June 2015 marks four years of enforcement of the Indian merger control regime. Over the last four years the decisions of the Competition Commission of India (“CCI”) have steadily shaped the merger control landscape in India. Rather than viewing the merger control regime as a mere mandatory filing obligation required before the closing of certain transactions, industry has been forced to sit up and take notice of the regime as a transforming force while doing business in India and notifying parties are required to assess the competition law implications arising out of a proposed transaction right since the inception of deal negotiation. This article highlights a few key decisions of the CCI that establish the increasingly important role played by it in the M&A space and cement the CCI’s stance as an efficient, effective and pro-active regulator.
Background: Indian Merger Control Framework
An acquisition of shares, control, voting rights or assets or merger or amalgamation of enterprises where certain jurisdictional thresholds are exceeded (“Combination”), needs to comply with the merger control provisions contained in Sections 5 and 6 of the Competition Act, 2002 (“Act”) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”).
In case of acquisitions, by way of a notification dated 4 March, 2011, a proposed transaction is exempt from notification to the CCI if the assets or turnover of the target do not exceed INR 2500 million or INR 7500 million, respectively. Further, Schedule I to the Combination Regulations lists certain categories of transactions which would ordinarily not require a merger notification as they are generally presumed not to cause an “appreciable adverse effect on competition” (“AAEC”) in India.
The Act prescribes a mandatory filing regime wherein a Combination must be notified to the CCI within 30 days of executing a binding definitive agreement or other document (in case of acquisitions) or within thirty days of the board approval (in case of mergers and amalgamations). In case of any failure to notify a Combination, the CCI can impose a penalty which may extend to 1% of the total turnover or assets, whichever is higher, of the Combination. The Act also contemplates a suspensory regime and parties are prohibited from consummating or giving effect to the Combination until receipt of the CCI’s approval.
Strategic Investment and Acquisition of Control
Notably, the ‘Item 1 Exemption’ continued to be the focal point of the CCI’s decision even in the fourth year of the merger control regime. Schedule I to the Combination Regulations lists certain categories of Combinations for which a notification “need not normally be filed”. Item 1 of Schedule I exempts the acquisition of shares or voting rights of less than 25 per cent., provided that:
- the acquisition is not a strategic investment and has been made purely for investment purposes; and
- the acquisition does not amount to an acquisition of control.
(“Item 1 Exemption”)
Based on the CCI’s precedents, an acquisition will be considered as a strategic investment if the acquirer has any interest in an entity which is in a similar line of business as the target enterprise. The CCI has clarified that the phrase ‘solely as an investment’ indicates mere ‘passive investment’ as against ‘strategic intent’ and would not include acquisitions made with an intention of participating in the formulation, determination or direction of the basic business decisions of the target (by way of voting rights, agreements, representation on the board of target or affiliates, affirmative/veto rights, etc.).
The CCI determines the availability of the Item 1 Exemption for private equity investors, based on the business of their portfolio companies. The Item 1 Exemption will not be applicable to acquisitions where the portfolio companies are engaged in a similar line of business as the target enterprise or are vertically linked to the target enterprise. However, investments in other portfolio companies in the similar line of business as the target enterprise are likely to cause concerns only when the investor exercises control over such companies. Thus, while analyzing the acquisition of a 17.14% shares of Bandhan Finanical Services Limited (“BFSL”) by Caladium Investment Pte. Ltd. (“Caladium”), the CCI assessed the investments of Caladium (an affiliate of GIC, Singapore sovereign wealth fund) and an affiliate of GIC (“Affiliate”) in the same sector as BFSL. The CCI found no horizontal or vertical overlaps between Caladium and BFSL since Caladium and the Affiliate did not exercise any direct or indirect control over the portfolio companies operating in the same sector as BFSL.
