India: Merger Regulations Needs Fine Tuning By The Competition Commission Of India

In the wake of 'Make in India' initiative, the Government of India has announced and implemented several steps to encourage investments and improve the environment by simplifying the multiple processes for doing business in the country. Significant relaxations were announced in the FDI policy last year. The Budget which was presented by the Finance Minister last month also seeks to introduce some more measures, including some welcome tax relaxations and incentives. The resultant effect is that India is increasingly been considered as bright spot for investment and also as an island of stability supplemented by sound legal system. Interestingly, India has witnessed growth despite global turmoil1.

In line with the broader efforts of the Government, the financial thresholds above which any merger or acquisition (M&A) must be reported to the Competition Commission of India (CCI) for its prior approval have been significantly raised. Keeping in view the wholesale price index, the Ministry of Corporate Affairs, Government of India through its recent notification2, has raised the merger thresholds by 100 per cent for a period of five years until March 3, 2021. With this geometrical increase in threshold, India joins the family of countries having very high threshold in the world. 

The Government has also notified3 incremental increase in the thresholds for the small target exemptions, which in competition literature parlance is known as the de minimis exemption. In 2011, in order to mitigate the burden of reporting every M & A to the CCI, the Government dispensed with the requirement of reporting a transaction when target entity is Lilliput in terms of assets/turnover as per its latest audited annual accounts. The Government had exempted transactions involving small targets from seeking the Commission's approval for five years, i.e. where the target enterprise in India had assets less than Rs 250 crores or turnover less than Rs 750 crores4. The Government has now extended the exemption for another five years till March 3, 2021, and has simultaneously raised the thresholds: from Rs 250 crores to Rs 350 crores ( a hike by 33%) for assets or from Rs 750 crores to Rs 1,000 crores (a hike of 40%) for turnover in India. Though extension of exemption term with enhanced threshold is a business friendly initiative, however, its benefit continues to be restricted to 'acquisition by one of another' not to merger and amalgamations. Competition assessment does not differ much whether it is a case of acquisition of shares, voting right, control or assets of a small target or small one subsume into another through the process of merger.  Thus, the unintended distinction between acquisition and merger needs to be given good bye and the benefit of de minimis needs to be  extended to mergers along with acquisitions transactions. 

As a step towards further liberalization and ease of merger transactions, the current Government has extended the notification restricting the definition of 'group' to only those group entities where shareholding carrying voting rights is 50 per cent or more5. This extension is also for a period of five years till March 2021. Thus, group entities where the shareholding is below 50 per cent would not be taken into account while computing group's assets or turnover.

It is believed that businesses will need to file significantly less transactions and this will  enable CCI to render swift approvals thereby contributing to the 'ease of doing business'. Thus Government has done its bit in making merger regime benign than before.  However, the CCI can contribute immensely by re-looking into the following:

