The merger control regime in India has finally come into effect. The Competition Commission of India (CCI) is now in full swing and has also commenced granting of approvals to mergers and acquisitions in India. The latest mergers to be approved include the merger of Wockhardt with Danone, UTV Software with Walt Disney and the two sister companies of Alstom in India. In all these transactions, the CCI found that the amalgamation was not likely to have an adverse impact on competition in India.
Notably, the merger control regime also applies to foreign companies. Corporate houses based in India, as well as those located abroad with significant investments in India, are required to mandatorily notify all proposed mergers and acquisitions or joint ventures to the CCI, wherein the assets or the turnover of the parties involved exceed the thresholds specified under the Competition Act, 2002 (Act). However, mergers and acquisitions, which were completed and effected prior to June 1, 2011, are excluded from this notification requirement. The CCI approval is in addition to various other regulatory approvals which are required to be obtained from different regulatory authorities in India, (such as the SEBI and the High Court) under other existing regulations.
Given the broad tenor of the law, even overseas transactions undertaken between two foreign parties having a significant nexus with India in terms of assets or turnover will require the CCI nod. In other words, a Vodafone-Hutch type of deal will also be subjected to examination by the CCI (even though the deal was executed outside India and between foreign companies), so long as the prescribed thresholds are met. However, any merger or acquisition, which takes place entirely outside India with insignificant local nexus and effects on markets in India, does not need to be notified to the CCI.
Once notified, the CCI will assess whether or not the combination has or is likely to have an appreciable adverse effect on competition in India. It is required to form a prima facie opinion within 30 days of such notification. However, it can take up to 210 days before the transaction can come into effect (although the regulations provide that the CCI shall endeavour to complete the process within 180 days). Parties should, therefore, factor in the additional time required for obtaining the CCI approval as this may have significant implications on the project timelines.
In addition, the contractual arrangements between the parties must include the receipt of the CCI approval as an additional condition precedent for the transaction to take effect, and without which the transaction itself would be called off with no costs or consequences to the parties involved. Parties should also be aware that the CCI has the power to make modifications to the terms of the merger while granting the approval, which may again have implications for the proposed transaction.
A list of specified borderline transactions, ordinarily not likely to cause an appreciable adverse effect on competition in India, has been spared from the notification requirement. These include minority stake acquisitions (of less than 15 per cent) for mere investment in the ordinary course of business; acquisition pursuant to a bonus issue or rights issue or stock-splits; inter-group acquisitions by group companies, etc. However, the law is not entirely clear on whether acquisition of shares pursuant to put/call options will also trigger the notification obligation. If so, it can severely damage the commercial understanding of the parties.
However, there is no notification requirement if the combined assets or turnover of the parties or the acquirer’s group don’t exceed the prescribed thresholds under the Act. The updated thresholds (after the recent increase of 50 per cent) are as set out below:
In case of a merger, the above thresholds would be tested against the assets and turnover of the entity surviving the merger or the assets and turnover of the ‘Group’ to which the surviving entity will belong to after the merger, as the case may be. Companies which are in a position to exercise 26 per cent or more voting rights in other companies or companies which exercise majority board control or control the management or affairs of other companies, will together constitute a ‘Group’ under the Act. While this definition is not entirely clear, it can be assumed that not only downstream investments but even upward linkages of the acquirer would together constitute the ‘Group’ of the acquirer.
Some relaxations have been introduced by the government. The threshold of 26 per cent or more voting rights in the definition of the ‘Group’ has been enhanced to 50 per cent or more voting rights albeit for an initial period of 5 years. Companies, which are proposing to acquire target entities with an asset value not exceeding INR 2.5 billion (equivalent to US$55.39 million) or turnover not exceeding INR 7.5 billion (equivalent to US$166.1 million) can also breathe easy for the time being as these transactions are specifically exempted for a temporary period of 5 years.
Foreign institutional investors and venture capital funds registered with SEBI are also safe, as investments by such entities are specifically exempt from the pre-notification requirement as well as filing fees. However, they must report their investments to the CCI within seven days after the acquisition in the prescribed format.
Further, the CCI has, through a notification, permitted consultation prior to filing of notice of the proposed combination to allow the parties the option of consultation with the staff of the CCI before filing notice of the merger or acquisition.
With the merger control regime coming into force in real time, it is imminent for corporate houses, both in India and abroad, who have further expansion plans in India, to revisit their investment strategies and structuring options from a competition law perspective before embarking on fresh mergers and acquisitions having a significant nexus with India.
(Garima Basu is a partner at ALMT Legal, London.)