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mergers and acquisition regulation

mergers and acquisition regulation

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Published by Aditya Verma
Regulatory Environment for mergers and acquisitions
Regulatory Environment for mergers and acquisitions

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Published by: Aditya Verma on Jan 15, 2013
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CCI Act: Regulation of Mergers and Acquisitions (Sections 5 and 6 of the Act) And The Implementing Regulations The

economic reforms process initiated by the Government of India in the last two decades has undoubtedly shown a path to Indian corporate houses to attain global scale and competitiveness. This has given rise to mergers and acquisitions activity in India on a very large scale. It is understood that Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and quadruple of 2005. In spite of today’s globalized and highly competitive environment, Indian Companies are not only acquiring businesses in India but also globally. It is imperative in this scenario that we create a conducive and enabling environment to boost M&A activity in India. There is a need to further strengthen the policy change process rather than impose curbs/slowing down combinations. Recently, the new Competition Act 2002 was enacted to ensure free and fair competition in the market by prohibiting anti-competitive agreements, abuse of dominant position and combinations likely to have appreciable adverse effects on competition within the relevant market in India. While FICCI welcomes the new Competition Act that would help in bringing more transparency and fair play for the companies, we believe that some of the provisions regulating mergers and acquisitions in the new Act are inconsistent with the objectives of the Act and the development of industrial and economic growth. In FICCI’s view, these provisions can adversely affect the competitiveness of Indian Industry. For the development of an effective competition policy, therefore, the Act’s provisions regulating mergers and acquisitions must be modified. This calls for appropriate amendments of the Competition Act. In this context, FICCI would like to submit the following for the consideration of Government and the Regulator: I. Provisions of the Competition Act, 2002, as amended, Regulating Mergers and Acquisitions. A. Section 5 - - Combinations 1. The definition of “combinations” is unnecessarily repetitive and gives rise to confusion. For example, Sections 5(b) and 5(c) are subsumed under Section 5(a). But, from a competition law perspective the only pertinent provision is Section 5(a), which regulates an acquisition of “control”. 2. Section 5 defines “combinations” by reference to assets and turnover:

4500 crores) may acquire a company in India with sales just short of Rs. an Indian company with a turnover of Rs. however. a foreign company with turnover outside India of more than USD 1. For example. 1500 crores without any notification to (or approval of) the Competition Commission being required. and in India and outside India. 3000 crores in India must notify the Competition Commission if it acquires any Indian company. 3000 crores cannot acquire another Indian company without prior notification and approval of the Competition Commission. then. and (c) the “combination” gives rise to a market share in a relevant market in India in excess of 25%. The turnover thresholds. under part (c) above. therefore. This test admittedly will pick up conglomerate acquisitions. are biased against the Indian company. On the other hand. ___________. and (b) each of at least 2 of the parties to the “combination” must have turnover in India in excess of Rs. The turnover/sales and assets tests of Section 5 should also pick up “salami” styled acquisitions by a foreign acquirer where the acquirer structures its transaction in parts so that each part is acquired separately to avoid notification to the Competition Commission because the acquisition of each part falls below the threshold of Rs. In contrast. an Indian company with turnover of Rs. ______________. is not notifiable to the Competition Commission under Section 6. but the implementing rules of the Competition Commission could then provide that purely conglomerate transactions that do not give rise to any addition to market shares of the parties in the relevant market in India will be assessed and “cleared” within a 30 day period from notification. 10 lakhs! . Part (b) above will adequately address the issue of the Competition Commission asserting jurisdiction over a transaction that has sales in India and would exclude purely “foreign” transactions (example. If. It is suggested that Section 5 be modified and a single sales/turnover test be adopted along the following lines: (a) Combined world-wide turnover of the parties to the “combination” in excess of Rs. 3. even a company with a turnover of Rs. 1500 crores and. General Electric acquiring a coffee shop in Brazil). it need not be notified to the Competition Commission. the “combination” does not give rise to a market share in a relevant market in India in excess of 25%.5 billion (or in excess of Rs.(i) (ii) exclusively in India. however.

