26 May, 2015
On April 1, 2015, Competition Commission of India (‘CCI’) published amendments (‘Proposed Amendments’) to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘Combination Regulations’), the fourth in the four years since the introduction of the merger control regime.1 The Proposed Amendments draw heavily from CCI’s experiences in the past year and CCI has invited comments on the proposed amendments from stakeholders such as businesses, industry bodies and the competition law bar in India.2 This article reviews the impact of key substantive and procedural changes on merger control and mergers & acquisitions going forward.
Key Substantive Changes
The Combination Regulations go beyond being merely “implementing regulations” as there are several provisions, which relate to substantial rights of notifying parties, including the obligation to notify, itself. The Proposed Amendments suggest, inter alia, critical changes to the Trigger Event (as defined below) for notification under the Combination Regulations and a seemingly untethered power to invalidate such a notification.
1. Trigger Event For Notification
The Competition Act, 2002 (‘Competition Act’) and the Combination Regulations list certain events in the context of an acquisition, merger or amalgamation, that would trigger the requirement to notify CCI (‘Trigger Event’). Previously, the Trigger Events were restricted to passing of board resolutions, execution of definitive documents or any other document for an acquisition. The term “other document” meant, inter alia, any communication of the intention to acquire to the Central Government or State Government or a Statutory Authority, where no binding document conveying an intention or decision to acquire has been executed.
The current definition of “other document” has the potential to trigger the notification requirement upon any communications to statutory authorities, including the Insurance Regulatory and Development Authority, Department of Industrial Policy and Promotion and the Foreign Investment Promotion Board (‘FIPB’), at a stage when parties are yet to finalise the details of the transaction in question, let alone its potential effect on competition.
The Proposed Amendments limit “other document” to a public announcement under the Securities and Exchange Board of India (‘SEBI’) Substantial Acquisition of Shares and Takeovers Regulations, 2011 (‘Takeover Regulations’) for their acquisition of shares, voting rights or control (which are made in the case of direct or indirect acquisitions in listed entities). The amendment is welcome to the extent that it limits a dangerously broad Trigger Event to a clearly identified occurrence. However, the element of uncertainty in relation to the underlying transaction continues to subsist despite the proposed change.
The Takeover Regulations recognize the uncertainty associated with indirect acquisitions of control in listed entities, and therefore restrict the obligation to make an open offer only to situations in which the primary acquisition, i.e. the acquisition in the direct (unlisted) target entity, is completed. This demonstrates that even at the public announcement stage for indirect acquisitions, the notifying parties may not have the requisite deal-certainty to notify CCI. CCI’s proposed position would still not be congruent with the position under the Takeover Regulations. The amendment does not obviate the original problem, which is to prevent premature notifications to CCI by pegging Trigger Events to an event or document that is clear, determinate and certain to culminate in a transaction.
2. Invalidation Of Notice
CCI is also contemplating inclusion of the power to invalidate notifications if “it comes to the knowledge of the Commission that the notice is not valid or complete as per sub-regulation (1) of the Regulation 14 of the Combination Regulations.” Currently, merger notifications can be treated as invalid only if (i) CCI requested further information from the parties, which they failed to satisfactorily respond to; and/or (ii) the parties notified CCI of any change to the combination, which CCI believed would significantly affect its ability to assess the competitive effects of the combination. In practice, CCI has invalidated and returned notices for various reasons that include failure to meet jurisdictional thresholds and premature notifications.
The proposed amendment is effectively a catchall, particularly in the absence of any defined scope for the terms “not valid” and “complete”. The need for this amendment is debatable given that CCI has wide powers to seek further information from parties and third parties, as well as penalize parties for any related transgressions. Given the ample safeguards currently woven into the scheme of the Competition Act, the latitude that could be granted to CCI via this amendment could ostensibly extend to the rejection of notifications for minor gaps in information and small procedural improprieties which have little or no impact on CCI’s ability to review the combination. Absent any qualifications, this would unduly burden notifying parties, delay the review process and eventually affect the timelines for the consummation of the transaction, particularly since the order of invalidation does not fall within the list of orders3 against which an appeal may be preferred to the Competition Appellate Tribunal.
Key Procedural Changes
The Proposed Amendments also attempt to tweak several aspects of the current merger regime in minor but crucial ways. They aim to reduce the procedural obstacles faced by parties but lengthen the overall clearance process by granting CCI an increased period of review.
