Competition Law in India: Top Ten Things to Know About Merger Control in India

By Arshad (Paku) Khan, Executive Director, Jayati Handa, Associate, and Arunima Chatterjee, Associate, Khaitan & Co LLP¹.

The merger control provisions of the Competition Act, 2002 (as amended) (Competition Act) came into effect on 1 June 2011. The Competition Commission of India (CCI) has passed some path- breaking orders in its assessment of over 500 notifications received so far, indicating that it is on a progressive route something that is comforting in the current scenario where we are seeing increased investments relating to India. The CCI is also trying to increase its advocacy and reaching out to more companies and people, such as its merger control FAQs to ensure compliance with the provisions of the Competition Act.

 

The merger control regime in India mandates that if the thresholds set out in Section 5 of the Competition Act are breached, the parties to a proposed combination are obliged to notify the proposed combination to the CCI. The Indian merger control regime is suspensory in nature. No notifiable combination can be consummated (entirely, or in part) without obtaining the CCI's approval. Where the parties to a combination consummate the transaction without obtaining CCI approval, the CCI can (and does) levy a penalty and may even declare the transaction to be void.

The mandatory and suspensory nature of the Indian merger control regime also has an implication on inter-connected transactions. Regulation 9(4) of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) provides that "Where the ultimate intended effect of a business transaction is achieved by way of a series of steps or smaller individual transactions which are inter- connected, one or more of which may amount to a combination, a single notice, covering all these transactions, shall be filed by the parties to the combination." Therefore, even steps to the transaction that are not notifiable must be notified within 30 calendar days of the execution of relevant documents (discussed in detail below) and cannot be consummated until the notice is approved by the CCI.

In Thomas Cook India Limited/Thomas Cook Insurance Services (India) Limited/Sterling Holiday Resorts (India) Limited², the CCI noted that Thomas Cook Insurance Services (India) Limited (TCISL) had acquired a stake of 9.93% of Sterling Holiday Resorts (India) Limited (SHRIL) through open market purchases between 10-12 February 2014. The CCI imposed a penalty of INR 10 million (approx. USD 148,500; GBP 119,631; EUR 138,159; JPY 17 million)³ on Thomas Cook India Limited (TCIL) and TCISL under Section 43A of the Competition Act, for failing to notify and consummating certain inter-connected parts of the transaction prior to obtaining the CCI's approval. The CCI noted that since the combination and the market purchases were authorized in the same board meeting and all transactions related to SHRIL's business and shares, the market

Section 5 of the Competition Act sets out the asset and turnover based jurisdictional thresholds based on which the notifiability of a transaction is assessed.

Note that eight separate tests, involving worldwide and Indian assets and turnover at both a group and direct transacting party level, need to be run in order to determine notifiability. Accordingly, careful attention needs to be paid to India given the complexity in whether to notify. These tests are set out below: The form of the transaction is important, as the threshold tests could differ if the transaction is (a) an acquisition of a non-competitor, (b) an acquisition of an actual or potential competitor, or (c) a merger or amalgamation. The jurisdictional thresholds contain the relevant parties to which the applicable threshold test must be applied. As a general matter, the relevant reference period is the last completed financial year immediately preceding the year in which the proposed transaction is to occur.

By way of its notification dated 4 March 2011, the Ministry of Corporate Affairs (MCA) had prescribed a de minimis test, whereby when an enterprise whose control, shares, voting rights or assets were being acquired had assets and turnover less than a certain threshold, the acquiring party is exempt from making a notification to the CCI (Target Exemption)⁴. The thresholds for Target Exemption were set out as assets and turnover of INR 3.5 billion (approx. USD 51.95 million / EUR 48.35 million / GBP 41.77 million / JPY 5.8 billion) and INR 10 billion (approx. USD 148.50 million / EUR 138.15 million / GBP 119.34 million / 16.44 JPY billion).

On 27 March 2017, the MCA expanded the scope of the exemption as follows:

(i) Inclusion of mergers and amalgamations: Prior to this change, the CCI viewed that mergers and amalgamations could not avail of the de minimis exemption. Now, mergers or amalgamations where the value of Indian assets being merged or amalgamated is not more than INR 3.5 billion (approx. USD 148.50 million / EUR 138.15 million / GBP 119.34 million / 16.44 JPY billion) or Indian turnover is not more than INR 10 billion (approx. USD 148.50 million / EUR 138.15 million / GBP 119.34 million / 16.44 JPY billion) are exempt from making a notification to the CCI.

