Fine for market purchases casts doubt on exemption

By Amit Tambe and Kunal Chandra, Trilegal
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The Competition Commission of India (CCI) fined Thomas Cook Insurance Services (India) Limited (TCISIL) and its parent Thomas Cook (India) Limited (TCIL) ₹10 million (US$165,000) for purchasing 9.93% of the shares of Sterling Holiday Resorts (India) Limited (SHRIL) on the stock exchange (market purchases) without notifying the CCI, i.e. for jumping the gun.

Amit Tambe
Amit Tambe

The fine may be small in terms of the size of the deal – reported to be around ₹8.7 billion – but the ramifications of this order may be far-reaching because the market purchases were within the de minimis exemption of the combination regulations and the parties denied that the purchases were part of the combination for which the CCI was approached.

Facts of the case

The proposed combination was to be effected by a composite scheme of arrangement whereby: (a) the resorts and time share business of SHRIL were to be transferred by way of a demerger from SHRIL to TCISIL and equity shares of TCIL would be issued to the shareholders of SHRIL; and (b) SHRIL, with its residual business, is proposed to be amalgamated into TCIL, with equity shares of TCIL issued to the shareholders of SHRIL. The CCI approved the proposed combination of which notice was given on 14 February 2014. The market purchases were effected a couple of days prior to the notification and the parties informed the CCI.

The CCI viewed the market purchases as being part of the “composite combination” and ordered that the parties show cause as to why the purchases were completed without its prior approval. The CCI relied on regulation 9(4) of the Combination Regulations, which provides that if the ultimate intended effect of a business transaction is achieved by way of a series of steps or smaller transactions which are interconnected or interdependent on each other, one or more of which may amount to a combination, a single notice covering all these transactions may be filed by the parties to the combination.

Arguments and analysis

At the show-cause hearing, the parties submitted that: (a) the market purchases and the notified transaction are not interconnected or interdependent; (b) the purchases were not required to be notified as they were exempt; and (c) the purchases were made even though there was no certainty as to completion of the combination.

The CCI observed that the purchases were authorized on the same day as the combinations and they were completed almost simultaneously and immediately after finalizing the composite combination. In the CCI’s view this indicated that the purchases were inherently related to the other transactions and TCISIL would have had no reason to pursue the purchases if it were not for the scheme and other acquisitions. The CCI also mentioned that if the parties had considered the purchases as different from the combination, they would not have referred to them in the notice.

This rationale raises two questions: Is mere timing of the transactions sufficient to determine that they are part of a “composite combination”? Could the fine have been avoided if Thomas Cook had simply mentioned in its application that TCISIL already held the 9.33% stake?

Kunal Chandra
Kunal Chandra

As for the de minimis exemption argument, the CCI said it would have been available had the transactions not been inherently connected. The CCI acknowledged that parties are entitled to structure their transactions in context of the Competition Act, but clarified the CCI is required to determine the substance of a transaction to assess the effect on competition irrespective of whether the combination is achieved through a series of steps, some of which may not need to be notified. The CCI has held that “taking advantage of the structure of transaction(s) with a view to avoid compliance with the requirements of the Act cannot be accepted”.

The CCI’s order casts doubt on the reliance parties may place on the de minimis exemption. The notification in March 2011 which introduced the exemption is unequivocal in its terms and doesn’t stipulate any qualifications.

The parties also argued that the CCI in past decisions had indicated that the test for “composite combinations” is mutual interdependence of the transactions. The CCI rejected this argument, saying it has never held this test as the determining factor and that the determination of whether transactions form a “composite combination” depends on the facts and circumstances of each case.

In M&A deals involving listed companies, it is not uncommon for an acquirer to trade in the target’s stock pending finalization of deal contours. In view of this order, acquirers may have to tread such acquisitions with caution, irrespective of whether the transactions are connected or mutually dependent. This could make such acquisitions more expensive should the market react positively to news of a CCI notification being made.

An appeal by the parties against this order is currently awaiting adjudication by the Competition Appellate Tribunal.

Amit Tambe is a partner at Trilegal and Kunal Chandra is a counsel. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.

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