COMPETITION LAW AND M&A

Key terms of the Merger Control Regime

Competition Law and M&A
Key terms of merger control regime

Learning Objectives:
● To understand the basic concepts of Merger Control which include definition under
Section 5 of the Act;
● To understand the preliminary examination of combinations and ascertain whether
they are required to be notified or not.

How does the Act define the term ‘Combination’?

The definition of the term “Combination” can be found in Regulation 2(b) of the
Combination Regulations which means it includes combinations under Section 5 of the
Competition Act, 2002.

It is pertinent to note, that the term “Combination” includes a) proposed combination or b)

combined entity- if the combination has come into effect. Only the transactions under
Section 5 of the Act will be termed as Combinations.

Section 5 broadly enumerates three kinds of Combinations. If parties were to propose a

transaction that comes under any of these three situations, then a preliminary examination
is done by checking whether this combination is notifiable to the CCI or not.

If it is notifiable, then the proposed combination is notified by filing a well-drafted Notice

before the CCI in the form of Form I or Form II. Form III as we know is not mandatory and is
therefore rarely filed by parties. This Notice encapsulates the intent, purpose, economic
motive of the proposed transaction with its impact in the relevant market supported with
an in-depth market study which is then assessed by the CCI in a set timeline. Under Section
5, the following are termed as combinations:

1. Section 5(a): Acquisition of control, shares, voting rights or assets by an acquirer

entity of a target entity;
2. Section 5(b): Acquisition of control by a person over an entity when such person
already has direct or indirect control over another entity engaged in the business of
similar or identical or substitutable goods or services; and
3. Section 5(c): Merger or amalgamation of two or more entities.

These combinations will only be notifiable subject to some jurisdictional thresholds of

assets and turnover which will be discussed in the next segment. For now, let us read into
what each of these provisions includes:

a. Section 5(a):
The acquisition of shares refers to the share capital of the company which carries
voting rights. The term security has not been defined in the Act, therefore the
meaning of shares has to be construed as explained in Section 2(v) of the Act:

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Key terms of merger control regime

“shares” means shares in the share capital of a company carrying voting rights and
includes—

i) any security which entitles the holder to receive shares with voting rights;
ii) stock except where a distinction between stock and share is expressed or
implied.

Acquisition of shares also includes acquisition of convertible instruments like zero

coupon optionally convertible debentures and that would come within the definition
of shares as held in Independent Media Trust/RB Mediasoft (P) Ltd. C-2012/03/47.

Acquisition of assets does not include the following:

1. An acquisition of assets 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, not leading to control of the enterprise whose assets are
being acquired;
2. An acquisition of stock in trade, raw materials, stores and spares, trade
receivables and other current assets in the ordinary course of business.

To determine assets, reference has to be given to Explanation (c) to Section 5(c)

which says that the value of assets shall be determined by taking the book value of
the assets as shown in the audited books of account of the enterprise, in the
financial year immediately preceding the financial year in which the date of
proposed merger falls, as reduced by any depreciation, and the value of assets shall
include the brand value, value of goodwill, or value of copyright, patent, permitted
use, collective mark, registered proprietor, registered trademark, registered user,
homonymous geographical indication, geographical indications, design or layout-
design or similar other commercial rights, if any, referred to in sub-section (5) of
section.

b. Section 5(b):

This clause essentially refers to horizontal combinations whereby the acquirer has
direct or indirect control over enterprises that are in the same business as the target
company. That would mean that the acquirer is accordingly directly or indirectly
engaged in the same line of business as the target company and therefore has the
nature of a competitor.

Hence, if the acquirer which is a competitor, gains control of the target company
such combinations will have to be notified- even if this combination does not involve
the acquisition of shares.

Control has been defined under the explanation to Section 5 to mean that-

(a) “control” includes controlling the affairs or management by—

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i) One or more enterprises, either jointly or singly, over another enterprise or

group;
ii) One or more groups, either jointly or singly, over another group or enterprise;

The concept of “Control” has been widely discussed in Chapter 6 of this module.

c. Section 5(c):

This section refers to mergers and amalgamation proposed to be undertaken and

approved by the board of directors.

