In brief: the key features of merger control legislation in India

Legislation and jurisdiction

What is the relevant legislation and who enforces it?

Competition law in India is governed by the Competition Act 2002 (the Competition Act) and the regulations and guidance notes issued thereunder. Sections 5 and 6 of the Competition Act require the pre-notification of all acquisitions, mergers and amalgamations where the turnover or assets of the parties and groups cross specified thresholds (collectively described as ‘combinations’) to the Competition Commission of India (CCI), which is responsible for merger review, applying the standard of appreciable adverse effect on competition (AAEC).

What kinds of mergers are caught?

Section 5 of the Competition Act covers three broad categories of combinations.

• The acquisition by one or more persons of control, shares, voting rights or assets of one or more enterprises where the parties, or the group to which the target will belong post-acquisition, meet specified assets or turnover thresholds. Acquisitions not involving a change of control are caught in this category.
• The acquisition by a person of control over an enterprise where the person acquiring control already has direct or indirect control over another enterprise engaged in the production, distribution or trading of similar or identical or substitutable goods, or in the provision of a similar or identical or substitutable service, where the parties, or the group to which the target will belong after the acquisition, meet specified assets or turnover thresholds.
• Mergers or amalgamations where the enterprise remaining, or enterprise created, or the group to which the enterprise will belong after the merger or amalgamation, meets specified assets or turnover thresholds.

To prevent the merger control regime from becoming unduly onerous, Schedule I to the CCI (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations 2011 (the Regulations) lists categories of transactions that are ‘ordinarily’ not likely to cause an AAEC in the relevant market in India and, therefore, are not ‘normally’ required to be notified to the CCI. These transactions are:

• direct or indirect acquisitions of shares or voting rights entitling the acquirer to hold less than 25 per cent of the shares or voting rights of a target company (including through a shareholders’ agreement or articles of association) solely for investment purposes or in the ordinary course of business, provided that this does not lead to the acquisition of control. The acquisition of less than 10 per cent of total shares or voting rights will be treated solely as an investment if the acquirer:
  • is able to exercise only the rights of ordinary shareholders exercisable to the extent of their respective shareholding;
  • does not have, or have a right to have, or intend to have a seat on the board of the target enterprise; and
  • does not intend to participate in the management or affairs of the target enterprise;
• an acquisition of additional shares or voting rights of an enterprise by the acquirer or its group, where the acquirer or its group, prior to the acquisition, already holds 25 per cent or more shares or voting rights of the enterprise, but does not hold 50 per cent or more of the shares or voting rights of the enterprise either prior to or after such acquisition. This exemption is not available if the acquisition results in the acquisition of sole or joint control of such enterprise by the acquirer or its group;
• an acquisition of shares or voting rights where the acquirer already holds 50 per cent or more of the shares or voting rights in the target enterprise, except where the transaction results in a transfer from joint control to sole control;
• an acquisition of assets not directly related to the business of the acquirer or made solely as an investment or in the ordinary course of business, not leading to control of the target enterprise, except where the assets represent substantial business operations of the target enterprise in a particular location or for a particular product or service, irrespective of whether such assets are organised as a separate legal entity or not;
• intra-group reorganisations. These include:
  • an acquisition of shares or voting rights or assets by one person or enterprise of another person or enterprise within the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part of the same group; and
  • a merger or amalgamation of two enterprises where one of the enterprises has more than 50 per cent of the shares or voting rights of the other enterprise, or a merger or amalgamation of enterprises in which more than 50 per cent shares or voting rights in each of such enterprises are held by enterprises within the same group. This exemption is not available if the transaction results in transfer from joint control to sole control;
• acquisitions of stock-in-trade, raw materials, stores and spares, trade receivables and other similar current assets in the ordinary course of business;
• an acquisition of shares or voting rights pursuant to a buy-back or a bonus issue or a stock split or consolidation of face value of shares or subscription to rights issue, not leading to an acquisition of control. Note that care will need to be taken in case of an acquisition of control through a renunciation of rights;
• an amended or renewed tender offer where a notice has been filed by the party making such an offer;
• an acquisition of shares, control, voting rights or assets by a purchaser approved by the CCI (for instance, in case of a divestiture); and
• an acquisition of shares or voting rights by a person acting as a securities underwriter or a registered stockbroker on behalf of its clients, in the ordinary course of its business and in the process of underwriting or stockbroking.

