India's merger control regime finally gains momentum with the notification of the key provisions of the Competition Act by the Ministry of Corporate Affairs. This development will have significant impact on cross border M&A activity involving Indian companies. Additionally, to draw fresh foreign investments into India, significant changes have been introduced in the third consolidated FDI policy released by the Department of Industrial Policy & Promotion.
Notification of the merger control regime
After a long wait, India finally joins the list of over a 120 jurisdictions with a merger control regime. Mergers or acquisitions falling within the jurisdictional thresholds must now be notified to the Competition Commission of India ("CCI"), India's competition law regulator. On 1 June 2011, sections 5, 6, 20, 29, 30 and 31 of the Competition Act 2002 ("Act") dealing with the merger control provisions became operative. Additionally the CCI released the (Procedure in regard to the transaction of business relating to combination) Regulations, 2011, in relation to the implementation of sections 5 and 6 of the Act ("Regulations").
The merger control regime applies to "combinations", which are defined in section 5 of the Act as an acquisition of one or more enterprises or a merger or amalgamation of enterprises. "Control" is defined, in turn, as "controlling the affairs or management" of an enterprise. The main test that CCI will follow in assessing the combination is whether they are likely to cause an appreciable adverse effect on competition in a relevant market in India. Those companies that plan to enter into a combination will be required to give a notice as specified by the Regulations. In case of interconnected transactions, a single notice covering all the transactions can be submitted by the parties.
Statutory merger thresholds
Section 5 sets out the jurisdictional thresholds which are largely complex and comprehensive. The thresholds take into account the assets and turnover of the acquirer and the target (collectively called the "Parties"), or the group to which the target/merged entity will belong to post acquisition (the "Corporate Group"). Under the Act, transactions satisfying the following thresholds must be notified in India:
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The thresholds specified provide for a de minimis exception, where transactions need not be notified where the value of one party's assets does not exceed INR 250 Crores or where the turnover does not exceed INR 750 Crores. However it is still uncertain whether this exception applies only to Indian assets and turnover or to non Indian assets and turnover as well. In the event the de minimus exception does not apply, the parties need to assess whether a filing is required on the basis of multiple filing thresholds. Furthermore, Schedule I of the Regulations specifies a list of combinations which are not likely to cause appreciable adverse effect on competition in India and thus aptly exempted from the notification process.
The timeline for the entire notification process seems rather lengthy as compared to other jurisdictions. The Act sets a deadline of 210 calendar days for the review of combinations. However CCI has stated it will endeavor to complete almost 95 per cent of the deals notified before it within 180 calendar days of filing. A filing must be submitted within 30 days of the approval of a proposal of merger or amalgamation by the board of directors, or the execution of any agreement or other document relating to an acquisition. An appeal against the decision of the CCI lies with the Competition Appellate Tribunal and such an appeal has to be made within 60 days from the date of the CCI order.
Notification form and filing fees
The notification for the majority of the combinations will have to be filed in the simplified Form I. The fees for a Form I notification is INR 50,000 and for Form II is INR 10 lakhs.
Failure to comply with the notification requirements empowers the CCI to impose fines of up to 1% of the total turnover or assets of the merged entity involved, whichever is higher. Additionally the CCI can inquire into whether a combination has caused or is likely to cause an appreciable adverse effect of competition and may require the parties to submit information necessary for its examination.
Liberalisation in the FDI Policy - Circular 1 of 2011
The Department of Industrial Policy & Promotion (DIPP) in its recent review of the Foreign Direct Investment (FDI) policy released Circular 1 of 20112; which lays down India's FDI policy effective from 1 April 2011. This circular includes amendments and simplified norms for foreign investors, after FDI inflows declined by almost 25% last year. The most significant change in the circular includes the scrapping of Press Note 1 to attract greater foreign investment into India.3
No prior approval required for existing JVs operating the same field
Foreign companies that have an existing joint venture ("JV") in India will no longer be required to get a 'no-objection certificate' from their JV partner before venturing on their own or with another local company in the same field of business in India. Thus foreign investors are permitted to go independent or set up a new JV in the same field of business as their existing JV. The earlier policy provided that the foreign investor would need a 'no objection certificate' from its local partner if it decided to venture on its own in a line of business similar to that of the existing JV. This change is expected to promote India's competiveness as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into India.
Several other changes have also been introduced as a part of the liberalisation process. The earlier FDI policy required the conversion price of equity convertible instruments to be determined upfront at the time of issue of such convertible instruments. To provide better valuation based on performance, the revised policy permits the option of using a conversion formula for such convertible instruments subject to the regulatory guidelines on pricing. The new policy further classifies companies into two main categories: companies owned or controlled by foreign investors and companies owned or controlled by Indian residents. With respect to the agricultural sector, the revised policy permits the development and production of seeds and planting material without the stipulation of having to do so under controlled conditions.
What Singapore based companies need to watch out for
Singapore based companies engaging in M&A transactions involving Indian companies need to meticulously structure and plan their proposed transactions. Companies contemplating mergers and acquisitions involving Indian assets will need to co-ordinate merger filing requirements bearing in mind the long waiting period under the Indian regime. An uncoordinated approach in notifying the transaction with the relevant authorities globally (in case of a multi-jurisdictional deal) can delay closing and increase the risk that the transaction will be challenged. Thus global M&A deals that have an India link will need prior approval of the CCI if their operations or assets meet the relevant thresholds under the Act. Those deals with an insignificant connection with the Indian market need not be notified. The efforts of the Indian Government are a welcome move in order to strengthen the liberalisation process to attract greater foreign investment. The adoption of the recent changes in the FDI policy sends an encouraging signal to the international business community.