27 July, 2016
June 1, 2016 marks 5 years of merger control in India.2 Since the operationalization of merger control rules,3 CCI has witnessed a steady increase in the number of merger notifications.4 In 2015 alone, CCI received 127 notifications, with an average of 15 notifications in the last three months of the year. Naturally, the Combinations Division5 which operates with about a dozen case officers,6 a few research associates,7 one director8 and one advisor,9 was overwhelmed. Understanding CCI’s institutional constraints is as essential as the knowledge of the peculiarities in Indian merger control rules and procedures. As a young competition authority, CCI’s im- plementation of the merger control rules is laudable. Yet, in the face of multiple notifications – many routine and some strategic – CCI appears to have lagged behind when it comes to review- ing multi-billion dollar strategic global transactions. Belying the otherwise exemplary trend of granting quick approvals,10 CCI appears to take considerably more time in reviewing transactions with horizontal overlaps/vertical linkages. In global transactions, the review timelines are often stretched further, much to the dismay of the notifying parties. In this article, we discuss the potential stumbling blocks in securing CCI approval – some arising from the peculiarities in Indian merger control rules and others from the resource crunch at CCI. We conclude by iden- tifying possible steps that may lend greater predictability to the review process and help secure quicker approvals from CCI.
Notify or not?
For global transactions, the very assessment of whether a filing is required in India can get tricky. Broadly, if the combined value of assets or turnover of the parties to the transaction breaches the thresholds prescribed under Section 5 of the Act and the transaction does not ben- efit from any exemption,11 a notification would be required in India. What initially appear to be straightforward rules on notification obligations become complex in their implementation, especially when it comes to asset acquisitions or creation of greenfield joint ventures.
Intuitively, a transaction that lacks nexus to India should not require notification. At first blush, the notification thresholds prescribed in Section 5 of the Act, in fact, reflect this basic principle. For global transactions to be notified in India, the combined value of assets or turno- ver of the parties to the transaction must breach a set of worldwide thresholds, as well as a set of India-nexus thresholds prescribed under Section 5 of the Act. However, since the India-nexus threshold is linked to the value of assets or turnover of the parties to the transactions, and not the value of assets or revenue accruing from the target asset or business, simple asset/business acquisitions get caught in the net, even when the target asset or business has no India-presence. In fact, in the past, even when the Combination Regulations allowed CCI to exempt (from notifi- cation) transactions that had insignificant nexus to, or effect on, market(s) in India,12 CCI reject- ed the application of this exemption and required the parties to file purely foreign transactions with no effect on competition in India. For example, Nestlé S. A.’s (‘Nestlé’) acquisition of Pfizer, Inc.’s (‘Pfizer’) nutrition business required notification despite the fact that Pfizer was not en- gaged in the nutrition business in India.13 As perplexing as the Indian merger control rules on asset/business acquisitions may be, the penalty for not notifying a transaction that satisfies the relevant asset or turnover thresholds and does not qualify for any exemption, is significant.14 Thus, there is no option but to notify a deal of this kind.
Similarly, the parties are left with no choice but to notify the setting up of greenfield joint ventures in certain situations. Generally, setting up a new joint venture (‘JV’) does not trigger an obligation to notify CCI because it involves an acquisition of/subscription to the shares of the newly set up JV company (which is treated as the ‘target’) by the JV partners, where the ‘target enterprise’ (i.e., the JV company) typically has no/negligible assets/turnover. As per Indian merger control laws, any acquisition, where the target (on a consolidated basis) has either assets not exceeding ¤3,500 million or turnover not exceeding ¤10,00015 million in India, is exempt from an obligation to notify CCI (‘De Minimis Exemption’).