1. Extended Review Timelines
Competition regulators and the business community have a shared interest in the comprehensive and timely review of transactions. The current regime in India permits CCI 30 calendar days in the so-called Phase I, from the date of notification, to arrive at a ‘prima facie’ opinion as to whether the transaction is likely to cause an appreciable adverse effect on competition (‘AAEC’), with a limited exclusion or ‘clock stops’ for time taken by parties to respond to requests for further information from CCI. At the end of this period, CCI can approve, reject or refer the combination to a detailed Phase II review.
The use of the term ‘prima facie’ is misleading given the substantive level of review conducted by CCI in Phase I. In most cases, during the Phase I period, CCI reviews substantial information submitted by the parties, and of approximately 250 notifications in four years, there have only been three instances of referral to Phase II.4 While technically speaking, CCI has approved all these within 30 days, on average, given the degree of review in Phase I, this figure translates to approximately 60-80 days, inclusive of clock stops.
The Proposed Amendments modify the 30 calendar day requirement to 30 ‘working’ days, and introduce two provisions that grant two additional periods of 15 working days each in the event that CCI reaches out, in Phase I, to (i) third parties; or (ii) statutory authorities for their views regarding the combination. While there is merit in seeking feedback from third parties and statutory authorities, there is no corresponding requirement for CCI to notify the parties upon the issue of such requests. Moreover, this means a significant extension to the overall review timeframe, and therefore, transaction timelines.
2. Authorised Signatory:
The Proposed Amendments relax the requirements with respect to the authorized signatory who may verify the contents of a notification on behalf of the relevant party. Currently, only the managing director is permitted to verify the notification, unless the company authorizes a director or a company secretary to do so by way of a specific board resolution. This gave rise to practical difficulties, due to the absence in certain jurisdictions, of designations that are the equivalent of a ‘managing director’ or ‘company secretary’. The proposed change to the Combination Regulations permits “any person duly authorized by the board of directors of the company for the said purpose”, to sign and verify the notification. While the proposed change still envisages a separate board resolution authorizing any individual other than a managing director, the relaxation with respect to other representatives does away with a major procedural bottleneck. However, in what appears to be a drafting oversight, the amendment applies only to acquisitions and not mergers or amalgamations5.
The other procedural amendments proposed by CCI include guidance on confidential and public versions of submissions, limit on the number of copies to be submitted, and discretion (to CCI) to determine the form of notification in cases of failure to notify within the prescribed filing deadline (previously, this would automatically trigger the requirement for a detailed Form II). Given the recent divestment orders passed by CCI, the Proposed Amendments also include two provisions that, (a) declare that proceedings before CCI in a merger review are not “complete” unless the compliance report for undertaking divestments is accepted by CCI; and (b) the acquisition of shares, control, voting rights or assets by a purchaser approved by CCI pursuant to and in accordance with CCI’s final orders approving a transaction (and also, directing divestments), is exempt from the requirement to file a merger notification. The Proposed Amendments demonstrate CCI’s learnings over the past year, but present a mixed bag, which in some cases, brings the Combination Regulations in line with global practice and in others, widens existing divergences and reaffirms CCI’s distinct stance on such issues.
1 The Combination Regulations came into force on 1 June 2011.
2 The last date for submission of comments to CCI was 24 April 2015.
3 List of orders is set out under Section 53A of the Competition Act.
4 CCI carried out Phase II investigations in Sun/Ranbaxy (C-2014/05/170) and Lafarge/Holcim (C-2014/07/190). In MIAL/IOCL/BPCL/HPCL/MAFFL (C-2014/04/164), decided on 29 September 2014, CCI issued a show cause notice to the parties as to why a Phase II investigation should not be carried out and was ultimately satisfied by the answers provided by the parties as well as the commitments offered at this stage. A Phase II investigation was not carried out in this case.
5 The authorized signatories for acquisitions are specified in Regulation 9(1), whereas the authorized signatories for mergers and amalgamations are specified in Regulation 9(3). Regulation 9(1) and 9(3) are in pari materia.
For further information, please contact:
Zia Mody, AZB & Partners
Abhijit Joshi, AZB & Partners
Shuva Mandal, AZB & Partners
Samir Gandhi, AZB & Partners
Percy Billimoria, AZB & Partners
Aditya Bhat, AZB & Partners