Introduction
The onset of the COVID-19 pandemic in early 2020 brought with it the full force of both, a sudden economic downturn and a massive cultural shift in the manner of doing business. As India Inc looks to tide over financial difficulties and adapt to the new business climate, corporate restructuring programs are at the heart of their transition. Public reports suggest that large conglomerates including, Vedanta Limited1, Shriram Group2, Shapoorji Pallonji3, IDFC4 are already evaluating the feasibility of such organisational overhauls.
Corporate restructuring is a catchall phrase which includes capital structure modifications through, intra-group acquisitions, intra-group mergers, intra-group amalgamations, spin-offs, etc. Given the context of the current business climate, this article briefly discusses the costly and perhaps unintended "miss" in the intra-group acquisition exemption provided to notifiable transactions under the Indian merger control regime.
Merger control - In a nutshell
A transaction must be notified to the Indian competition authority, i.e. the Competition Commission of India (CCI) if the transacting parties jointly breach certain monetary thresholds under the Competition Act, 2002 (Act). Pertinently, a notifiable transaction cannot be consummated (in part or full) prior to its approval from the CCI. The purpose behind this suspensory regime is to ensure that the potential anti-competitive impact of a transaction does not affect a market, before the CCI is able to review and remedy the potential impact, if required.
Cognizant of the wide net cast by the Act's monetary thresholds, and the fact that not all kinds of transactions are likely to have an anti-competitive impact on markets, the CCI introduced certain transactions that need not be normally notified to it.5.
These categories of transaction are recorded in Schedule I to the Combination Regulations. Simply put, transactions encased within Schedule I of Combination Regulations are, for all practical purposes, exempt from notification requirements.
In this article, we discuss entries 8 and 9 of Schedule I to the Combination Regulations, which deal with intra-group acquisitions and intra-group mergers / amalgamations, respectively.
Per Entry 8 of Schedule I to the Combination Regulations, an intra-group acquisition is exempt from notification obligations if both the following criteria are satisfied: (i) both, the acquirer and target, belong to the same "group"; and (ii) the target after the combination, i.e. the "acquired enterprise", is not going to be under the joint control of one or more enterprises, outside such group (Item 8).
On the other hand, per entry 9 of Schedule I to the Combination Regulations, an intra-group merger / amalgamation is exempt from notification obligations if both the following criteria are satisfied: (i) both the merging / amalgamating parties belong to a variation of the "group"6; and (ii) the merger / amalgamation does not result in the transfer from "joint control" to "sole control" (Item 9).
Evidently, the requirements under Items 8 and 9 of the Combination Regulation are distinct from each other. Whereas Item 8 is strictly inapplicable if the target, after the acquisition, would be controlled by more than one group, under Item 9, an intra-group exemption remains applicable to both, solely and jointly controlled targets - as long as there is no change in the nature of control.
The following section breaks down this key distinction and expounds on the implications of the constructs of Items 8 and 9.
Understanding the dichotomy
To better understand the difference in requirement under Items 8 and 9, readers must first familiarise themselves with the idea of "control" from an Indian competition law standpoint.
"Control" under Indian competition law is a loose concept that is used to capture even the lowest degree of influence that an enterprise can exercise over another enterprise. For context, an illustrative list of "control rights" identified in the CCI's decisional includes affirmative rights in relation to the commencement of a new business line, right to appoint an observer, detailed information rights not available to ordinary shareholders, rights in relation to amendments to charter documents, etc.
Having stated the foregoing - we circle back to evaluating the implication of the distinction between Item 8 and Item 9.
Item 8 is inapplicable where the target would be jointly controlled by another group, to which the acquirer doesn't belong. At first glance, the requirement may not appear prohibitive. But take for example a target "X" with a diverse capital shareholding structure. The primary shareholding of "X" (say, 70%) lies with the promoter group / family. However, the remaining shareholding of "X" is dispersed between PE investors who merely enjoy certain investor protection "control" rights (such as, the right to an observer seat) in "X" or certain select veto rights relating to no changes in the charter documents or entering a new line of business, etc.