Merger refers to a situation where the enterprise is blended/absorbed into another

entity and the remaining entity is the new entity. Either the first entity survives or the
second entity survives. It could be A+B=A, or A+B= B.

Amalgamation refers to a scheme where a new combined entity is created as a

result of two companies merging into each other which means A+B= C.

This provision includes all kinds of mergers, amalgamations, and demergers.

Preliminary examination of Combinations

Now that we have understood the basic provisions under Section 5, let us see how
combinations are preliminarily examined. When parties (clients) decide to propose a
transaction, the general corporate team of law firms connects the client with the
competition team partners to provide advice on whether the combination is notifiable to
the CCI or not. Not all transactions mentioned above are notifiable. Only those transactions
which cross a particular threshold will be notifiable. Hence, let us see how this exercise of
ascertaining modifiability is done.

The obligation to file a combination notification triggers when a combination crosses

minimum threshold limits for assets and turnover as prescribed in Section 5 (Jurisdictional
Thresholds) of the Act. This means that a preliminary analysis has to be made by looking
into the books of accounts of the acquirer entity and target entity and in case their assets
and revenue (turnover) as deduced from their books of accounts crosses a prescribed
threshold, a notice will be required to file before the CCI. In case of an acquisition, the
responsibility of filing the notice rests with the Acquirer and in case of a Merger or
Amalgamation, a joint notice needs to be filed by all the parties involved.

It is important to know that the Act provides some exemptions to proposed transactions. If
any of these exemptions apply to the transactions, then they need not be notified. The
exemptions are as follows:

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a. Target Based Exemption:

This is a preliminary exemption available to transactions which involve acquisitions,
mergers or amalgamations involving a small target company. According to this
exemption, in the event of an acquisition, merger or amalgamation of the target
enterprise, including its divisions, units and subsidiaries, has either total assets
(reflected as total assets in its preceding financial year consolidated1 balance sheet) of
the value not exceeding INR 350 crores in India or revenue (reflected as total revenue
profit and loss account of the consolidated annual report) not exceeding INR 1000
crores in India, then the proposed transaction will not be required to file a notice
before the CCI. It is important to note that if any of these two requirements are met,
then notice need not be filed.

This is the first legal opinion drafted by competition law teams to clients who want to
seek information with respect to the modifiability of their transactions.

Note: In case of an acquisition, the target company’s financials are taken into account.
In case of a merger/amalgamation, the financials of the final enterprise remaining after
merger/amalgamation or created as a result of the merger/amalgamation is taken into
account.

Merger: A+B= B (the resultant entity B’s assets and revenue earned will be analyzed).

Amalgamation: A+B = C which includes A and B (C’s assets and revenue earned will be
analyzed).
Also, in many instances, an acquirer company targets a portion/unit /division of the
target company. The Ministry of Corporate Affairs by way of a notification on 27 March,
2017 clarified that where only “a portion of an enterprise or division or business is
being acquired, it is the value of assets and turnover attributable to the relevant
portion or division or business that will be considered to determine the applicability of
the thresholds of the Act”. For example: If A is acquiring the salt manufacturing
business of B which is a conglomerate, then the consolidated financial statement of B
will not be taken into account, but only the consolidated financial statement of the salt
manufacturing business.

b. Specific exemptions to regional rural banks and public sector

banks:
The merger control regime will not apply to regional rural banks or transactions
pertaining to the reconstruction/amalgamation of nationalized banks.

1
The consolidated statement means “financials which include the financials of its units, divisions or
subsidiaries”.

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Key terms of merger control regime

c. Specific exemption to Central Public Sector Enterprises

(CPSE) operating in the oil and gas sector
Transactions falling under section 5 and 6 of the Act involving CPSE operating in the oil
and gas sector have been exempted from seeking prior approval of the CCI.

d. Exemptions under Schedule 1 of Regulation 4 of the

Combination Regulations 2011:
These exemptions provide for categories of transactions that are not likely to have
AAEC on competition in India. It enumerates 10 categories of transactions under
Schedule I which are ordinarily not likely to cause an AAEC in India and therefore, no
notice is required to be filed for its approval. These exemptions will be discussed in the
last segment of this chapter.