grant extension of time for the purpose. The breadth of Section 5 is so wide that it would require notification of transactions that constitute an increase in shareholding by a promoter of a listed public company (including possible internal reorganizations within a corporate group). subject to the acquirer agreeing to pay interest to the shareholders for delay beyond fifteen days. While the objectives addressed by the SEBI Takeover Code and the Competition Act are different. Regulation 22(13)? 5. if the Competition Commission’s assessment is delayed because the Commission seeks additional information from the notifying party(ies). . 20 lakhs. in addition to the devastating impact that such a notification would cause in terms of loss of confidentiality in respect of such a transaction. It is important to clarify that the mere execution of a non-disclosure agreement or a letter of intent or memorandum of understanding (and other similar documents that do not constitute the definitive acquisition agreement) will not trigger the notification requirement. the notifying parties would need to pay filing fees of Rs.4. It is important to note that these transactions are exempted under the SEBI Takeover Code. will this delay be construed by the Board as “willful default or neglect” by the notifying party(ies) resulting in forfeiture of the entire amount in escrow account under the SEBI Takeover Code. if satisfied that non-receipt of requisite statutory approvals was not due to any willful default or neglect of the acquirer or failure of the acquirer to diligently pursue the applications for such approvals. For example. Is it the intention of the Act to require notification of firm allotments in a public issue? If this is the case. Regulation 22(12) of the SEBI Takeover Code provides that “where the acquirer is unable to make the payment to the shareholders who have accepted the offer before the said period of fifteen days due to non-receipt of requisite statutory approvals. an execution of such “other document” triggers an obligation to notify the Competition Commission. the Board may. then the Act is overreaching because these acquisitions in any event do not give rise to an adverse impact on competition.” Furthermore. notification and assessment under the Competition Act gives rise to serious cost consequences under the SEBI Takeover Code. essentially. There are cost implications as well because if a non-binding letter of intent were to trigger a notification requirement. as may be specified by the Board from time to time. Section 6(2)(b) of the Act uses the term “other document” and. 6.

2002 states that. 200- Comments: Section 6 of the Competition Act. after adhering to all requirements of SEBI Takeover Regulations and also the Act. In addition. mergers. All types of intra-group combinations. Such combinations should not be made subject to the mandatory notification procedure. These transactions do not have any competitive impact on the market for assessment under the Competition Act. as is the case in the SEBI Takeover Regulations.division of shares. 2. provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year. The definition of the term ‘shares’ should be modified to exclude preference shares within its purview. the following categories of transactions should be exempted from the mandatory notification requirements: 1. The draft Regulation 5(2) (x) exempts acquisition of shares or voting rights pursuant to a bonus or rights issue or sub. The Competition Commission of India (Combination) Regulations. 4. It should also be clarified as to when the notification procedure should commence in the case of issue of convertible securities or warrants. [Regulation 11(1) of the SEBI Takeover Regulations] However. 3.II. cases of consolidation of face value of shares should also be exempted. In the draft Regulations. This should be clarified by way of a suitable explanation in the Regulations. should be exempted from the Act for further acquisition of shares or voting rights in the same company. certain categories of transactions are treated as “NOT” likely to have an appreciable adverse effect on competition in India. Drawing the same analogy. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations. Section 6. SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%. Similarly the acquirer who has already acquired control of a company (say a listed company). reorganizations and other similar transactions should be specifically exempted from the notification procedure and appropriate clauses should be incorporated in sub-regulation 5(2) of the Regulations. demergers. acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act. no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. The only exception may be a situation where an acquirer acquires .

