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Trends and climate
How would you describe the current merger control climate, including any trends in particular industry sectors?
The Indian merger control regime was introduced in 2011. Since then, the relevant provisions have been evolving to reflect the experiences of the antitrust authorities and the concerns of stakeholders.
The Competition Commission of India is responsible for enforcing competition law in India. According to its most recent annual report, it reviewed and approved 107 transactions from April 1 2015 to March 31 2016 – an increase of approximately 30% on the preceding year.
During this same period, some 113 transactions were notified to the commission. In terms of industry breakdown, financial services led the way, accounting for 22% of these transactions; pharmaceuticals and healthcare placed second, with 11%.
Importantly, the commission has heightened its scrutiny of mergers of late. While the number of Phase II decisions remain in single digits, the commission’s decisional practice seems to indicate an increase in such reviews. Between 2011 and 2016, Phase II investigations were initiated in just three cases; but so far this year the commission has already commenced Phase II investigations in two cases, illustrating its comfort in exercising such powers.
The commission is also striving to ensure compliance with the pre-merger notification requirement. In several recent cases, it has taken action against gun jumping on its own initiative – another first. It has also imposed significant penalties on companies for late notification or failure to notify. As of published decisions till June 30 2017, the commission had heard a total of approximately 35 cases involving late notification or failure to notify, imposing penalties amounting to Rs355 million in aggregate.
Another interesting development is an increase in third-party merger litigation. While this is still relatively rare, it appears to be a growing trend to watch in the future.
Are there are any proposals to reform or amend the existing merger control regime?
The commission regularly revises the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011, with the most recent amendments introduced on January 7 2016.
The year 2017 has been active in terms of amendments to Indian merger control rules:
- On March 29 2017 the government issued a notification altering the manner in which jurisdictional thresholds are calculated.
- On June 29 2017 another notification was issued, removing the 30-day filing deadline.
It is also expected that the commission will introduce additional amendments to the regulations, which are expected to come into force in the second half of 2017.
Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
The Competition Act, 2002 and the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 are the two key merger control statutes. The central government is also empowered to issue notifications granting exemptions from time to time.
What is the relevant authority?
The Competition Commission of India is the primary authority responsible for enforcing merger control rules under the Competition Act. Its decisions may be appealed to the National Company Law Appellate Tribunal (NCLAT). NCLAT’s decisions may be appealed to the Supreme Court of India, which is the final appellate authority under the Competition Act.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
A ‘combination’ is defined as either a merger or an acquisition of shares, assets or control which exceeds the financial thresholds, in terms of both assets and turnover, set out in the Competition Act.
Transactions that do not meet these thresholds do not constitute a combination and need not be reviewed by the commission.
Under the Competition Act, parties to mergers or acquisitions of assets, shares or control that exceed these thresholds must file a formal notification in the prescribed form with the commission and wait until approval has been granted before closing the deal. This rule applies to all transactions, with the sole exception of acquisitions by certain financial institutions pursuant to a covenant in a loan or investment agreement. In such cases, notification should be made post-closing and the commission’s approval is not required.
Inter-connected transactions Where a transaction is structured as a series of interconnected steps, each of these steps is considered as part of a single composite transaction. If any one of these steps meets the thresholds, pre-merger notification is mandatory before any part of the transaction can be implemented.
The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 further provide that certain transactions are unlikely to have an appreciable adverse effect on competition and as such are not ordinarily notifiable (listed in the section on notification process below).
Do thresholds apply to determine when a transaction is caught by the legislation?
The commission has jurisdiction to review and investigate a transaction if it meets the prescribed thresholds as provided below.