  1. The CCI takes into account 'export business' while computing total turnover in India.  It needs to be appreciated that sales made to overseas customers (notwithstanding how they are accounting for) does not impact market much less consumer in India.  Incidentally, the Act excludes agreement relating to export business from the applicability of provisions pertaining to anti competitive agreements. On the same analogy, the export business should not be reckoned  as turnover in India. The twin benefits are that firstly it is logical and secondly will reduce the burden of filing when transaction involves a party having whole or substantial exports earnings.
  2. As of now, Combination Regulations provides that the value of assets and turnover of the enterprise whose assets are being transferred shall be attributed to the value of assets and turnover of the enterprise to which the assets are being transferred. This is obviously not to allow parties to avail of the benefit of de minimis exemption by adopting structure resorting to transfer of assets from one to another. However, the CCI in practice also considers transfer of key personnel/manpower as a case of transfer of assets. Incidentally, manpower is neither covered in the scope of 'assets' as defined in the Act6 nor shown as asset in the accounts of the party to transaction.
  3. The Commission's current approach to what amounts to 'control' includes affirmative/veto rights granted to investors regardless of the shareholding percentage acquired. This list of affirmative/veto matters amounting to control has been elaborated in several orders of the Commission (For example. SPE Mauritius/Multi Screen Media Pvt Ltd7, Caladium Investment Pte. Ltd.8, Alpha TC Holdings Pte Limited/ Tata Capital Growth Fund I9 and Caladium Investment Pte. Ltd.10). This has historically been contradictory to the position taken by the Securities Appellate Tribunal in M/s Subhkam Ventures (I) Pvt. Ltd. v. SEBI11. the Securities and Exchange Board of India issued a Discussions Paper on "Brightline Tests for Acquisition of 'Control' under SEBI Takeover Regulations" wherein it has been suggested that the existence of certain veto rights would not amount to control. The list provided in the said Discussions Paper covers many of the items which the Commission has held to amount to control. While different laws/authorities (Companies Act, 2013, the RBI Act and the FIPB)  may have differing objectives, however, it may be conducive to have an open and participatory dialogue between/amongst the authorities, as well as with interested stakeholders, so that a holistic view may be taken.
  4. Swift, timely and predictable regulatory approval is the essence in every structural transaction. Keeping this in mind the Commission had included Regulation 19 in the Combination Regulations in 2011 that the CCI shall form its prima facie opinion within a period of 30 days from the date of filing a valid notice. Vide amendment of 01.07.2015, the Commission incorporated a 30 working day time period (approximately 42 to 45 days – an increase of almost 50%)12. In addition an amendment also introduced a 15 day exclusion period where the Commission calls information from third parties under the Proviso to Regulation 19(3). This keeps anxious parties fingers crossed for more than 30 working days 13. Moreover, where the Commission raises concerns over certain clauses of an agreement, such as a non-compete for example, a hearing is normally scheduled with a gap of two to three weeks and this period obviously is also excluded while computing 30 working days.  Such a long waiting period needs to be minimized failing which the well intentioned objective of timelines is frustrated.
  5. Realizing that the Act, unlike in several other jurisdictions, does not provide for formal advance ruling mechanism, the CCI put in place pre filing non binding informal consultation without fee on name basis. Initially, its scope was limited to clarifications in relation to filing/filling up of 'Notice' and later its scope was extended to interpretation of law/regulations as well.  The informal consultation has been extremely useful experience in better understanding of regulator view and also found to be helpful in reducing unpredictability about the outcome of a Notice. As a work in progress, the Commission, on the lines of SEBI, may now consider publishing the views it renders on its website after suitable redactions and publish only the substantive content of such Pre Filing Consulations. Apart from consistency in informal advice and approach, the publication will provide the much needed guidance and also ensure that the Commission is not approached with the same query on multiple occasions.

The above issues squarely fall within the domain of the CCI.  Since enforcement of combination regulations, the Competition Commission of India has not allowed its reforms rabbit to become turtle. It has consistently and constantly endeavored to sync its working with market realities and global trend.  Considerations of highlighted suggestions would be steps towards fostering a robust merger regulatory regime and a contribution to ease of doing business initiatives.


G R Bhatia is Partner & Head of Competition Law Practice, Luthra & Luthra Law Offices, New Delhi. He is a former Additional Director General , Competition Commission of India/Monopolies and Restrictive Trade Practice Commission, Government of India. Member Expert Committee set by the Government of India to suggest National Competition Policy and Amendments to Competition Act, 2002. Ranked as Lead Anti Trust Lawyer in Asia by Chambers & Partners, 2015.The views of the author are personal and the author can be reached at © copyright reserved.

1 Business Standard of 13th March, 2016.

2 Notification No. S.O. 675(E) dated 4th March, 2016.

3 Notification No. S.O. 674(E) dated 4th March, 2016

4 Notification No.S.O.482(E) dated 4th March, 2011 and further modified by Notification No. 1218(E) dated 27th May, 2011.

5 Notification No. S.O. 673(E) dated 4th March, 2016.

6 Explanation 9c) below Section 5(c) of the Act.

7 Order dated 09.08.2014, Combination Case no. C-2012/06/63

8 Order dated 05.03.2015, Combination Case No. C-2015/01/243

9 Order dated 09.09.2014, Combination Case No. C-2014/07/192,

10 Order dated 25.06.2015, Combination Case No. C-2015/05/278

11 Appeal No. 08 of 2009, Order dated 15.01.2010

12 Substituted by Notification F No. CCI/CD/Amend/Comb. Regulation/2015 dated Ist July, 2015 for 'thirty days' with effect from ist July, 2015

13 Inserted by Notification F No. CCI/CD/Amend/Comb. Regulation/2015 dated Ist July, 2015 w.e.f. Ist July, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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