This is part 8 of a ten part series - that was authored by AnantLaw and published by Lexology on 30 April 2020. All laws stated in this series were accurate on 24 February 2020.
Part8: Competition Compliance in mergers and acquisitions (M&A)
Competition authority approval
Does the company need to obtain approval from the competition authority for mergers and acquisitions? Is it mandatory or voluntary to obtain approval from competition authority before completion?
Sections 5 and 6 of the Competition Act, which deal with the regulation of mergers and acquisitions, have been in force since 1 June 2011. Any transaction that qualifies as a combination under the Competition Act is required to be notified to the CCI. Notification to the CCI is mandatory if the jurisdictional thresholds are met. The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (the Combination Regulations) and various notifications issued by the Ministry of Corporate Affairs are also to be examined when analysing a proposed transaction. In the Etihad Airways PJSC and Jet Airways (India) Limited case (Combination Registration No. C-2013/05/122), the CCI after examining the facts had passed an order approving the combination. However, the Commission, in spite of the approval order, issued a notice under section 43A of the Competition Act for failure to give a notice to it after dismissing Etihad’s argument that the alleged transaction is exempt under the exemptions provided under Schedule I of the Combination Regulations.
However, before considering the jurisdictional financial thresholds mentioned under the Competition Act, the applicability of exemptions (if any) are to be assessed. Other than the exemptions in terms of section 54 of the Act (where the central government may exempt any class of enterprise by way of notification, the other set of exemptions are provided under Regulation 4 of the Combination Regulations read with Schedule I of the Combination Regulations. These are the categories of transaction that are ‘ordinarily’ not likely to cause an appreciable adverse effect on competition (AAEC) in the relevant market in India and therefore not ‘ordinarily’ necessitating notification to the CCI.
A combination that does not satisfy the de minimis thresholds (ie, the value of the target’s assets is less than 3.5 billion rupees or the target’s turnover is below 10 billion rupees) and meets the jurisdictional threshold prescribed under the Competition Act is required to notify the CCI. In this regard, the asset and turnover thresholds are displayed below.
Jurisdictional thresholds
Parties may consider engaging with the CCI and undertake a pre-filing consultation. The consultation does not always require detailed filing or detailed disclosure before the CCI (in terms of seeking assistance in finalising the actual filing of the notification with the CCI) and can also be undertaken for seeking interpretational clarifications.
A combination, if notifiable, cannot be consummated or implemented in any way until clearance has been obtained from the CCI, or a review period of 210 calendar days has passed, whichever is earlier, owing to the suspensory nature of the regime.
How long does it normally take to obtain approval for mergers and acquisitions from competition authority?
The CCI (in terms of Phase I filing) is required to form its prima facie opinion as to whether a combination is likely to result in or has resulted in an appreciable adverse effect on competition in the relevant market in India within 30 working days of receipt of the notice. Clock stops are applied whenever the CCI makes a formal request for information, and the clock is restarted only upon receipt of a satisfactory and complete response from parties as the case may be. The time period of 30 days is extendable up to 15 (additional) working days if the CCI reaches out to third parties or statutory authorities. The time period is extended by 15 more working days if modifications are offered. Finally, when the CCI is of the opinion that the combination does not cause or is likely to cause an AAEC, it will clear the Phase I transaction.
However, if the CCI forms an opinion that the notified combination is likely to cause, or has caused, an AAEC, then the CCI issues a show cause notice to the parties, seeking an explanation as to why an investigation into the combination should not be conducted. Upon receipt of the response from the parties (within 30 calendar days), the CCI may either direct the Director General to conduct a detailed investigation or do so on its own, marking initiation of a Phase II notification.
The CCI directs the parties to publish details of the notified combination in leading daily newspapers, the parties’ websites and the CCI’s website with the objective of inviting comments from the public (and parties’ response to the public’s comments, etc). After examining the additional information sought and so furnished by parties, the CCI reviews the notified combination. If the CCI is of the view that the transaction will cause or is likely to cause an AAEC, then it proposes necessary remedies to the parties and passes final orders approving, prohibiting or suggesting modifications to the notified combination.
Further, under the Competition Act, the CCI is required to pass an order on a combination under section 31 within 210 days of the date of the notice given to it. The timeline includes both Phase I and Phase II assessment of combinations by the CCI.
Further, the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations 2019, which came into effect on 15 August 2019, added a new Regulation 5(A) to the pre-existing Combination Regulations. Regulation 5(A), among other things, introduces a ‘green channel’ route that allows the combinations of certain types to pass through a route with lesser procedural requirements and restrictions. The combination – wherein the parties to the proposed combination (including their respective group entities or any entity in which they, directly or indirectly, hold shares or control) are not operating at the same or different levels of the production chain nor are engaged in any activity that is complementary to each other – can benefit from the ‘green channel’ route. In other words, parties to the combination that, after considering all plausible alternative relevant market definitions, do not have any horizontal, vertical or complementary overlaps can benefit from the ‘green channel’ route.
If the company obtains approval from competition authority, does it mean the authority has confirmed the terms in the documents will be considered compliant with competition law?