(ii) Clarification regarding asset acquisitions: Previously, the de minimis exemption treated asset acquisitions very differently from other acquisitions by applying the thresholds to the vendor rather than the "true" target. As a result of the clarification to the de minimis exemption, where only a "portion of an enterprise or division or business is being acquired", the value of the assets and turnover attributable to the relevant portion or division or business will be considered to determine the applicability of the thresholds under the Competition Act. As such, if the value of the Indian assets and turnover attributable to the relevant portion or division or business is, respectively, not more than INR 3.5 billion (approx. USD 148.50 million / EUR 138.15 million / GBP 119.34 million / 16.44 JPY billion) or INR 10 billion (approx. USD 148.50 million / EUR 138.15 million / GBP 119.34 million / 16.44 JPY billion), the acquisition is exempt from notification to the CCI.

Reverse triangular mergers

The CCI has a peculiar position regarding the notification of reverse triangular mergers (RTMs) and demergers. The CCI has treated RTMs as an "acquisition" in a multitude of cases such as Pfizer/Hospira⁵, Capgemini/Gate⁶, Sabita/Symphony⁷ and Silver Lake/ Dell⁸, all of which were notified under Section 5(a) of the Competition Act. However, in Konecranes Plc/Terex Corporation⁹ and Johnson Control, Inc./Tyco International Plc.¹⁰, the CCI treated the transactions as mergers, notified under Section 5(c) of the Competition Act. There is a lack of clarity in the way RTMs are treated by the CCI and it might be helpful to seek a pre-filing consultation (PFC) with the regulator prior to filing a notification.

India is one of the few jurisdictions that has a specific deadline to file a notification from the occurrence of the trigger event. If a combination is notifiable, the parties to a combination must file a notice with the CCI within 30 calendar days of the signing of the trigger document (i.e., in case of acquisitions, binding transaction document(s) or any other binding document conveying the decision to acquire and in case of mergers, the approval by the board of directors discussed in further detail in point 5 below). In case of acquisitions, the onus to file a notification lies on the acquirer and in case of mergers/amalgamations, it is on each party to the transaction.

The CCI has a period of 30 working days to form a prima facie opinion on whether the proposed combination results in an appreciable adverse effect on competition (AAEC). The time taken by the parties to the combination to respond to CCI's requests for additional information is excluded from the 30 working day period. The Commission may also call for information from any other enterprise while inquiring as to whether a combination has caused or is likely to cause an AAEC in India. The time taken in obtaining such information shall not exceed fifteen working days and will be excluded from the time period of 30 working days.

If CCI reaches the prima facie opinion that a proposed combination does not (or is not likely to) cause an AAEC in India, it issues a formal order approving the proposed combination. This is referred to as a Phase I investigation. If the CCI is unable to form such an opinion, it issues a notice under Section 29 of the Competition Act, seeking the parties' view on why a detailed investigation to examine the competitive effects of the proposed combination should not be initiated. If the parties are successful in addressing CCI's concerns (by offering structural or behavioural remedies, if required), the CCI does not initiate a formal inquiry and approves the transaction. However, if the CCI is not satisfied, it initiates a formal Phase II investigation.

In any case, the CCI is required to pass an order or issue a direction on a combination within 210 calendar days of filing of the notification, according to the provisions of the Competition Act. This period of 210 days includes both, Phase I and Phase II investigations of combinations by the CCI.

So far, the CCI has initiated Phase II investigations in only three instances, namely, Sun Pharmaceutical Industries Limited/Ranbaxy Laboratories Limited¹¹ (Sun/Ranbaxy case), Holcim Limited/Lafarge S.A.¹² (Holcim/Lafarge case) and PVR Limited/DLF Utilities Limited¹³.

In case of acquisitions, execution of binding transaction document(s) or any other binding document(s) that convey an agreement or decision to acquire control, shares, voting rights or assets¹⁴ is the trigger. In case of mergers, the trigger refers to the approval of the proposed combination by the board of directors of the parties.

In case of global transactions, the CCI, until recently, has considered the global trigger to be the trigger event in India as well - even when there is an explicit carve out for India in the global agreement. In Baxalta/Baxter¹⁵, the parties entered into a global agreement and had planned to execute a separate agreement for certain deferred jurisdictions, including India. The CCI held that the execution of the global agreement would be considered the trigger and levied a penalty of INR 10 million (approx. USD 148,500; GBP 119,631; EUR 138,159; JPY 17 million) on the parties for belated filing as the implementation of the agreement (outside India) took place on the same day as the day of the execution of the agreement and the parties had filed the notice only on the 30th day from execution of the global agreement. However, in the recent case of APHL/AGI¹⁶, the CCI considered the execution of the agreement for retained markets (including India) to be the trigger document for India and not the master global agreement. This issue needs to be carefully examined when considering a transaction in India.

The parties can file a Form I (short form) notification or a Form II (long form) notification to the CCI. It is recommended, but not required, that the parties to a combination file a Form II notification when: (i) the parties produce or provide similar products or services and will have a market share of more than 15%; or (ii) the parties are engaged in the production or provision of goods or services at different stages of the production chain and their individual or combined market share is more than 25% in the relevant market.