Parties Test/Group Test:

If a transaction cannot avail of the Target Exemption, it requires mandatory notification to
the CCI if any of the following thresholds are breached:

a) Parties Test: The standalone acquirer enterprise (Not including its divisions, units
and subsidiaries) and consolidated target enterprise (including its divisions, units
and subsidiaries), jointly have either: (i) assets in excess of INR 2,000 crores (INR
20,000 million) in India or turnover in excess of INR 6,000 crores (INR 60,000 million)
in India; or (ii) worldwide assets in excess of USD 1 billion, including at least INR
1,000 crores (INR 10,000 million) in India or worldwide turnover in excess of USD 3
billion, including at least INR 3,000 crores (INR 30,000 million) in India; or

b) Group Test: The group to which the target entity will belong post-acquisition has
either: (ii) assets in excess of INR 8000 crores (INR 80,000 million) in India or turnover
in excess of INR 24,000 crores (INR 240,000 million) in India; or (ii) worldwide assets
in excess of USD 4 billion, including at least INR 1,000 crores (INR 10,000 million) in
India or worldwide turnover in excess of USD 12 billion, including at least INR 3,000
crores (INR 30,000 million) in India.

Note: For computation, the acquirer group financials and consolidated target enterprise
financials will be calculated.

The above values are called jurisdictional thresholds. If the transaction breaches the parties
test threshold – i.e. if the standalone acquirer enterprise or consolidated target enterprise,
jointly have either total assets of INR 2000 Crores or more or total revenue/turnover of INR
6000 Crores or more, then the parties test will be considered breached and the notification
will have to be made.

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Key terms of merger control regime

Similarly, if the Parties Test is not breached, then we go on to see if Group Test is breached.
So if either Acquirer group or consolidated target enterprise jointly have either total assets
of INR 8000 Crores or more or total revenue/turnover of INR 24000 Crores or more, then
the Group test will be considered as breached and the notification will have to be made.

If neither the Parties test nor Group test is breached, then a notification will not have to be
made.

These values have been reproduced in the form of this table:

Table 2: THRESHOLDS FOR FILING NOTICE

Assets Turnover

Acquisition: India INR 20 billion INR 60 billion

Either Acquirer stand (approx. USD 286 (approx. USD 857
alone or target million) million)
consolidated or both
have: Or 2000 INR Crores Or 6000 INR Crores

Merger/Amalgamation: Worldwide USD 1 billion USD 3 billion

The enterprise remaining with India with at least with at least
after the leg INR 10 billion in INR 30 billion in India or
merger/amalgamation or India or 1000 INR 3000 INR crores
created as a result of the crores (approx. USD (approx. USD 429 million
merger/amalgamation 143 million)
has:

At Enterprise Level

India INR 80 billion INR 240 billion (approx.

Acquisition: (approx. USD 1.14 USD 3.42 billion)
Acquirer’s group billion)
together with the Or 24000 Crores
consolidated target have: Or 8000 Crores

Merger/Amalgamation: Worldwide USD 4 billion USD 12 billion

The enterprise remaining with India with at least INR with at least INR 3000
after the leg 1000 Crores in India Crores in India
merger/amalgamation or (approx. USD 143 (approx. USD 429
created as a result of the million) million)
merger/amalgamation
has:

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At Group Level

Note:
i. ‘Group Company’: will include all entities controlled by the ultimate parent entity, in
which the ultimate parent entity, directly or indirectly, is in a position to: (i) exercise
50% or more of the voting rights; or (ii) appoint more than 50% of the members of
the board of directors; or (iii) control the management or affairs.

ii. In the case of a merger, group-based thresholds are calculated by reference to the
group to which the enterprise remaining after the merger would belong. In the case
of an acquisition, group-based thresholds are calculated by reference to the acquirer
group and the target enterprise.