more than its percentage share in a rights issue or a consideration. the transferor company(ies)’ shareholders are issued shares of the transferee company as per ‘share exchange ratio’ mentioned in the scheme. A person who is in control of a company (listed or unlisted) irrespective of his shareholding in the company should be exempted from the notification requirement if such person consolidates his holdings in the company either under an IPO. Further clarification should be provided in respect of the draft Regulation 5(2)(vii) dealing with “renewed tender offer”. Note: The expression ‘Promoter’ is to be defined and it could be adapted from SEBI Takeover Regulations. not leading to control of the enterprise whose assets are being acquired except where the assets being acquired represent the entire business operations in a particular location or for a particular location or for a particular product or service of the enterprise of which assets are being acquired and such assets exceed ___% of the combined assets of the acquirer irrespective of whether such assets are organized as a separate legal entity or not. While the scheme of merger/ amalgamation per se would have received . In a scheme of arrangement involving amalgamation or merger. Inter se transfer of shares by promoters or sale by one joint venture partner of its shares in a joint venture to another joint venture partner should not trigger notification or assessment under the Competition Act. It is likely that post amalgamation / merger. and 5(2)(xii) dealing with an acquisition by the Central Government or a State Government.” 8. 5. Regulation 5(2)(ii) of the draft Regulation can be modified to read as under: “An acquisition of assets by the parties. 7.The above proposal takes into account permitted consolidation of shares or voting rights under SEBI Takeover Regulations and exemption granted under SEBI Takeover Regulations [3(i)(a)] in the IPO. Conglomerate acquisitions or acquisition of assets by parties not in the same line of business should benefit from the 30 day review procedure as they are not likely to have an appreciable adverse effect on competition within the relevant market in India. referred to in sub-clause (i) or (ii) of clause (a) of Section 5 of the Act. market acquisitions or in any other manner. 9. 11. 6. 5(2)(iii) dealing with international combinations. 10. This is because there is no overall change in the competitive impact of the joint venture by such a transaction. preferential offer. one or more party(ies) may happen to acquire / hold more than 26% of the total shares or voting rights of the transferee company. not directly related to the business activity of the party acquiring the asset or made solely as an investment or in the ordinary course of business.

which are not available in the Country. [Regulation 22(12) of the SEBI Takeover Regulations] It would therefore be essential that the maximum turnaround time for CCI should be reduced from 210 days to 90 days. either the notification is optional (as is the case in the UK and .approval of CCI.20 lakhs even though the proposed company may not be having significant volumes to start with. B. Reduction of Maximum Turnaround Time of 210 Days: Comments: The time lines prescribed under the Act and the Regulations do not take cognizance of the compliances to be observed under other statutory provisions like the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. Indian or foreign. the shareholders of the demerged company would be issued shares of the resulting company(ies). To compare anti-trust laws in effect in other jurisdictions. in a scheme of arrangement involving demerger. Further. should be included as one of the categories of transactions under Regulation 5(2) of the Regulations. such joint venture may eventually not even materialize due to various reasons. Establishment of a new business as a joint venture by a person fulfilling the assets/turnover criterion is also covered under the present scheme of the Act. Similarly. Such joint ventures might have been conceptualized for products or services. 12. Failure to make payments to the shareholders in the public offer within the time stipulated in the SEBI Takeover Regulations entails payment of interest by the acquirer at a rate as may be specified by SEBI. within 90 days from the date of public announcement. the proposed joint venture may not take off subsequently for various reasons. mergers and amalgamations get completed generally in 3-4 months’ time. 1997 (‘SEBI Takeover Regulations’). acquisition of shares or voting rights pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation. no fruitful purpose would be achieved if the party(ies) acquiring shares in such cases are required to secure CCI approval again. Similarly. This is not likely to cause an appreciable adverse effect on competition. It is therefore suggested that joint ventures with foreign entities for setting up a new business different from the existing business of the Indian partner should be exempt from the notification requirement. It may lead to a situation wherein a large company entering into a Memorandum of Understanding with a foreign company for launching a new product in the Country having to take approval of the CCI by paying fees of Rs. Worse still. In view of the above. Accordingly. SEBI Takeover Regulations require the acquirer to complete all procedures relating to the public offer including payment of consideration to the shareholders who have accepted the offer. a business house will be required to notify under the Act if it is contemplating to enter into a new line of business for a new product or service as a joint venture with some foreign party.