The filing fee for a Form I notification is INR 1.5 million (approx. USD 22,275; GBP 17,945; EUR 20,723; JPY 2.5 million) and the filing fee for a Form II notification is INR 5 million (approx. USD 74,250; GBP 59,815; EUR 69,079; JPY 8.3 million).

Section 43A provides for imposition of penalty where the parties have notified the CCI after the 30 calendar day deadline (but have not consummated the transaction, entirely or in part) as well as instances where the parties have consummated the transaction (entirely or in part) prior to obtaining CCI's approval. The maximum penalty that can be imposed under Section 43A is 1% of the total turnover or the assets, whichever is higher, of such a combination. The highest penalty levied so far is INR 50 million (approx. USD 742,500; GBP 597,000; EUR 692,000; JPY 85 million).

Some of the notable cases where the CCI has levied a penalty under Section 43A are Etihad Airways PJSC/Jet Airways (India) Limited¹⁷, Clariant Chemicals/Lanxess India Private Limited¹⁸, G.E. Energy Europe B.V./GE/GEIF Alstom India Limited/Alstom T&D India Limited¹⁹, SCM Soilfert Limited/Mangalore Fertilizers and Chemicals Limited²⁰ and Piramal Enterprises Limited /Shriram Transport Finance Company/Shriram Capital Limited/Shriram City Union Finance Limited²¹.

The CCI has not provided specific guidance on joint ventures (JVs), and the Competition Act itself is silent on how JVs are treated for merger control purposes. The treatment of JVs by the CCI is different from the treatment in the European Union (EU). Unlike the EU, the concept of full function JVs is not recognised in India. As such, even a temporary arrangement between parties may be notifiable. Further, given that the Competition Act provides for the acquisition of an "enterprise" to be notified, only JVs with active or former business are notifiable under the Competition Act based on prevailing practice. Therefore, greenfield JVs are implicitly exempt from the requirement of a notification.

Prior to the MCA notification dated 27 March 2017 mentioned in point 2 above, , the principle of attributability set out in Regulation 5(9) of the Combination Regulations required that the value of assets/turnover of each of the parents contributing business/ assets to the JV would be considered "targets" for the purposes of applying the thresholds under the Act. However, now the value of the assets and turnover attributable only to the portion of the assets being transferred to the JV company by the parents will be considered.

Where the CCI is of the view that a proposed combination may lead to an AAEC, the parties may either voluntarily propose certain modifications/remedies to the combination to address such concerns or the CCI may itself propose modifications/changes. Such remedies can either be structural or behavioural. As in most jurisdictions, the CCI has shown a preference for structural remedies as they provide certainty and are easier to monitor.

In the Sun/Ranbaxy case, the CCI approved the combination but ordered the divestment of all Tamsulosin and Tolterodine products of Sun and six other products marketed by Ranbaxy. In the Holcim/Lafarge case, the CCI approved the combination on the condition that Lafarge would sell its entire assets worth amounting to approximately INR 100 billion (approx. USD 1.48 billion; GBP 1.19 billion; EUR 1.38 billion; JPY 166.66 billion) in India.

Until mid-2014, the Combination Regulations provided for an exemption to transactions based on "local nexus", which was removed by way of an amendment to the regulations. This exemption provided that "[a] combination referred to in Section 5 of the Competition Act taking place entirely outside India with insignificant local nexus and effect on markets in India". As such, there was no concept of local nexus until recently and the parties had to notify transactions to the CCI even if such transactions completely took place outside India (except in cases of acquisitions).

However, under generally accepted merger control best practices²², worldwide revenues or assets alone should not be sufficient to trigger a merger notification requirement in the absence of a local nexus (e.g., revenues or assets in the jurisdiction concerned) exceeding appropriate materiality thresholds. Further, the merger control thresholds set forth in the Competition Act did not set out the requirement for the presence of two or more entities to the transaction in India. Thus, a single party with sufficient Indian turnover or assets might be enough to trigger a filing to the CCI.

The clarifications to the de minimis exemption discussed in point 2 effectively tie in this international approach in the Indian merger control regime. Foreign to foreign transactions, where the relevant business divisions or assets being acquired or merged are completely located outside India, would not have the requisite assets and turnover in India or if the assets are located outside India. Therefore, the transaction would not have local nexus in India. In essence, only if the enterprises exceed the de minimis exemption thresholds and the thresholds under Section 5 of the Competition Act, will they be considered to have local nexus. This aligns the position in India more with the international standards.

http://www.cci.gov.in/sites/default/files/C-2015-05-

http://www.cci.gov.in/sites/default/files/C-2013-03-

¹¹Combination Registration No. C-2014/05/170, available at http://www.cci.gov.in/sites/default/files/C-2014-05- 170_0.pdf.

http://www.cci.gov.in/sites/default/files/C-2014-07-

¹⁶Combination Registration No. C-2016/10/441, available at

²²http://www.internationalcompetitionnetwork.org/uploads/library/doc588.pdf.