However, often, even the setting up of a new JV can trigger an obligation to notify CCI be- cause of assets being transferred into the JV as part of the transaction. When an enterprise (transferor) transfers assets to a transferee entity for the purpose of the transferee entity agree- ing to an acquisition or merger/amalgamation, the entire value of assets/turnover of the trans- feror company is attributed to the transferee entity for the purpose of making CCI filing as- sessment (‘Anti-circumvention Rule’).16 Notably, this rule does not prescribe any de minimis threshold when it comes to determining the transfer of assets under the Anti-circumvention Rule. Rather, any asset transfer, no matter how low the value of such asset, would trigger the
Anti-circumvention Rule. The Anti-circumvention Rule also applies regardless of the nature (whether revenue-generating or not) and location (whether situated in India or not) of the transferred asset.17 In other words, while setting up the JV, if a JV partner transfers assets to the JV company, CCI would attribute the JV partner’s (transferor’s) assets and turnover to the JV company (transferee). This attribution of assets and turnover under the Anti-circumvention Rule could entail a filing obligation provided the broader notification thresholds are also met. For example, last year, CCI reviewed and approved the setting up of a JV, Warren Robotics Inc. (focusing on robotic-surgery R&D in the US, with no competitive effect in India), by Google and Johnson & Johnson,18 a transaction that was notifiable due to the fact of assets being transferred into the JV by the JV partners.
It is pertinent to note that penalties can also ensue from a delayed notification to CCI. In sum, while the Indian merger control regime borrows from the global best principles and prac- tices, the finer details may, at times, be different. Understanding these differences is the key to avoiding penalty for failing to file or filing a delayed notification in India. Ascertaining the correct trigger event for making a filing and, complying with the twin burden of short filing deadline and suspensory effects are both crucial for avoiding penalties and securing a quick approval from CCI.
When to notify?
If a global transaction satisfies the notification thresholds specified under the Act and cannot avail any exemptions, the filing trigger (from which date parties have 30 calendar days to notify) is the global one, i.e., in case of acquisitions, the execution of the global transaction agreement or the public announcement of the global transaction to Indian stock-exchanges as per Indian takeover regulations, and, in case of mergers, the board resolution approving the global merg- er.19 When it comes to determining the filing trigger for such a global transaction, it is irrelevant whether the notifying parties envisage a separate, subsequent Indian leg of the transaction with its own set of local agreements to be executed at a later date. In a nutshell, once the filing trigger for the global transaction occurs, the filing countdown under the Act begins.
What to notify?
If a global transaction comprises a bundle of multiple inter-connected transactions, even if only one of such inter-connected transactions triggers the obligation to notify (with the other inter- connected transactions not being notifiable by themselves), the parties are obliged to notify all such inter-connected transactions in a single, consolidated notification. Consequently, the suspensory effect would apply equally to all parts of the overall transaction.
By way of example, consider a two-part transaction which entails: (Step 1) – Company A acquiring a certain shareholding in Company T, and subsequently, (Step 2) – Companies A and T merging together to form a resultant entity C. If T’s assets/turnover do not exceed ¤3,500 million/10,000 million, Step 1, in and of itself, is not notifiable since it can avail the De Minimis Exemption. However, since the De Minimis Exemption applies only to acquisitions, it would not apply to Step 2 (which is a merger). Consequently, if assets or turnover values for A are such that the combined assets/turnover for Companies A and T breach the monetary thresholds under the Act (and provided no other exemption applies), both Step 1 and Step 2 would need to be no- tified together in one single, consolidated notification.
Carrying the twin burdens – short filing deadline and suspensory effect
India often emerges as the outlier jurisdiction for submission of merger notifications. Indian merger control law imposes the twin burden of: (i) a filing deadline (parties must notify within 30 calendar days of the filing trigger20); and (ii) a suspensory effect (no part of the notified transaction can be completed prior to CCI’s approval21).
The relatively short filing deadline means that the parties must expedite the assessment of whether a filing obligation exists. Sufficient lead time would help avoid a last-minute rush to complete the notification within time. While, in practice, it is possible to submit the notifica- tion with information gaps to avoid the breach of the filing deadline, in practice, CCI does not start the 30-working-day merger approval clock.22 Moreover, if the parties do not address the information gaps in the filing in a timely fashion, they run the risk of CCI rejecting the filing altogether and directing that a fresh notification be filed.23 Delay in the start of the 30-working- day merger approval clock or a direction from CCI to re-notify a transaction could potentially derail global deal-closing timelines.
Once the parties have ascertained the trigger event, identified the target date for making the notification and outlined contours of the notifiable transaction, the next crucial step is the selection of the correct format for making the notification.
Which form to select for making the notification?
Transactions can be notified in two different notification formats – Form I (a relatively short form with less onerous market-level data requirements) and Form II (a long form requiring much more detail, including extensive market-level information).