The CCI has adopted an approach akin to mature antitrust jurisdictions and has interpreted control to include negative control. Accordingly, the Item 1 Exemption does not apply to transactions wherein negative control is acquired. The CCI, by way of its decisional practice, continues to expand the list of veto rights, the acquisition of which amounts to an acquisition of negative control. Such rights include those in relation to amendments to the constitutional documents, changes in the capital structure, significant changes to the incentive structure of the senior management, appointment or removal of any senior management personnel, reorganization or change in the nature of current business or launch of any new business, appointment or change of auditors etc. In this regard, parties are required to assess the veto and affirmative rights being acquired in case of acquisition of a minority stake, while determining the notifiability of the acquisition.
The CCI introduced the anti-circumvention rule in 2014 to ensure that parties to a Combination do not avoid merger notification on account of innovative transaction structures. The CCI has applied the anti-circumvention rule in conjunction with the requirement of notifying inter-connected steps of a composite transaction. The CCI requires parties to notify inter-connected and inter-dependent steps of a composite transaction, even though any of the individual steps can avail of any of the exemptions on a stand-alone basis.
The CCI recently invalidated a merger notification since the parties failed to notify an inter-connected step of a composite transaction. In contrast with the Thomas Cook case, where the CCI opted to impose a penalty for non-notification of an inter-connected step to a composite transaction, the CCI asked the parties to file a fresh merger notification in this case. The Combination related to an: (a) acquisition of 24.75 per cent. of the equity share capital of Manipal Health Enterprises Private Limited (“MHEPL”) by TPG Asia VI SF Private Limited (“TPG SF”) (“TPG Acquisition”); and (b) acquisition of real estate assets of Manipal Health Systems Private Limited (“MHSPL”) by MHEPL by way of a demerger (“Demerger”). While the parties only notified the TPG Acquisition to the CCI (given that the Demerger was an intra-group acquisition which is a category of transaction exempt under Schedule I to the Combination Regulations), the CCI viewed the Demerger as inter-connected and inter-dependent to the TPG Acquisition and required the parties to file a fresh notice for the TPG Acquisition and the Demerger.
Phase II Scrutiny and Structural Commitments
The fourth year of the Indian merger control regime also witnessed two instances of a full-fledged Phase II investigation being conducted, wherein the CCI imposed structural commitments by requiring the parties to divest certain assets. The first Phase II investigation related to the pharmaceutical sector, i.e. the merger of Ranbaxy Laboratories Limited into Sun Pharmaceutical Industries Limited. Based on its earlier decisions in the pharmaceutical sector, the CCI defined the relevant market at the molecular level and assessed competitive effects of the proposed transaction in 49 relevant markets for formulations and the market for active pharmaceutical ingredients. The CCI held that the proposed transaction was likely to cause an AAEC in 7 markets based on the post-merger combined market shares of the parties, the number of players in the market, the elimination of a significant competitor and the reduction in market shares of other competitors. The CCI imposed structural commitments, requiring the parties to divest 7 brands to a buyer approved by the CCI. The CCI, for this first time, specified an upfront buyer requirement and crown jewels.
The second Phase II investigation pertained to the highly contested cement sector and involved an acquisition of shares which would result in Lafarge S.A. (“Lafarge”) becoming a subsidiary of Holcim Ltd. Based on factors such as an increase in the level of concentration, absence of countervailing buyer power, significant entry barriers, the oligopolistic nature of the cement industry and the likelihood of co-ordinated effects, the CCI concluded that the proposed transaction was likely to have an AAEC in the market for grey cement in the Eastern region of India and proposed divestitures to eliminate the competition concerns. While requiring the parties to divest certain cement plants, the CCI also held that the cement plants being divested should constitute a complete eco-system and the divestiture should result in reducing the overall level of concentration in the relevant market and address the adverse impact of structural changes in the market resulting from the proposed combination. In terms of the purchaser requirement, the CCI order stipulated that the proposed purchaser should not have operational capacity exceeding 5 per cent. of the total installed capacity in the relevant geographic market.