such as in the EU and USA. the review period is short. Therefore. . be required to go through the mandatory notification process. We suggest that the Commission clearly state that acquisitions or mergers that do not give rise to an increase in market power in the relevant market in India (such as the case with conglomerate mergers and acquisitions) or that give rise to market shares in the relevant market in India not exceeding 25% be either exempt from the notification requirement or benefit from the 30 day review period. Notably. This period is very long and will lead to significant transaction costs for the parties concerned. where review period in each case is 30 days).Australia) or mandatory (in which case. The draft Regulation 6 provides that a proposed combination must be notified to the CCI within 30 days from the date of execution of any agreement or “other document” or acquisition of share/voting rights or control of an enterprise. 2. even if the acquisition does not materialize and if the concerned parties withdraw from the transaction. Regulation 11 Void combination Comments: 1. It is crucial that the Commission establish the 30 day self-imposed time limit for a prima facie assessment and determination for a wide variety of transactions to facilitate efficiency. The event that triggers the notification requirement under Section 6(2) of the Act should be clearly described in the Regulations. C. The definition of “other document” is very wide and will include any document which reflects an “intention to acquire” including merely a confidentiality or non-disclosure agreement. the parties would. 2. D. 20 lakhs. The suspensory regime created by the amended Act and sub-regulation 11 provides for a 210 day waiting period after notification. under the current regulation. the Raghavan Committee report had suggested a 90 day waiting period for a reasoned order from the Commission. Regulation 6 Form of notice for the proposed combination Comments: 1. coupled with the application fee of Rs.

the Commission is empowered under Sec. The proviso to the Regulation 12(2)(b) requires a filing fee of Rs 40 lakhs together with a Notice in Form 1 and response to show cause. if notice has previously not been filed under Section 6(2) of the Act. 43A to penalize the parties if the notice is not filed by them under Sec. 2. even prior to the conduct of an investigation by the Commission. The entire fee amounts must be revisited and revised. should be included within the 210 day period. 18 Permitting additional time on the request of the parties to the combination and 21 Computation of time limits Comment: The aforesaid Regulations propose to further extend the 210 day period (which already is too long) by excluding the time given by the CCI for curing defects. 6(2) of the Act. Regulation 12 Fee Comments: 1. The exclusions must be strictly and clearly circumscribed. etc. The Rs. This additional fee (on top of the initial filing fees of Rs. F. As currently drafted. as imposed under Regulation 12(2)(b). 20 lakh additional fee requirement. Imposition of such a penalty prior to the conduct of a detailed investigation by the Commission is contradictory to the principles of natural justice and procedural fairness. Thus.20 lakhs). Regulations 16 Scrutiny of notice. a case may arise where a party would be called up to pay excessive amounts as penalty even prior to the completion of a full scale investigation by the Commission and a determination of the merits of the transaction. amounts to a penal sanction. .E. they allow for arbitrary extensions and delay. The Commission’s view seems to be based upon the assumption that the alleged combination is likely to cause an appreciable adverse effect. required to be met by the parties at the time of filing a response to a show cause notice is unfair and excessive. 17 Consequences of not removing defects. In addition. 3.

If third parties are permitted to challenge such orders. Regulations 27(2) specifies time periods for formulation of the prima facie view by the Commission but does not specify the time period. We. 2. 4. as a practical matter. Also. Regulation 27 Opinion on the existence of a prima facie case Comments: 1.G. 3. and failure to provide a decision within such period. should be “deemed clearance/approval”. would request the Commission that. It is submitted that a single review window of 30 days for both Forms 1 and 2. such an order could become the basis for an appeal to the Appellate Tribunal. then it will be used by competitors and members of the public to give rise to considerable delays and destroy transactions. by reference to the date of filing of the notice. Decisions that constitute “deemed clearance” may easily be challenged by third parties and struck down for failure to provide reasons. the Commission should not adopt this option as a matter of general practice because it could raise issues for challenge by third parties (see below). because a prima facie review order would be treated as an “order” under Section 31 of the Act. within which the show cause notice is required to be issued by the Commission. however. Nowhere does this provision become more destructive than situations where there is a tender offer or where speed is “of the essence” in a transaction. The different time periods prescribed is unclear as most short form notifications call for quick clearance. . The rights of third parties (members of the public and others) and their “standing” to challenge a decision of the Commission must be clearly specified. The Commission has 30 days to formulate its prima facie opinion upon the filing of Notice in Form 1 and 60 days to do so on the filing of Form 2. The two different types of notification and the different time periods raise issues as to their need and purpose – it is ironical that a short form notification to assess a pro-competitive transaction should lead to a 60 day review. while this may be expressly stated in the Regulations.