iii. “assets” mean the book value of total gross assets (e.g. fixed assets, investments,
current assets and deferred tax assets), less any depreciation, as shown in the
audited books of account of the enterprise, in the financial year immediately
preceding the financial year in which the proposed transaction falls, and should
include the value of any intangibles (e.g., intellectual property rights, brands,
permitted use or other commercial rights) reflected in the audited financial
statements. Please note that netting off for current liabilities is not permitted.

iv. turnover” is defined as “value of sale of goods or services” and “goods” is defined as
“goods as defined in the Sale of Goods Act, 1930” and includes: (a) products
manufactured, processed or mined; (b) debentures, stocks and shares after
allotment; (c) in relation to goods supplied, distributed or controlled in India, goods
imported into India. While assessing a profit or loss account, the turnover is
calculated by taking into account the “revenue earned” in the immediately preceding
financial year. Other Income is excluded from the computation of turnover. Please
refer to the CCI FAQs to understand what refers to turnover.

v. If audited financial statements of the immediately preceding financial year are not
present then unaudited statements should be considered.

Exemptions under Schedule 1 of Regulation 4 of the

Combination Regulations 2011
Regulation 4 of the Combination Regulations provides for categories of transactions which
are not likely to have an AAEC in India. It lists down 10 categories of transactions under
Schedule I of the Combination Regulations which are as follows:

Item Exemption Explanation

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1. Solely in the This clause states that any person who may own less than
investment and 25% of an enterprise’s shares or voting rights need not make a
ordinary course notification before the CCI because such transactions would
of business. be deemed to be “investment only” transactions. The CCI
views that these transactions are not done with the aim of
acquiring any form of control as they are minority investments
and hence outside the purview of CCI’s assessment. This
relaxation is usually given to investment holding companies or
private equity entities. However, it’s not clear whether the
CCI will give the same leniency to competitors acquiring up to
10% shares in a fellow competitor enterprise. For example in
Alibaba/ Jasper Infotech Case (C-2015/08/301), though the
acquirer got a non-controlling stake in the target of less than
5%, since the acquirer and target were competitors, such an
acquisition did not receive the Item I exemption.

Additionally, while examining minority investments, it is

important to analyse whether these minority share
investments carry any sort of control with it, for example: a
board seat or control to manage the affairs of the target
company. If minority investments carry such affirmative rights
then Item I exemption will not be applicable because it will not
be an investment in the ordinary course of business but a
strategic investment. The best example for this would be the
Jet/Etihad case (C-2013/05/122) which involved an acquisition
of 24% of equity share capital in Jet by Etihad Airways. This
transaction could have received an Item I exemption but the
acquisition also entailed 2 board seats in the board of
directors of Jet Airways which made this investment a
strategic one and hence notifiable.

Item I exemption is very important as the CCI is evolving the

concept of “investment only” acquisitions.

Creeping Item 1(A) involves situations where there is a creeping

acquisition acquisition by a pre-existing acquirer who already holds 25%
between and is now set to acquire a percentage less than 50% of
25-50% shares, assets or voting rights. For example: in Sanlam
Engineering Markets/Shriram Life Insurance Insurance Co. Ltd
(C-2016/03/379), the acquirer had a 25.37% stake in the target
company and wished to increase it to 42.39%. By virtue of its
previous stake, the acquirer already had negative rights and
certain affirmative rights which did not increase or decrease in
any manner. Due to no material change in control, the CCI felt

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that there will be no AAEC. Hence, ideally this transaction was

not required to be notified.

2. Joint Item 2 provides that in case of acquisition where acquirer,

Control/Sole prior to acquisition has 50% or more shares or voting rights in
Control (prior the target enterprise and it proposes to acquire more, then
control of 50% there is no need to notify the transaction- unless the acquirer
or more) is taking sole control of the target enterprise from a joint
control. For example: A holds 55% stake in B and C holds 35%
stake in B. This means that B is jointly controlled by A and C. If
A were to increase its stake it to 100% making B a
wholly-owned subsidiary, then A will have to notify the CCI
because B is now under sole control and not joint control. If A
merely seeks to raise its stake to say 60%, with no change in
affirmative rights and C is still maintaining control then it need
not notify.