Should the promoter family want to undertake an internal group restructuring and transfer its 70% shareholding in "X" to "Y", a wholly owned entity of the promoter group family, the transaction would not benefit from the intra-group acquisition exemption. This is because "X" is technically under the "joint control" of the promoter family and several minority PE investors. This gives rise to an absurdity, whereby the mere transfer of shareholding from point A to point B, between members of the same group, without the acquisition of any additional control rights, is reportable to the CCI.
In fact, the CCI has in the past evaluated intra-group transfers of shareholding involving "jointly controlled". In the Taurus-Capricorn case7, Max India Limited (Max) transferred its shareholding in certain entities (Target) to its wholly owned subsidiaries. However, the Target was jointly controlled by Max and other enterprises. Therefore, the CCI noted that the transaction did not benefit from the Item 8, Schedule I exemption of the Combination Regulations.
In contradistinction, consider a situation wherein the intended transfer of shareholding in "X" to "Y", is achieved differently. The revised transaction structure would play out as follows: the promoter group / family of "X" would merge / amalgamate "X" with "Y"; simultaneously, and as consideration for the merger, the PE investors would acquire shareholding in post-merger "Y". The revised structure would benefit from Item 9 and not be notifiable to the CCI because (i) the same promoter group / family exercise over 50% shareholding in both, "X" and "Y", and therefore, they belong to a variation of a "group"; and (ii) "X" (now part of post-merger "Y") would remain under the "joint control" of the promoter group / family and the PE investors.
At this juncture, it is relevant to reiterate that the purpose behind the introduction of Schedule I was to allow a pass through mechanism for transactions which are unlikely to have any competitive impact in the markets. In the Item 8 example provided above, the intra-group acquisition by "Y" will not cause any change in the competitive landscape, as the control structure of "X" will effectively remain entirely unchanged. Therefore, the target entity will continue to operate in the same manner as it was before the transaction. Given this and in the spirit of Regulation 4 of the Combination Regulations and Schedule I of the Combination Regulations, such kind of intra-group transactions should be allowed the benefit of an exemption. Curiously, this problem is not present under Item 9 since intra-group mergers / amalgamations are not subject to the same oddity. Item 9 envisages situations of joint control of the merging parties. Therefore, the transaction as discussed in the Item 9 hypothetical, if structured as a merger between "X" and "Y" - would be exempt from notification obligations as there would be no change from joint to sole control.
Here, it is relevant to observe that with rising PE investments and debt / equity financing, most corporates have multiple distinct groups exercising control over a target. And therefore, Item 8 of the Combination Regulations, despite being a well-intentioned provision, is unable to bring forward its benefit to many intra-group acquisitions.
Resolving the Quandary
As a matter of practice, the CCI periodically finetunes the Combination Regulations and has amended the Combination Regulations 10 times since its inception in 2011 (~ 10 years).
Given the foregoing, it may be worth consideration for the CCI to bring a resolution to this issue in the next set of amendments by amending Item 8 to mimic the benefits under Item 9. Such an amendment will have a two-fold benefit. Firstly, it will introduce consistency by doing away with the absurdity of the distinction between acquisitions and mergers. Secondly, it will come as much-needed relief for several businesses, thereby promoting the ease of doing business in India.
Footnotes
1. See: https://www.moneycontrol.com/news/business/markets/vedantas-shares-tumble-as-it-evaluates-restructuring-what-are-the-concerns-7736481.html
2.See: https://economictimes.indiatimes.com/industry/banking/finance/insure/shriram-group-closing-in-on-merger-insurance-biz-to-be-hived-off-into-separate-entity/articleshow/87595448.cms
3. See: https://economictimes.indiatimes.com/industry/services/property-/-cstruction/shapoorji-pallonji-in-talks-to-raise-up-to-375-million-via-dubai-property-sale/articleshow/87875278.cms
4. See: https://timesofindia.indiatimes.com/business/india-business/idfc-clears-merger-of-three-arms-with-itself/articleshow/87615337.cms
5. Regulation 4, the Competition Commission of India (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (Combination Regulations)
6. The definition of "group" includes cases where one enterprise holds 26% or more (read to be 50% or more based on an exemption that has recently expired on 3 March 2021) voting rights in the other. In Item 9, the exemption applies on account of either one transacting party holding more than 50% shareholding / voting rights in the other transacting party, or a third entity within the same group holding more than 50% shareholding / voting rights in each of the transacting parties.
7. Combination Registration No. C-2015/02/251.
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