the time given to the Director General to submit his report may be extended up to 105 days. the Director General’s Report was made available to both the Parties.H. provides for the tabling of the Director General’s Report together with the responses made by the Parties to the show cause notice before the Commission on the basis of which the commission then proceeds to formulate its prima facie view. Also. 2. It is further noteworthy that such additional time periods will add to the transaction costs for the parties. the Director General’s report can only be made available on a discretionary basis. the Commission will issue the show cause notice only after the Commission has formed an adverse prima facie view. It is difficult to understand why the Director General cannot submit a report in a shorter time such as 30 days or 45 days. . 31(2): Extension of time to submit report and 32: Time given to the Director General to submit the report Comment: Under Regulation 32. This will lead to an exclusion of the parties right to review the Report and comment on the same and violates the principles of natural justice. on the other hand. Under Section 29(1) of the Act. There is. Prior to the Amendments to the Act. I. Regulation 30(2) Meeting of the Commission to consider responses from the parties. Regulation 35 Meeting of the Commission to form prima facie opinion under sub section (2) of section 29 Comment: The provisions of Regulation 35 are inconsistent with the mandate expressed under Section 29(1) of the Act. an inconsistency between Section 29(1) of the Act and Regulation 35 – specifically whether the tabling of the Director General’s Report before the Commission would be made to enable the Commission to formulate the prima facie view or to reach a final decision on the merits. Regulation 33 Report by the Director General and Sec. Regulation 35. the procedure for acquiring the report in such circumstances is also not laid out in the Regulations. therefore. 26(4) of the Act: Role of the Director General and the report prepared by him Comments: 1. J. however. Regulation 33 does not provide for making available the Report of the Director General mandatorily to the parties. With the amendment to Sec 26(4) of the Act.

Regulation 42 Meeting to consider the effect of combination on competition Comment: The parties at present under the aforesaid Regulation are precluded from viewing or raising defenses to any objection raised from a member of the public. Regulation 44 Modification proposed by the Commission Comment: Appropriate guidelines must be enacted in order to understand the scope and impact of the modifications that could be proposed by the Commission. Regulation 54 Appointment of independent trustees to oversee modification Comment: Implications of appointment of independent trustees to monitor implementation of the modifications should be reviewed.K. setting out reasons for the same. . This is against the rules of procedural fairness and the parties to the combination must be given an opportunity to be heard. Appropriate amendments in this regard must follow in relation to Regulation 38 of the Draft CCI (General) Regulations. L. The Regulation must in this regard. Regulation 55 Request for confidential treatment Comment: The confidentiality provision should be reviewed and elaborated with regard to possible public disclosure if any to be made and the manner in which this is to be made. Any rejection to afford confidentiality treatment upon a party involved in such a transaction must be followed up with reasoning in writing by the Commission. Already sufficient procedure is in place to ensure implementation and therefore the remuneration of the trustees so appointed leads to additional transactional cost burden being imposed upon the parties. N. provide for the adjustments in the modifications proposed by the Commission in the event of changes in the structure/ details of the combination or upon the occurrence of other unexpected changes. M. Any information coming forth from third parties must also be subjected to confidentiality norms and provisions in this regard must be included in the draft Regulations.

Miscellaneous Comments: 1.O. In this time period. this time may be extended to 105 days. under Regulation 30. a transaction with no adverse competitive impact would be unnecessarily jeopardized and be jettisoned by the parties. Forms 1 and 2 Comment: It is suggested that the Forms be divided into separate sections under different sub-heads as it would allow for a more meticulous and quick review. There is a serious risk that the regulator will “buy” time and M&A transactions will be delayed. P. For example. But under Regulation 32. . the Director General is given 60 days to submit his report.

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