Technically, the Indian merg- er regulations specify that parties may, at their option, notify in Form II when: (a) the parties’ horizontal overlap, measured through their combined market share, exceeds 15% in the relevant market; and (b) the parties are active in vertically linked markets and their individual/com- bined market share is more than 25%.24
However, where these thresholds are breached, CCI is directing parties to re-notify in Form II. This is because (i) CCI is empowered to direct parties to re-notify in Form II even if the ini- tial notification was in Form I; (ii) the merger approval clock resets once parties re-notify in Form II (the clock only starts ticking once parties have filed the Form II); and (iii) CCI, driven primarily by limited institutional capacity dealing with a large case-volume within a tight time- line, is increasingly directing parties to re-notify in Form II, on a simple consideration of the combined market shares. For example, the parties notified the
Anheuser-Busch InBev SA/NV / SABMiller Plc. deal in the longer Form II, even though the combined market shares of the two in India were only marginally above the 15% mark and the increments in market shares were insignificant.25
Transactions relating to highly competitive and contestable markets, with higher than 15% combined market shares may not necessarily require detailed scrutiny. Based on such think- ing and the knowledge of significantly high information requirement in Form II, the short 30 days window to submit the filing and the need for providing Form II level information for all overlapping markets,26 the parties may nonetheless adopt the shorter Form I for making the notification. Such an approach though is fraught with the risk of CCI directing the parties to re-notify the transaction in the longer Form II. The risk is perhaps accentuated due to resource constraints at CCI, as noted above. The strategy of selecting the most appropriate format (shorter Form I or longer Form II) to make a notification must, therefore, be driven as much by an appreciation of the resource constraints at CCI, as by the merits of each case.
Review process at CCI – is each step a potential stumbling block?
CCI’s merger review takes place through the following process: (i) the notification is examined by a case-officer with background support from research associates, and further requests for information (‘RFIs’) generally arise at this stage; (ii) the case officer reports his/her observa- tions on the notified transaction to the advisor, Combinations Division, who heads the merger division;27 (iii) once all information gaps and clarifications are addressed, the Combinations Di- vision’s report is placed before CCI members, who may again, either simply accept the report, or seek further clarity/information;28 and (iv) once CCI members decide to approve/conditionally approve/disapprove a notified transaction, the decision is conveyed to the notifying parties.29 Each step in the review process has the potential to result in clock stops. The Combinations Division at CCI has only about a dozen case-officers, who are assisted by a few research associ- ates. All case-officers report to a single advisor but decisions on whether a given transaction would likely result in an AAEC rest on the 7-member CCI, which is also the sole hearing and deciding authority for all behavioural cases.
The increasing work load at CCI, without a corresponding increase in the staff appears to have increased the time taken by CCI in approving transactions. In fact CCI, as a whole, has an institutional shortfall with 72 positions, out of a sanctioned strength of 197, lying vacant as on March 31, 2016.30 As a young competition regulator, CCI continues to invest in training of staff. Yet, since it did not inherit a pre-existing cadre of personnel trained in antitrust, there is still an expertise/experience gap at the CCI.While training initiatives and ongoing enforcement experi- ence are quickly bridging this gap, this expertise/experience gap is, nonetheless, a critical factor affecting the merger control process, especially in respect of more complex mergers.
The manpower crunch, expertise/experience gap at times manifests itself in RFIs, resulting in clock-stops. CCI is statutorily obligated to issue its prima facie opinion of a notified transac- tion (such prima facie opinion is the approval in non-problematic transactions, else it could be a show cause notice leading up to a more detailed second phase review) within 30 working days of the notification. In fact, until July 2015, this statutory deadline was 30 calendar days. This statutory deadline further exacerbates the factors highlighted above. However, since the 30 days merger approval clock stops on issuance of an RFI, there is perhaps an in-built incentive for is- suing RFIs strategically to buy more time.