Jurisdictional thresholds Transactions are caught by the merger control legislation if the enterprises involved in the transaction meet the thresholds set out below.
|Direct parties test: India|
|Combined Indian assets > Rs20 billion||Combined Indian turnover > Rs60 billion|
|(approx $310 million)||(approx $931 million)|
|Direct parties test: worldwide and India|
|Combined worldwide assets > $1 billion||Combined worldwide turnover > $3 billion|
|Combined Indian assets > Rs10 billion||Combined India turnover > Rs30 billion|
|(approx $155 million)||(approx $465 million)|
|Acquiring group test: India|
|Combined worldwide assets > Rs80 billion||Combined India turnover > Rs240 billion|
|(approx $1.24 billion)||(approx $3.72 billion)|
|Acquiring group test: worldwide and India|
|Combined worldwide assets > $4 billion||Combined worldwide turnover >$12 billion|
|Combined Indian assets > Rs10 billion||Combined India turnover > Rs30 billion|
|(approx $155 million)||(approx $465 million)|
The Competition Act defines ‘group’ to mean two or more enterprises which, directly or indirectly, are in a position to:
- exercise 26% or more of the voting rights in the other enterprise;
- appoint more than 50% of the members of the board of directors in the other enterprise; or
- control the management or affairs of the other enterprise.
Asset acquisition The most recent change in the merger control rules is that now, if the transaction involves an acquisition, merger or amalgamation of a portion or business division of an enterprise, the value of assets and turnover of that portion or business division of the enterprise will be relevant in assessing whether the notification requirement applies.
Target de minimis exemption Notwithstanding the above, the Indian government has established a target-based exemption whereby a transaction is exempted if the target entity (or business) has assets in India worth less than Rs3.5 billion (approx $54 million) or turnover in India of less than Rs10 billion (approx $155 million). This exemption is effective until March 28 2022.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
Yes ‒ parties may apply for a pre-filing consultation with the commission. The pre-filing consultation is confidential and the parties must apply for it separately. The consultation is oral, informal and non-binding on the commission.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
Foreign-to-foreign mergers are caught under the Indian merger control regime. If a transaction meets the prescribed thresholds, it will be subject to the pre-notification requirement even in the absence of any local nexus.
What types of joint venture are caught by the legislation?
No special provisions relate to joint ventures under the Competition Act. A joint venture comprising an acquisition or merger that meets the thresholds will be subject to the pre-notification requirement. Typically, a greenfield joint venture will be exempt under the target de minimis exemption.
Process and timing
Is the notification process voluntary or mandatory?
If a transaction meets the jurisdictional thresholds, pre-merger notification is mandatory and suspensory. Thus, the parties cannot close the transaction until they have received approval from the commission. However, the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 provide that the following transactions are unlikely to have an appreciable adverse effect on competition and as such are not ordinarily notifiable
- Investment-only transactions – that is:
- an acquisition of less than 10% of the total shares or voting rights of an enterprise which is treated as solely for investment; or
- an acquisition which results in the acquirer holding less than 25% of the total shares or voting rights of an enterprise in the ordinary course of business and which does not lead to an acquisition of control, directly or indirectly, over the enterprise whose shares are being acquired.
In each case the acquisition must allow the acquirer to exercise rights commensurate to those of an ordinary shareholder, and the acquirer must not be a director of the target or have any right or intention to nominate a director on the board of directors of the target. Further, the acquirer must not intend to participate in the management of the enterprise.
- Acquisitions where the acquirer already holds between 25% and 50% of the shares or voting rights – that is, an acquisition of additional shares or voting rights of an enterprise by the acquirer or the acquirer’s group where the acquirer or the acquirer’s group previously held 25% or more, but less than 50%, of the shares or voting rights. In such case, the acquisition must not result in the acquisition of sole or joint control by the acquirer or the acquirer’s group over the target.
- Acquisitions where the acquirer already holds 50% or more of the shares or voting rights – that is, an acquisition of additional shares or voting rights of an enterprise by the acquirer where the acquirer previously held 50% or more of the shares or voting rights. In such case the acquisition must not result in a transfer from joint control to sole control.
- Acquisitions of unrelated assets – that is, an acquisition of assets which is unrelated to the acquirer’s business activity or solely for investment or in the ordinary course of business, which does not lead to control of the target, and where the assets being acquired likewise do not represent substantial business operations in an area or a product or service category for the target. This condition applies even if the assets being acquired are structurally organised as a separate legal entity.
