C&A eAlert: Amendments to Indian Merger Control Regulations
Right on cue, the Competition Commission of India (Commission/CCI) began the new year with amending the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). Combination Regulations supplement the merger control provisions in the Competition Act, 2002 (Competition Act). These were primarily drafted along the lines of Implementation regulations in the EUMR. However, unlike the Implementation regulations, Combination Regulations have come to include both procedural as well as certain substantive aspects of merger control. Consequently, the amendments have brought about a significant change to the merger Indian control regime. Effective 8 January 2016, the new amendments (Amendments) attempt to streamline merger control in India.
Noteworthy changes in the amendments are listed below.
Minority shareholding — investment only exemption
Schedule I of the Combination Regulations list out certain types of transactions which do not require a notification as these transaction are not likely to have an appreciable adverse effect on competition.
Entry I to Schedule I pertains to acquisition of shares less than 25%, “solely as an investment” or in the “ordinary course of business”, which do not amount to “control”. This has been perhaps one of the most debated provisions as it requires interpretation of all three concepts.
The Amendments now provide an explanation to Entry 1 which states that an acquisition of shareholding of less than 10% will be “treated” as an acquisition “solely as an investment” provided rights transferred are those which are exercisable by the ordinary shareholders; the acquirer is not a member of the board; does not have a right or intention to nominate or appoint a director; and does not intend to participate in the affair or management of the company whose shares or voting rights are being acquired.
While the Amendments seem to carve out an investment only exception for shareholding of less than 10%, the Amendments also give important clarity on the Commission’s view on the concept of “control”.
Worryingly, it is not clear whether the Commission intended the Amendment to mean that only acquisitions of voting rights or shares less than 10% will qualify as investments; and investments between 10% - 24.99% will need to be in “ordinary course of business” to qualify for the exemption. If the latter is correct, this exemption may be restricted to financial investors and holding companies.
Creeping acquisition excluded
The Amendments also modify Entry 1A of Schedule I which previously exempted creeping acquisitions of less than 5% of voting rights or shares in a financial year, subject to the acquirer holding 25% or more but less than 50% of the voting or shares, before and after the acquisition. The Amendments have now done away with the 5% cap and permitted acquisitions as long as they do not breach the 50% mark. It is important to note that an acquisition between 25-50% will be exempt if it does not lead to the acquisition of sole or joint control.
One of the unique features of the Indian merger control is that – despite being a suspensory jurisdiction - it mandates parties to notify within 30 days from the date of execution of the agreement or “other document”.[i] Failure to file a notice in time could attract a penalty.[ii] Under the earlier provisions the term “other document”, amongst other things, was also taken to mean communication of the intention of an acquisition conveyed to any statutory authority. Resultantly, this left the definition relatively nebulous leading to parties attracting penalties for failure to notify within the 30-day period. To clarify this position, the Amendments have now limited the scope of “other document” to mean a public announcement made under the Indian Takeover Code[iii].
Single notice in interconnected transactions
The 2015 amendments to the Combination Regulations made it mandatory for parties to file a composite notice for a transaction which comprised of a series of inter-related or inter-connected steps. The kink in this provision comes from the fact that in India a transaction has to be filed within 30 days from the trigger event. Resultantly, in such a case, if the ultimate transaction is notifiable but the steps preceding the transaction are not, the obligation to notify is triggered with the effectuation of the first step — notwithstanding the fact that the step independently did not trigger a notification requirement.
While the original provision laid down the test of interconnected interdependent, recent case law seemed to have arguably interpreted this to mean steps which are inter-connected inter-dependent on each other.[iv] Subsequently, the Amendments have now done away with the inter-dependent test and only focus on steps which are inter-connected to each other. This seems to further expand the outreach; in turn necessitating a more scrutinized diligence at the time of structuring a transaction.
Invalidation of notice
The July 2015 amendments to the Combination Regulations empowered the Commission to invalidate a notice that is not complete and/or not in conformity with the Combination Regulations and guidelines. Recently, the Competition Appellate Tribunal and Administrative Courts have emphasized that the observation of principles of natural justice in the functioning of the Commission. Accordingly, the Amendments now allow for the notifying parties to be heard before the Commission takes a decision to invalidate the filing. This right is not absolute and is at the discretion of the Commission. Notably, the Amendments also now expressly state that the time taken to decide on the validity of the notice will be excluded whilst calculating the 30 working day period (for phase I) and the aggregate 210 days (within which the Commission is mandated to pass an order).
Verification changed to declaration
The Amendments have also relaxed the previous verification requirement at the time of filing a notice. Now the form has to be accompanied by a declaration of the authorized representative of the notifying party and is not required to be notarized – saving precious time in meeting the 30 day mandatory notification deadline.
The Amendments appear to be more of a corollary — rendering clarifications — to the previous amendments and decisional practice of the Commission. However, parties (especially private equity and other financial investors) will need to carefully assess minority investments as these may require the prior approval of the Commission.
Nevertheless, these provisions are an important manifestation of the Commission’s attempt to continue to streamline Indian merger control.
Should you have any questions, please contact members of our competition law team.
Karan Singh Chandhiok
Head, Competition and Dispute Resolution Practice
© 2016 Chandhiok & Associates, Advocates and Solicitors
This e-alert is for information purposes only and does not constitute legal advice.
[i] Section 6(2), Competition Act
[ii] Section 43A, Competition Act.
[iii] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations
[iv] Thomas Cook (India) Limited & Ors. v. Competition Commission of India, Appeal No.48 of 2014, order dated 26 August 2015 at para 21.