Being a relatively nascent regulator still in the expertise-building phase, when faced with a complex, multi-jurisdictional transaction involving product markets that are global in na- ture, CCI tends to look carefully at how other more mature regulators (typically, the European Commission and the United States of America (‘US’) Federal Trade Commission treat the same transaction. As a corollary, CCI is unlikely to approve such complex, multi-jurisdictional trans- actions unless it has the comfort of knowing that the same transaction has been approved in the European Union (‘EU’) or the US. On the flip-side, CCI’s approach may also sometimes compel it to scrutinize a transaction in greater depth and detail than warranted by the Indian mar- ket conditions, simply because the regulators in the EU and US have taken that approach. This, somewhat understandable diffidence also has a slightly negative implication for deal timelines since it is unlikely that a complex, multi-jurisdictional transaction would receive CCI’s approval prior to approval in the US or the EU.
While the peculiarities in Indian merger control regime, the manpower shortage at CCI, and the expertise/experience shortfall may appear as stumbling blocks, they do not create insurmount- able barriers. The statutory cut off of 210 days for deemed approval, should CCI not issue its decision, works as the ultimate safety net against prolonged review. Most transactions though are approved well within the 210 days outer cut off limit. Starting early, earnest and constructive engagement with CCI hold the key to smooth review and perhaps quicker approvals from CCI.
It is always helpful to assess whether a notification is required in India, sufficiently in ad- vance of the filing trigger, so as to avoid a last-minute dash to file the notification. This is espe- cially useful in transactions which may need to be notified in the longer, more detailed Form II, because gathering that level of information for all the relevant markets involved, can consume significant time and resources.
CCI, particularly the Combinations Division, is fairly receptive to constructive engagement with parties. The Indian merger control provisions specifically allow parties to reach out to CCI for pre-filing consultations to: (i) seek (albeit informal) clarification from the Combina- tions Division, CCI in case of any confusion regarding the notifiability of a transaction; and (ii) ‘perfect’ the filing, i.e., request the opinion/inputs of the Combinations Division on a draft version of the notification, which can go a long-way towards ensuring fewer subsequent RFIs and quicker approvals. Another useful initiative is to offer the Combinations Division, CCI, an opportunity to be briefed by the parties’ business personnel to help explain the products and markets involved in a simpler, more interactive manner.
Overall, CCI in a very short time has established itself as an efficient and credible competi- tion regulator. The challenges associated with Indian merger control regime may perhaps be unique but are not impossible. A little bit of planning, careful reading of the law, and continuous cooperation with CCI is all that is required to secure quick approvals for most transactions.
1 This article was submitted to and used as the basis for panel discussion on merger control in the “Antitrust in Asia” conference organized by the ABA Section of Antitrust Law conducted between June 2 and 3, 2016, in Hong Kong.
2 The merger control provisions came into effect from June 1, 2011 as per the Ministry of Corporate Affairs Notifica- tion S.O. 479(E), dated March 4, 2011.
3 Contained in the CCI (Procedure in regard to the transaction of business relating to Combinations Regulations, 2011 (‘Combinations Regulations’).
4 Since the beginning of merger control in June 2011, CCI has received almost 400 merger notifications.
5 Combinations Division is the unit within CCI which is primarily responsible for CCI’s merger control opera-
tions. The Combinations Division receives the notifications, reviews them, seeks additional information from the notifying parties, and puts forth its recommendation to the members of CCI who make the final decision.
6 Case officers are part of the permanent staff at CCI and are the primary personnel responsible for reviewing a notification. It is the case officers who scrutinize the notification in detail, frame additional queries for the notify- ing parties, and prepare an internal report with their assessment of the notified transaction. The case officers get background support from the research associates and, in turn, report to the advisor.
7 Research associates are typically short-tenure staff-members who assist the case officers in background research on a notification.
8 The Director is the second-most senior staff member within the Combinations Division and also responsible for reviewing the assessment prepared by the case officer and suggesting appropriate changes.
9 The advisor is the operational and administrative head of the Combinations Division. It is the advisor who ap- proves an assessment prepared by the case officer (and as vetted by the Director), and puts forth the Combina- tions Division’s recommendation on a notification to the members of CCI who make the final decision.