3. Not directly Item 3 provides an exemption from making a notification

related to involving acquisition of fixed assets, not directly related to the
business activity business activity of the acquirer company and which was
made solely for investment purposes. This acquisition should
not lead to any form of control in the target enterprise.

4. Amended Item 4 exempts from making a fresh/new combination

tender offer notification with the CCI where there is a renewal with the
open offer filed with the SEBI in terms of the Takeover Code
because the combination notification with respect to the
original open offer has already been filed with the CCI.

5. Acquisition of Item 5 provides an exemption from filing a notification where

stock in trade an acquisition with respect to raw materials, stores and
and raw spares, trade receivables and other current assets in the
materials ordinary course of business.

6. Acquisition of Item 6- This exemption is with respect to acquisition of shares

shares, voting or voting rights pursuant to bonus issue or stock splits or
rights pursuant consolidation of face value of shares or buy back shares or
to bonus issue, subscription to rights issue of shares, not leading to
stock split, acquisition of control.
consolidation of
face value of
shares or
buy-back etc.

7. Acquisition of Item 7- No notification is necessary where shares or voting

shares or voting rights are being acquired by a person acting as a securities

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rights by underwriter or a registered stock broker of a stock exchange

underwriters or on behalf of its clients, in the ordinary course of business and
stock brokers in the process of stock broking.

8. Acquisition of This item refers to intra-group acquisitions. These are

shares of voting combinations which need not be notified if acquisitions are
rights by a made by an entity within the same group except in cases
person within where the acquired entity is jointly held by another enterprise.
the same group Hence, transactions involving wholly owned subsidiaries and
their parent companies are usually not notified because they
are intra group transactions.

Item 8A This is the intra-group exemption for mergers and

amalgamations.

9. Merger or This item refers to transactions which need not be notified

amalgamation were the mergers and amalgamations involve two entities
of two where one has 50% or more stake in terms of voting rights or
enterprises shares in the other. Another such instance could be a
where one of merger/amalgamation in which 50% or more stake is held by
the enterprises an enterprise within the same group. This exemption is
has more than qualified by a condition that the transaction should not result
50% shares or in a transfer from joint control to sole control.
voting rights of
the other
enterprise.

10. Acquisition of As we know that merger assessment is done by the CCI to

shares, control, ensure that there are no AAEC concerns. But at times, in
voting rights or complex transactions, the CCI may contemplate AAEC
assets by a concerns and to eliminate them, it may propose some
purchaser modifications to the transactions. These modifications may be
approved by the structural or behavioural commitments. Structural
Commission modifications may include divestments- which means the CCI
pursuant to and may ask the notifying parties to divest some of their assets in
in accordance order to bring a balance to the competitive landscape. Once
with its order the assets have been divested, if a party acquires those
under section divested assets then this acquisition need not be notified to
31 of the Act. the CCI. This is because, the CCI has already looked into the
case and has done its competition assessment. This
acquisition is a mere formality that needs to be undertaken as
per the suggested modifications. Modifications will be
explained well in Chapter 9.

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Conclusion:
This chapter was an introduction into the basic concepts of merger
control and how a preliminary examination of combinations are done.
Asset and turnover assessment is one of the most important parts of a
merger control regime as that determines the modifiability of a
transaction. Hence, the preliminary assessment needs to be
undertaken in this order:
1. Ascertain what combination the transaction falls under- Section
5(a), 5(b) or 5(c);
2. Apply Target Exemption to see if this transaction is exempted
on the basis of assets and turnover of the Target Company;
3. If the combination does not get target exemption, seek the test
to apply the remaining exemptions including items under
Schedule I;
4. If the combination does not avail of any of the exemptions
mentioned above, proceed towards the Parties test/Group test;
5. If the combination breaches the Parties test/Group test, then
the combination is notifiable and proceed towards filing a Form
I or a Form II whichever is applicable.
The forthcoming chapters will explain various other kinds of
combinations and how Form I and Form II are filed before the CCI.

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