- Amended tenders - that is, an amended or renewed tender where the party making an offer has previously filed a notification with the commission, as long as the amendments are communicated to the commission at the earliest opportunity.
- Acquisitions of stock in trade – that is, an acquisition of stock in trade such as raw materials, stores and spares, trade receivables and other current assets in the ordinary course of business.
- Indirect acquisitions of shares or voting rights exemption – that is, an acquisition effected by way of:
- bonus issue;
- stock split;
- consolidation of face value of shares; or
- subscription to a rights issue.
The acquisition must not lead to the acquisition of control over the target as a result of any of the above actions.
- Acquisitions by a securities underwriter – that is, an acquisition by a person acting as a securities underwriter or a registered stockbroker on behalf of clients in the ordinary course of business.
- Intra-group transactions – that is, an acquisition of shares or voting rights or assets by one enterprise of another enterprise within the same group. The target must not be under joint control of entities that are not part of the same group.
- Intra-group transactions where the acquirer has more than 50% of the shares or voting rights – that is, an acquisition by an enterprise which holds more than 50% of the shares or voting rights in the target and/or a merger or amalgamation of enterprises in which more than 50% of the shares or voting rights in each enterprise are held by enterprises within the same group. The transaction must not result in a transfer from joint control to sole control.
- Pre-approved transactions – that is, an acquisition of shares, control, voting rights or assets by an acquirer approved by the commission pursuant to a previous order passed by the commission.
What timing requirements apply when filing a notification?
With effect from June 29 2017, transactions may be notified at any time after the execution of any definitive document conveying an agreement or decision to acquire (for acquisitions) or, in the case of mergers, at any time after the approval of the board of directors. In both cases, parties cannot implement the transaction before the commission’s approval of the transaction.
In the case of acquisitions by financial institutions pursuant to any covenant of a loan or investment agreement, notification must be filed at least seven days after the date of the acquisition and approval is required only post completion.
What form should the notification take? What content is required?
The notification can be filed as either Form I, Form II or Form III. Pre-notification can be filed through either Form I or Form II. These two forms contain a list of questions which must be comprehensively answered by the parties.
Form I is relatively limited in scope and is the recommended form for notifying transactions which are smaller in scale and will thus have a lesser impact on the market. While there is no requirement to file Form II, the parties are recommended to file Form II if their combined markets exceed:
- 15% in case of a horizontal overlap; or
- 25% in case of a vertical overlap in either relevant market.
Form III is the prescribed form for acquisitions by certain financial institutions pursuant to a covenant in a loan or investment agreement; this is filed post-implementation and the commission’s approval is not required.
Failure to provide complete information could result in invalidation of the notification form. In some cases the commission may also initiate proceedings against the parties for providing incomplete information, which could result in the imposition of fines (see Sumitomo Mitsui Trust Bank (C-2014/12/235), order under Sections 44 and 45 of the Competition Act).
The commission may also ask the parties to re-submit Form I as Form II if it feels that detailed information is required (eg, see Denali Holding Inc (C-2016/01/370)). There is no hybrid form. Thus, if Form II is filed, it must be completed for all products involved in the transaction, even if not all meet the relevant thresholds (GE Company, GE Industrial France SAS, Alstom, Alstom Holdings (C-2015/01/241)).
Is there a pre-notification process before formal notification, and if so, what does this involve?
While the parties can seek guidance from the commission on all issues relating to notification through the pre-filing consultation process, the views expressed during this consultation are not binding on the commission. The parties can also provide a draft filing to the commission before submitting the formal notification form. However, the window to submit a draft filing is narrow: the parties must submit this at least 10 days before the final form is submitted. This narrow window has limited use of the draft filing mechanism.
Can a merger be implemented before clearance is obtained?
The Indian merger control regime is suspensory in nature. Transactions that are subject to the pre-notification requirement cannot be implemented prior to receiving approval from the commission, with the exception of transactions involving acquisitions by certain financial institutions, pursuant to a covenant in a loan or investment agreement. In such cases notification is required only post completion.
