The next two weeks are expected to be a hectic time for corporate lawyers and board of directors for many companies, looking to circumvent the scanner of the Competition Commission of India (CCI) which is going to decide the fate of large M&A deals in the country from June 1.
The regulations under which CCI will monitor and, at times, nix M&As in the future was issued in March, and after representations from various stakeholders and experts, the modified form of the draft regulations was finalised last week. This, in effect, sets the rules of the game to determine whether a deal gets a go-ahead or needs to be less ambitious (read: cut some parts out of a proposed acquisition), lest it be shown a red signal or is just not palatable due to concerns of monopoly/duopoly/oligopoly powers.
As they ink what can be called ‘proposed’ transactions before June 1, this may bring a windfall for some, such as Indian promoters looking to sell to multinational firms. MNCs eyeing large Indian assets or firms, would prefer not to go through the regulatory scanner, especially as they know the history of many deals hitting a roadblock with the US Anti-Trust Law or the European Union Competition Law. This means they will be open to paying a premium for escaping the lens of the CCI.
Having said that, the final regulations have addressed some of the concerns of the industry – fine-tuning rules on who needs to approach CCI, who can claim exemption, reducing fees for scanning through the deals. But it has still left some loose ends which makes interpretation of its applicability somewhat ambiguous. This means more homework for legal advisors involved in future transactions.
For starters, the final rules exempt transactions that will not lead to ‘appreciable adverse effect on competition in India.’ These include aspects such as acquisition of current assets, stock-in-trade, raw materials, stores, transaction resulting from a rights or bonus share issue, increase in stake by an entity/group that already owns majority control, deals between two foreign firms with some operations in India that does not lead to significant nexus or effect on local market, acquisition of up to 15 per cent stake in a company (and thereby linking it with the takeover code of SEBI), among others.
There are other important changes such as the removal of the provision of a ‘pre-merger consultation.’ Although welcomed by the industry as an informal consultation between probable sellers and acquirers, the final provisions have not left any scope for such a process that might have clarified issues before the would-be M&A transaction parties actually filed their application related to the deal.
One of the demands of the industry bodies was to shorten the time period within which CCI must okay a deal. They had said that the 210-day outer limit to approve a deal was too long. But the final norms have retained the 210-day limit. However, legal experts have pointed out that at the ground level this is not exactly the outer limit, as the time taken by the deal-making parties to submit any extra information or disclosure asked by the CCI is not included in this deadline for deemed approval.
The final norms leave a question mark on how to treat joint ventures. This will create an issue if two large firms, instead of following a straightjacket sale and acquisition, decide to form a 50:50 joint venture, which can still lead to a monopoly but can escape the CCI.
It has also left some loose ends that will require clarification on issues such as De-Minimus provision, under which the government has kept out of the purview of CCI, transactions involving acquisition of small firms with sales of less than Rs 750 crore ($168 million) or whose assets is less than Rs 250 crore ($56 million). But it has not stated if this refers to assets/sales within India or the target’s global business.
However, the biggest question mark hangs over the interpretation of ‘local nexus’. For instance, how will market dominance be ascertained in a market with a large, unorganised sector? Does it mean that the acquirer will be subjected to the CCI scan by default? And how will you evaluate market share – by volume or by value?
It seems that the subjective element can be the biggest challenge for would-be deal-makers, as well as for CCI. Perhaps it is time to borrow from and refine the existing rule book of the West?