12/12
Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.