Guidance from authorities
What guidance is available from the authorities?
The primary legislation governing the Indian merger control regime is the Competition Act, which is supplemented by the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011. Guidance is also available in the form of the commission’s decisional practice. Guidance notes are also available to assist with completion of the notification form.
The commission has published FAQs on the applicability of the merger rules and a separate guidance note on non-compete obligations. In addition to this, the commission has recently published the first edition of its compliance manual containing a chapter on merger control. These publications are available on the commission’s website (www.cci.gov.in) and provides useful insight into the notification requirement and the parameters for assessment.
Parties needing further guidance may approach the commission for an informal pre-filing consultation.
What fees are payable to the authority for filing a notification?
The obligation to pay the fees rests with the enterprise submitting the notification form. The fees payable are as follows:
- Form I – Rs1.5 million (approx $23,300);
- Form II – Rs5 million (approx $77,500); and
- Form III - no fee payable.
Publicity and confidentiality
What provisions apply regarding publicity and confidentiality?
Merger control regulations require that the parties provide a short summary of the transaction (up to 500 words) along with the notification form. This summary should not contain confidential information and will be published on the commission’s website immediately after the notification form is filed. The commission will also publish a public version of its final orders ‒ including orders approving transactions and orders imposing fines on defaulting parties ‒ on its website. Further, upon initiation of a Phase II review, the parties must publish details of the transaction in a prescribed form.
All other documents are maintained in the commission’s files. At the time of filing the notification form, the parties should separately apply for confidentiality for any documents or information that they consider sensitive. Access to confidential information is not available to third parties. Third parties can access non-confidential information by applying to inspect such files, although this is subject to the commission’s discretion and the commission is generally extremely circumspect in granting access to such files. In practice, third parties will need to establish sufficient cause for inspection (BGR Energy Systems Ltd v Competition Commission of India WP (C) 11195/2015).
Are there any penalties for failing to notify a merger?
Failure to notify may attract a maximum penalty of up to 1% of the combined value of the parties’ total turnover or assets (whichever is higher). The obligation to pay the penalty rests with the notifying party.
The last two years have seen an increase in fines for gun-jumping and late notification. In the early years of the merger control regime, the commission was reluctant to impose fines. However, it has lately become more willing to impose fines in such cases – the highest imposed to date totalled Rs50 million (approx $775,000).
Procedure and test
Procedure and timetable
What procedures are followed by the authority? What is the timetable for the merger investigation?
The Competition Commission of India has 210 days from filing of the notification to review the transaction. If the commission fails to pass an order within this period, the transaction is deemed to have been approved.
The Indian merger control regime involves a two-phase review process. In Phase I, the commission conducts a preliminary assessment to form a prima facie opinion on whether the transaction is likely to have an appreciable adverse effect on competition. Under the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011, the commission has 30 working days from receipt of formal notification to issue its opinion. However, if the commission considers that the information provided is incomplete or insufficient to form a prima facie opinion, it may issue a letter (also known as a ‘defects notice’) requesting information which it deems to be lacking from the notification form. This letter ‘stops the clock’ on the 30 working day period, which begins to run again only once the commission is satisfied that the parties have provided full and complete information.
The commission also has the power to invalidate a notice if it is not provided in the prescribed form. The parties will be heard before a decision to invalidate is made. If a notice is invalidated, the clock stops running on the 30 working day period and begins to run again only once a valid notice has been filed.
During Phase I, while the commission takes only a preliminary view of whether the transaction will have or is likely to have an appreciable adverse effect on competition, the commission can also seek comments from other entities. Third parties can also file objections to a transaction based on the short summary published on the commission’s website. If the commission is satisfied that the transaction is unlikely to have an appreciable adverse effect on competition, it will pass a final order approving the transaction. Most transactions are approved at the Phase I stage.
