The CAA was enacted in September 2007 and amends the Competition Act 2002, which in turn replaced the Monopolies and Restrictive Trade Practices Act 1969 (the MRTPA). However, the majority of the Competition Act 2002 provisions have not come into force. The CAA will both repeal the MRTPA and bring into effect the remaining provisions of the Competition Act 2002, as amended by the CAA.
The Competition Commission of India (the CCI) published initial draft regulations in January 2008, after which a consultation process with stakeholders was held. The CCI subsequently published revised draft regulations in July 2008 (the draft Regulations, including the draft Merger Regulations). These go a long way towards addressing certain concerns expressed during the consultation period on the then-draft CAA and the initial draft regulations (eg, the lack of a requirement that the target has a nexus with India, and the lengthy waiting period). However, unless and until they are finalised, uncertainty must remain about these important issues.
Scope of the CAA
In common with other comprehensive competition law regimes, the CAA addresses three main areas, namely:
- merger control;
- the prohibition of abusive conduct by dominant firms; and
- the prohibition of anti-competitive monopoly agreements.
Most provisions derive from European antecedents and are generally in line with international norms. In addition, the Indian legislation also covers a fourth area: competition advocacy, which addresses the role of the CCI in promoting competition awareness and consulting with the government on proposed competition legislation.
India is one of the most important emerging markets in the global economy, and the forthcoming implementation and enforcement of the CAA is expected to have significant ramifications for how companies both within and outside India conduct their business. For example, post-implementation, it will not be possible to close transactions that trigger a merger notification in India until either expiry of the relevant waiting period, or clearance from the CCI. Failure to comply with the notification obligation will attract fines of up to 1 per cent of turnover.
Merger control regime
The CAA prohibits any ‘combination’ that ‘causes or is likely to cause an appreciable adverse effect on competition’ within a relevant market in India, and provides a list of factors to which the CCI must have ‘due regard’ when determining whether a combination has such an effect.
Only those transactions that involve the acquisition of shares, voting rights, assets or ‘control’ (which is not defined, but includes the concept of joint control) and exceed either an asset or turnover threshold are combinations within the meaning of the CAA. Any combination that exceeds the relevant thresholds must be notified to the CCI and must not close before the earlier of expiry of the waiting period or clearance by the CCI.
The relevant thresholds
The applicable turnover and asset thresholds are such that, at least in the early period, Indian companies should be able to merge with each other without encountering additional regulatory hurdles. There are two alternative threshold tests, the first of which applies to the joint assets and turnover of the parties, and the second of which applies to the assets and turnover of the acquirer’s group only.
There has been criticism of the thresholds because of the lack of a specific requirement that the target must have a nexus with India, meaning that the presence of the acquirer, if sufficiently large, could trigger a filing requirement, despite the target’s minimal activities in India. The draft Merger Regulations address this concern by stating that unless each of at least two parties to a combination (eg, the acquirer and target) meets either a turnover or asset threshold in India, the combination is not ‘likely to cause an appreciable adverse effect’ on competition. The CCI has issued a press release stating that transactions that do not meet these thresholds are not notifiable. Thus, it is likely that in practice, a combination will only be notifiable where the target meets either the asset or turnover threshold in India.
Potential exemptions from the notification requirement
The draft Merger Regulations also carve out as not ‘likely to cause an appreciable adverse effect on competition’ share acquisitions where the acquirer holds a 50 per cent shareholding before the acquisition, together with certain minority share acquisitions and asset acquisitions (of less than the entire business operations) that are made solely as an investment or in the ordinary course of business, unless the share or asset acquisition conveys control of the target. Although the draft Merger Regulations are silent on the point, it has been suggested that the CCI may in practice treat transactions falling within one of these safe harbours as non-notifiable.
Mandatory suspensory waiting period
Any combination that exceeds the relevant thresholds must be notified to the CCI and must not close before expiration of the waiting period, or until the CCI has cleared the combination, or the parties have accepted the CCI’s proposed modifications to the combination. Unusually in the case of a mandatory and suspensory merger regime, there is also a filing deadline: a combination must be notified within 30 days of approval by the board of directors of the merger proposal, or the execution of an agreement setting out the parties’ intention to convey control (including a letter of intent or memorandum of understanding). It has been suggested that this requirement was included in the context of the initial draft of the CAA, which provided for a voluntary, non-suspensory regime, and that therefore the CCI will in practice be flexible, extending the deadline at the request of the parties, and allowing early notification to facilitate co-ordination of filings in different jurisdictions. Moreover, the draft Merger Regulations provide, in the case of an acquisition, that the calculation of the 30-day deadline starts from execution of the definitive purchase agreement for the purpose of imposing a fine for late filing.
The CAA provides for a waiting period of 210 days (approximately seven months) from the date of notification. This is an unusually long suspensory waiting period and has been criticised for creating considerable uncertainty for businesses and as likely to delay multinational deals that have an Indian element.
The CCI has addressed the former concern in the draft Merger Regulations, which contemplate a three-stage waiting period: an initial assessment to be completed in the first phase (30 days or 60 days, depending on the complexity of the transaction); if further information is required, the investigation will be extended into the second phase (30 days); and in the event that additional information and time is required, the investigation will enter the third phase (lasting for the reminder of the 210 days).
The draft Merger Regulations provide for a long- and short-form notification. It has been suggested that the short-form notification will be appropriate in cases of new entry, a post-merger market share of less than 15 per cent, a failing firm defence, or a vertical merger with no overlaps, and that mergers notified using the short-form will be assessed by a designated sector of the CCI to ensure their expedited consideration. However, rather perversely, the draft Merger Regulations provide that if no request for additional information is received within 30 days of receipt of a long-form notification and within 60 days of receipt of a short-form notification, the merger will be deemed cleared.
The obligation to notify is on both parties to the merger, and a finding by the CCI of a failure to notify, or a late filing, attracts a penalty of 1 per cent of the turnover or assets (whichever is higher) of the party in violation. However, it is unclear whether the correct measure is the violator’s Indian or worldwide turnover; which measure is used will have potentially significant implications for the level of any fine.
The CCI can declare void any combination that causes or is likely to cause an appreciable adverse effect on competition.
Timetable for implementation
The CAA will take effect once the Indian central government appoints the effective date in the Official Gazette. Although this was anticipated to occur in September 2008, it may now be delayed until the first quarter of 2009. This is in part because the acting chairman of the CCI (who was due to step down in October 2008) tendered his resignation in June 2008 and has, to date, not been replaced, causing some uncertainty as to when the CAA will come into force.