What types of joint ventures are caught?

The formation of a joint venture is not specifically covered by section 5 of the Competition Act, as it only covers the acquisition of an ‘enterprise’ and mergers and amalgamations of ‘enterprises’.

‘Enterprise’ as defined under the Competition Act effectively refers to a ‘going concern’ that is already conducting or has previously conducted business. A purely ‘greenfield’ joint venture is unlikely to be considered as an ‘enterprise’, and will therefore not fall within the scope of section 5. Moreover, even if it were to be considered as an ‘enterprise’, in the majority of cases, a truly ‘greenfield’ joint venture is unlikely to meet the thresholds under the target exemption.

By contrast, the establishment or acquisition of a ‘brownfield’ joint venture (where parents are contributing existing assets or businesses, customers, customer contracts, intellectual property, etc, or conferring control over them) would be notifiable where the jurisdictional thresholds are met, as it involves the acquisition of an enterprise under section 5 of the Competition Act.

There is presently limited guidance from the CCI in relation to the treatment of joint ventures or the criteria it would apply in determining whether a transaction is greenfield or brownfield, or, for that matter, whether it would treat full-function joint ventures differently from non-full-function joint ventures.

Is there a definition of ‘control’ and are minority and other interests less than control caught?

The acquisition of control is only one of the events that may trigger a notification. As a starting point, ‘control’ is defined under section 5(a) of the Competition Act to include ‘controlling the affairs or management by:

• one or more enterprises, either jointly or singly, over another enterprise or group; or
• one or more groups, either jointly or singly, over another group or enterprise.

In the past, the CCI, in its substantial decisional practice, had interpreted control to mean the ability to exercise decisive influence over the management or affairs and strategic commercial decisions of a target enterprise, regardless of whether such decisive influence was capable of being exercised by way of a majority shareholding, veto rights (attached to a minority shareholding) or contractual covenants; however, the CCI has expanded the scope of control in two of its orders, penalising Telenor (C-2012/10/87) for failing to notify its acquisitions of shareholdings in two companies, and penalising UltraTech Cement (C-2015/02/246) for failing to provide information on the shareholding or control of the promoter family over two companies.

In UltraTech Cement, the CCI stated that, in defining control, regard had to be given to different levels of control – in ascending order, material influence, de facto control and controlling interest (de jure control) – and not just to special rights. In Telenor, the CCI held that Telenor could not have sole control of the two target companies. In the first target, another shareholder held a 51 per cent shareholding, conferring a controlling interest; in the second target, even though Telenor held 67.25 per cent shareholding, other shareholders held more than 26 per cent, giving them the ability to block special resolutions (which was considered negative control even under foreign direct investment policy). In those cases, the CCI moved from the concept of ‘decisive influence’ based on special or veto rights towards a more expansive definition of ‘control’, to include ‘material influence’.

Such an interpretation includes negative control by minority shareholders. In contrast to investor protection rights, having the ability to veto (or cause a deadlock in respect of) strategic commercial decisions could be sufficient to confer at least joint control, the acquisition of which would require notification to the CCI. Such strategic commercial decisions have included decisions on annual business plans, budgets, recruitment and remuneration of senior management, and the opening of new lines of business.

Because of the expansive interpretation given to control, and the absence of clear guidance from the CCI on which specific rights will be considered as pure minority protection rights, the distinction between genuine minority protection rights and negative control has become blurred. As a result, many pure financial investments and private equity transactions are susceptible to review by the CCI.

What are the jurisdictional thresholds for notification and are there circumstances in which transactions falling below these thresholds may be investigated?

The jurisdictional thresholds under the Competition Act are as follows:

• the parties test:
  • the parties have combined assets in India of 20 billion rupees or combined turnover in India of 60 billion rupees; or
  • the parties have combined worldwide assets of US$1 billion, including combined assets in India of 10 billion rupees or a combined worldwide turnover of US$3 billion, including a combined turnover in India of 30 billion rupees; and
• the group test:
  • the group has assets in India of 80 billion rupees or a turnover in India of 240 billion rupees; or
  • the group has worldwide assets of US$4 billion, including assets in India of 10 billion rupees, or a worldwide turnover of US$12 billion, including a turnover in India of 30 billion rupees.