The order of the CCI approving a combination under section 31 of the Competition Act is for the limited purpose of giving effect to the proposed transaction. Any subsequent violation of the provisions of the Competition Act are outside the ambit of the order. Generally, the order passed by the CCI contains a paragraph that limits the scope of the order passed by the CCI under section 31 of the Competition Act:
It is however to be noted, that the Commission is granting the present approval, under section 31(1) of the Act, and that such approval is being granted, pursuant to the underlying competition assessment, based upon the information/details provided by the Parties, in the notice given under subsection (2) of Section 6 of the Act, as modified and supplemented from time to time. This approval should not be construed as immunity in any manner from subsequent proceedings before the Commission for violations of other provisions of the Act. It is incumbent upon the Parties to ensure that this ex ante approval does not lead to ex-post violation of the provisions of the Act.
Alternatively, it could say: ‘This order shall stand revoked if, at any time, the information provided by the Parties is found to be incorrect.’
Although the above may be the case and although the (earlier) remedies suggested by the CCI largely pertained to non-compete obligations, there have been instances more recently where the CCI, by considering behavioural and structural remedies, which are of much more significance, has demonstrated that it will not be deterred from analysing the agreements in question of a notified combination.
Failure to file
What are the consequences for failure to file, delay in filing and incomplete filing? Have there been any recent cases?
An Indian combination regime is suspensory; that is, the parties to a notifiable transaction are not allowed to consummate or give effect to the proposed (notifiable) transaction (wholly or partly) in any manner before the CCI grants formal approval. Any action to further a proposed (notifiable) transaction, including the sharing of commercially sensitive information before the proposed (notifiable) transaction is granted approval by the CCI, is likely to be seen as an instance of ‘gun jumping’ and may attract penalties under the Competition Act. Section 43A of the Competition Act (empowering the CCI to impose penalties) would also be attracted in the case of gun-jumping.
If any person or enterprise that qualifies under prescribed thresholds fails to give notice (of a notifiable combination) to the CCI in the requisite manner, the CCI can impose on such person or enterprise a penalty that may extend to 1 per cent, of the total turnover or the assets, whichever is higher, of the combination.
Recently, the CCI imposed a nominal penalty of 100,000 rupees on Airtel (Bharti Airtel Limited, one of the largest telecom operators in India) under section 43A of the Competition Act for violating the standstill obligation under section 6(2)(A) of the Act under which combining entities are required to put the transaction on standby before the CCI gives its approval. In another recent case, the CCI observed that the payment of 1.2 billion rupees as an advance for a proposed transaction amounts to consummating a part of the combination in contravention of section 6(2) read with section 6(2)(A) of the Competition Act and accordingly imposed a nominal penalty of 1 million rupees on the acquirers.
In February 2014, Thomas Cook (India) Limited and Thomas Cook Insurance Services (India) Limited (collectively, Thomas Cook) entered into a part equity, part merger deal with Sterling Holidays Resort Limited, which involved multiple interconnected steps. The parties to the combination, however, analysed all the connected steps in isolation and chose to notify the CCI only of the leg of the multi-step transaction that qualified as a combination under section 5 of the Act. The contesting parties claimed that the remaining steps fall within the de-minimis thresholds, and, accordingly the remaining steps in isolation did not need to be notified. However, the CCI held that the steps are interconnected and interdependent on each other and formed part of a ‘composite combination’ that ought to have been notified and imposed a penalty of 10 million rupees under section 43A of the Competition Act. While upholding the penalty imposed by the CCI, the Supreme Court added that if there is a breach of the statutory provisions of civil law, a penalty is attracted unconditionally on its violation, and there is no requirement of mens rea or an intentional breach to levy a penalty under section 43A of the Competition Act.
If the parties do not disclose facts material to a notified combination or make statements or submissions that are false, then the CCI can impose penalties.
The CCI may invalidate a notification for the filing being incomplete; thereby necessitating re-filing; and the clock being reset. The CCI introduced amendments facilitating ‘pull and refile’ a merger notification that enable parties to offer modifications (remedies) in response to a show cause notice prior to the formal Phase II commencement. In addition, in 2018, the CCI brought into effect the ‘Do It Yourself Notifiability Check’ whereby individuals can take advantage of the portal’s assistance to examine and determine whether a transaction is notifiable or capable of availing any exemptions.
The CCI, in 2018, imposed a penalty of 5 million rupees under section 44 of the Competition Act on UltraTech Cement Limited (a leading cement company in India) for omitting to state material information in relation to the shareholding and control of Kumar Mangalam Birla and his family members in Century and Kesoram, which were competitors of the combining parties in the relevant market considered by the CCI for carrying out the competitive assessment of the combination between Jaiprakash Associates Limited and UltraTech Cement Limited. Further, the CCI imposed a nominal penalty of 500,000 rupees on Telenor ASA, under section 43A, for failure to file notice for certain steps of the combination relating to the acquisition of shares of Telewings Communications Services Pvt Ltd by Lakshdeep Investments & Finance Pvt Ltd. The CCI also imposed a penalty of 1 million rupees on Intellect Design Arena Limited for consummating a combination without giving a notice to the CCI.