The Competition Act (2002), amended in 2007 (the act), targets anti-competitive agreements or arrangements, abuse of dominance, and combinations. After many years in limbo, the reconstituted Competition Commission of India (CCI) was finally empowered from 20 May to inquire into and regulate anti-competitive agreements and abuse of dominance. Given that the provisions of the act dealing with combinations are yet to be notified, a move may be underway to lessen the rigidity by taking into account the typical change in transaction sizes in the last three to four years.
Under the act an acquisition, merger or amalgamation of one or more enterprises by one or more persons, who jointly meet stipulated combined asset/turnover criteria (either wholly within or both within and outside India) constitutes a combination.
An acquisition where the acquirer and the enterprise being acquired jointly meet the prescribed asset/turnover criteria must be notified to the CCI within 30 days of the execution of any agreement for acquisition (including informal and non-binding agreements). The CCI is allowed 210 days to evaluate the proposed combination and determine if it could be capable of causing “an appreciable adverse effect on competition within India”.
Even if one were to sail through upfront, the CCI has the authority to investigate any combination even after it is consummated but the inquiry has to be initiated within one year of the combination ‘taking effect’.
There are certain exemptions from the need for mandatory prior notification of combinations to the CCI, including the acquisition of shares by foreign institutional investors and venture capital funds registered with the Securities and Exchange Board of India (SEBI). It seems ironic that while offshore institutional investors which are not governmental in nature are exempted, effectively only those Indian institutions which are governmental in nature are exempted.
CCI issued a draft of the Competition Commission of India (Combination) Regulations, 200 (the draft combination regulations), though subsequent pronouncements suggest that these have been withdrawn for being worked upon. The draft combination regulations specify transactions which the CCI believes are not likely to “cause an appreciable adverse effect on competition in India”. The CCI’s apparent intent is to exempt a class of deals from the need for prior mandatory compliances.
Considering that even a minimal acquisition which results in the parties jointly meeting the prescribed asset or turnover criteria is subject to the notification requirement under the act, various situations could trigger a need for prior mandatory approval by the CCI. These could include acquisitions pursuant to an initial public offering by a company proposing to get listed on the stock exchanges, or by acquirers of American depository receipts, global depository receipts or warrants (the act defines shares to include “any security which entitles the holder to receive shares with voting rights”) of Indian companies.
While SEBI’s (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SAST), specifically exempt (among others) allotments pursuant to a public issue from the need for a mandatory open offer, the act does not exempt such allotments from prior mandatory notification. The draft combination regulations attempt to lessen the impact of this by stipulating that any acquisition made solely as an investment (up to a maximum of 15% of the total shares or voting rights of the company, and not leading to control of the company) would not be considered likely to “cause an appreciable adverse effect on competition in India”.Also, under the act there is no exclusion for acquisition of shares of a company in distress, even where the acquisition is pursuant to a scheme of revival framed under any applicable statute or by banks.
Presently, listed companies are raising finance through rights issues, qualified institutional placements (QIPs) and preferential allotments. Considering that QIPs involve issuances to qualified institutional buyers, it would appear that such issuances would need to be mandatorily notified to the CCI. Of course, the exemptions being proposed under the draft combination regulations could cover this, via the 15% investment test.
While the draft combination regulations are proposing enumerate exemptions from the need for prior mandatory notification, it is a moot point as to whether the CCI can grant such exemptions. Under section 54 of the act only the central government is empowered to grant exemptions (by notification), while under section 64 the CCI is empowered to issue regulations “consistent with this Act”.
In our view, while the intent of the Draft Combination Regulations is laudable (as regards the exemptions), it would be prudent if the Competition Act were amended to achieve this.
Hopefully the further delay in notifying the provisions of the act relating to combinations is also with an intent of revisiting the provisions, including the ability to exempt and enhance the thresholds.
Anahita Irani is a senior associate at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.
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