The government, through a notification dated 27 March 2017, revised the de minimis target-based filing exemption to apply to all forms of transactions (ie, acquisitions, mergers and amalgamations), for a period of five years until 28 March 2022. Transactions where the assets being acquired, taken control of, merged or amalgamated are not more than 3.5 billion rupees in India or where the turnover is not more than 10 billion rupees in India are exempted from the CCI notification requirement (the Target Exemption). The 2017 notification contained an explanation in relation to assessing the jurisdictional thresholds.

The government has recently published a notification dated 16 March 2022, extending the validity of the Target Exemption by an additional five years.

In 2018, the CCI also updated its frequently asked questions section on its website to provide guidance on the calculation of jurisdictional thresholds.

Is the filing mandatory or voluntary? If mandatory, do any exceptions exist?

If the jurisdictional thresholds are met and no exemptions are available, the combination must be notified to the CCI. Where a proposed combination consists of a number of interconnected steps or transactions, even where one or more of these steps or transactions would, on a stand-alone basis, have been exempt from filing, all such transactions must be filed as a composite whole and must not be completed pending the CCI’s review.

In August 2019, the CCI introduced a ‘green channel’ filing route that covers combinations where the parties have no horizontal overlap, no vertical relationships and no complementary businesses. Such combinations are, subject to certain conditions and safeguards, deemed to be approved by the CCI upon filing.

In addition to the Schedule I exemptions and the Target Exemption, the government has also exempted banking companies from the merger notification requirement when a notification of moratorium has been issued in respect of such companies. A notification of moratorium is ordinarily issued to ‘failing’ banks that are financially and operationally weak and are on the brink of insolvency.

In August 2017, the government exempted Regional Rural Banks and nationalised banks from the application of the provisions of sections 5 and 6 of the Competition Act for a period of five years and 10 years, respectively. In November 2017, the government exempted central public sector enterprises along with their subsidiaries operating in the oil and gas sectors from the application of the provisions of sections 5 and 6 of the Competition Act for a period of five years.

Section 6(4) of the Competition Act provides that acquisitions, share subscription or financing facilities, entered into by public financial institutions, registered foreign institutional investors, banks or registered venture capital funds, pursuant to any covenant of a loan agreement or an investment agreement, do not need to be pre-notified to the CCI; however, in those cases, the body concerned will need to notify the CCI of the acquisition within seven calendar days of completion of the transaction. To date, there have been only four decisions published by the CCI under this provision.

Do foreign-to-foreign mergers have to be notified and is there a local effects or nexus test?

Until the end of March 2014, the Regulations provided an exemption for transactions between parties outside India provided there was insignificant local nexus and effects on markets in India. The CCI interpreted the exemption narrowly, rendering it virtually redundant.

To remove uncertainty in this regard, the CCI withdrew the exemption so that foreign-to-foreign transactions satisfying the standard assets and turnover thresholds under the Competition Act, and not covered by any of the other exemptions, will have to be notified, even if there is no local nexus and effects on markets in India; however, the absence of a local nexus and effects should expedite the review and clearance process by the CCI.

Are there also rules on foreign investment, special sectors or other relevant approvals?

There are currently no other special rules under the Competition Act governing merger control review for foreign investment or specific sectors such as telecoms, electricity, pharmaceuticals, media, oil and natural gas.

In addition, there are non-competition regulatory approvals, which may be required, depending on the sector in which the investment is being made.

Following an amendment to the Insolvency and Bankruptcy Code 2016, it has been made clear that where a transaction covered by the corporate insolvency resolution process (CIRP) has to be notified to the CCI, approval by the CCI is required before a resolution plan is approved by the committee of creditors (although a recent judgement by the National Company Law Appellate Tribunal has indicated that this amendment is ‘directory and not mandatory’). The CIRP is limited to 180 days, which may be extended up to a further 90 days in certain cases. To meet this tight deadline, a bidder should notify a transaction to the CCI as early as possible.