10 For example, in the year June 2014 – May 2015, CCI had an average approval time of ~ 57 calendar days. However, it is notable that this average approval time has steadily increased every year since the enforcement of merger
control (~27 days in 2011-2, ~35 days in 2012-13 and ~48 days in 2013-14). See, “India Competition Law Develop- ments: The Year in Review: June 1, 2014 – May 31, 2015,” Sixth Annual Chicago Forum on International Antitrust Is- sues, Northwestern University School of Law June 8-9, 2015, Author: Nicholas J. Franczyk (Counsel for International Antitrust and Technical Assistance Office of International Affairs , Federal Trade Commission , Washington , D.C . )
11 Some typical exemptions include, to name just a few, exemptions for minority, non-controlling acquisitions, intra-group mergers/acquisitions, acquisition into small targets, ordinary-course asset acquisitions, incremental acquisitions not resulting in transfer from joint to sole control etc.
12 The now-deleted exemption under Item 10, Schedule I of the Combination Regulations exempted – “A combina- tion…taking place entirely outside India with insignificant local nexus and effect on markets in India.” This ex- emption was withdrawn via an amendment to the Combination Regulations, with effect from March 28, 2014.
13 Nestle/Pfizer, Combination Registration No. C-2012/05/57.
14 Under Section 43A of the Act, the potential penalties for delayed filing are severe, with CCI empowered to impose
a penalty which could, theoretically, reach 1% of the total assets or turnover (whichever is higher) of the parties’ combined assets/turnover. The liability for delayed filing follows the obligation for making the notification, i.e. the liability rests on acquirer(s) in case of an acquisition and on the merging parties in case of mergers. In practice, however, the highest penalty imposed for gun-jumping so far is ¤50 million (approximately US$ 0.75 million) [Sec- tion 43A Order – GE/ALSTOM, Combination Registration No. C-2015/01/241].
15 ~US$ 150 million.
16 Regulation 5(9), Combination Regulations.
17 CCI has also interpreted the term ‘assets’ fairly widely. For example, while examining licensing arrangements, CCI has considered exclusive licenses (e.g. an exclusive license for distribution of TV channels) to be a transfer of “as- sets” [UTV Global, Combination Registration No. C-2013/01/107].
18 Google/Johnson & Johnson, Combination Registration No. C-2015/06/283.
19 Section 6 of the Act, read with Regulation 5(8) of the Combination Regulations.
20 Section 6(2) of the Act.
21 Section 6(2A) of the Act.
22 Regulation 19(1) of the Combination Regulations makes it mandatory for CCI to issue its prima facie opinion on a
combination within 30 working days of the notification (such prima facie opinion is the approval in non-problem- atic transactions, else it could be a show cause notice leading up to a more detailed second phase review). However, this 30 working days timeline is subject to, and thus extendable through, ‘clock stops’ on account of requests for information issued by CCI [Regulation 14(5), Combination Regulations]. Overall, CCI has 210 calendar days from the date of notification to approve/disapprove/conditionally approve a transaction, failing which the transaction is deemed approved [Section 31(11) of the Act].
23 As per Regulation 5(5) of the Combination Regulations, CCI has the power to direct parties to re-file a notification in the longer Form-II, if it considers it necessary for its competitive assessment of the transaction.
24 See Regulation 5(3), Combination Regulations.
25 AB InBev/SABMiller, Combination Registration No. C-2015/12/350.
26 As a matter of practice, CCI usually insists that in transactions involving multiple relevant markets, parties pro-
vide information for all such relevant markets in the detailed Form II, regardless of the degree of overlap in such markets. For example, in the GE/ALSTOM transaction, where the parties had significant horizontal overlaps only in the markets for gas turbines and steam turbines with very limited overlap in the other relevant markets (like hydro-energy, wind-power, grid systems etc.), but CCI nevertheless insisted that the parties provide information for all such relevant markets (including ones with limited overlap) at a Form II level. [Combination Registration No. C-2015/01/241]
27 Sometimes, further RFIs result from the advisor’s review of the initial report and her suggestions to the case- officer.
28 Additional RFIs can also result based on the feedback from the CCI members. Further, CCI members may also de- cide to reach out to third party experts or competitors for their views on the notified transaction.
29 A practice has developed whereby CCI sends out a simple letter of approval to the notifying parties, with the de- tailed decision taking a further few weeks before finalization and release.
30 Based on the statement by Mr. Arun Jaitley, Minister for Corporate Affairs in the Upper House of the Parliamenton April 26, 2016.
For further information, please contact:
Zia Mody, Partner, AZB & Partners