The abovementioned decisions clearly establish the CCI’s pro-business approach in facilitating the commercial interests envisaged by the parties to the Combination, thereby evidencing its increasing maturity in objectively considering remedies to mitigate the adverse effects arising out of a Combination. The CCI’s recent approach in assessing the Phase II cases provides significant encouragement to the business community that the Indian competition regulator will aim to strike a perfect balance and factor the interests of the various stakeholders.
Non-notification and Gun Jumping
The CCI continues to adopt a stringent stance against parties that fail to notify Combinations or consummate Combinations prior to the CCI’s approval. The CCI imposed a penalty of INR 20 million on SCM Soilfert Limited (“SCM”) and Deepak Fertilizers and Petrochemicals Corporation Limited (“DFPCL”) for not notifying the acquisition of 24.46% equity stake in Mangalore Chemicals and Fertilizers Limited (“MCFL”) and for consummating an acquisition of additional 0.8% stake in MFCL prior to the CCI’s approval. While SCM and DFPCL sought to rely on the Item 1 Exemption for non-notification of the 24.46% equity stake, the CCI relied on a press release made by SCM to the stock exchanges to establish the strategic nature of the acquisition. Further, SCM argued that the 0.8% shares (for which SCM required CCI’s approval) were held in an escrow account and SCM/DFPCL would not exercise legal and beneficial rights accruing upon the acquisition of shares. However, the CCI held that the Act did not exempt a situation wherein a buyer acquires shares, but decides not to exercise legal/beneficial rights in such shares.
Based on a similar trend, the CCI also imposed a penalty of INR 30 million on Zuari for non-notification of 16.43% equity stake in MCFL. The CCI denied the applicability of the Item 1 Exemption based on a televised statement by the promoter of Zuari, which established that the transaction was not made ‘solely as an investment’. Notably, the CCI held that the absence of written agreements, defining the rights of the parties, would not preclude the strategic intent of any acquisition.
The CCI has always been receptive to feedback from industry and has demonstrated its willingness to address concerns faced by industry. In order to further streamline the merger review process, the CCI has proposed a fourth round of amendments to the Combination Regulations, which seek to provide clarity on substantive issues and simplify the filing process. The implementation of some of the proposed amendments will undoubtedly create a more efficient and efficacious merger control regime. However, certain amendments, such as the CCI’s power to invalidate a merger notification, potentially raise concerns given the likelihood of increased costs of transaction and prolonged transaction timelines. This wide discretionary power can be used by the CCI if it is of the opinion that the merger notification is “not valid” or ‘complete’, without there being any further guidance on what would constitute an invalid or incomplete merger notification. If the CCI were to ensure a right of hearing before summarily rejecting the merger notification, this would allay concerns of industry.
For the merger control regime to continue to be the transforming force in the Indian M&A arena, the CCI will have to adopt a consistent approach. While the CCI is a pro-active regulator, given the increasing role played by the CCI in the economic development of the country, it is pertinent that the CCI bring about predictability and adopt international best practices for a synchronized and efficient merger control regime.
 SCM Soilfert/ Mangalore Fertilizers (Combination Registration No. C-2014/05/175).
 Combination Registration No. C-2015/01/243.
 Alpha TC Holdings Pte Limited/Tata Capital Growth Fund I (Combination Registration No. C-2014/07/192 and Caladium/Bandhan Finanical Services Limited (Combination Registration No. C-2015/01/243).
 Regulation 9(4) of the Combination Regulations.
 Thomas Cook/Sterling Resorts (Combination Registration No.C-2014/02/153).
 Combination Registration No.C-2014/12/234.
 Supra at 6.
 Combination Registration No. C-2014/12/234.
 By way of full disclosure, the author represented Daiichi Sankyo Company Limited and Ranbaxy before the CCI.
 Combination Registration No. C-2014/05/170.
 Combination Registration N0.C-2014/07/190.
 Combination Registration No. C-2014/05/175.
 Combination Registration No. C- 2014/06/181.