If, during Phase I, the commission concludes that the transaction is likely to have an appreciable adverse effect on competition, it will issue a show cause notice to the parties, seeking comments as to why the investigation should not proceed to Phase II. If the commission is satisfied with the responses, it will approve the transaction (Mumbai International Airport Pvt Ltd, IOCL, BPCL, HPCL and Mumbai Aviation Fuel Farm Facility (C-2014/04/164)).
If, after considering the responses to the show cause notice, the commission believes that the transaction is likely to have an appreciable adverse effect on competition, it will proceed with a Phase II investigation. During this investigation, it may also direct the Office of the Director General, Competition Commission of India to conduct an investigation and submit a report to the commission.
Subsequently, if the commission is still of the prima facie opinion that the transaction is likely to have an appreciable adverse effect on competition, it has seven working days from receipt of either the parties’ response or the office of the director general’s report, whichever is later, to order the parties to publish details of the transaction in the prescribed form within 10 working days. The details of the transaction must be published in Form IV as provided in Schedule II of the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011, and must also be submitted to the commission before publication.
The information in Form IV must be published on the parties’ websites and in four leading daily newspapers ‒ including two business newspapers ‒ inviting public comments, which must be filed within 15 working days. The commission will also publish this information on its website. Even after this period has expired, the commission has a further 15 days in which to request additional comments if necessary. The commission then has 45 working days to decide whether to approve, block or propose modifications to the transaction. If modifications are proposed, the parties can either accept them or submit further amendments to the proposed modifications within 30 working days. If the commission is not satisfied with the amendments proposed by the parties, it will give them an additional 30 working days to accept its final modifications. If the parties do not accept these modifications, the transaction will be deemed likely to have an appreciable adverse effect on competition and will thus be prohibited. This additional 30-day period is not included within the standard 210-day period mentioned above.
What obligations are imposed on the parties during the process?
The parties are bound by a standstill obligation until the commission has approved the transaction or the 210-day period has expired, whichever is earlier. During this period, the parties can work mutually towards closing the transaction. However, the parties must be careful to ensure that none of their actions could be construed as gun-jumping. Certain actions ‒ such as pre-payment of consideration or the transfer of shares into an escrow account ‒ will be regarded as gun-jumping (Hindustan Colas Pvt Ltd (C-2014/08/297), order under Section 43A; SCM Soilfert Ltd (C-2014/05/175), order under Section 43A).
What role can third parties play in the process?
During the course of its assessment, the commission can seek comments from third parties in relation to the transaction. This typically involves sending a questionnaire to relevant third parties ‒experts, suppliers, customers and so on. During Phase I, third parties can voluntarily provide comments based on the public summary of the transaction. During Phase II, the process for public comments is more formal. Following the initiation of a Phase II review, the parties must publish additional details of the transaction in Form IV, inviting public comments. The commission is now exercising this power increasingly frequently.
What is the substantive test applied by the authority?
The Competition Act prohibits any combination which will have or is likely to have an appreciable adverse effect on competition in India under Section 6(1) of the Competition Act. An inclusive list of factors for assessing the likelihood of an appreciable adverse effect on competition is provided in Section 20(4) of the Competition Act.
During Phase I, the commission typically looks at the parties’ market shares and the resulting change in the level of concentration. An important aspect of the review process is the assessment of ancillary restraints – specifically, non-compete obligations, which are permitted only if they are proportionate and reasonable in scope. The commission has been vociferous in limiting the scope of non-permissible non-compete obligations, usually requiring the parties to modify their scope in terms of products (to those products which are the subject matter of the transaction only) and geography (to the seller’s physical area of operations only). The non-compete obligation must also be limited in terms of duration. While there is no decisive limit, the commission has provided a guidance note on non-compete issues, which permits non-compete obligations of up to three years for general business transfers and two years for transfer of goodwill. (Advent International Corporation and MacRitchie Investments Pte Ltd (C-2015/05/270); KKR Credit Advisor (US) LLC (C-2015/08/302); Broadstreet Investment (Singapore) Pte Ltd (C-2016/03/373); Clariant Chemical India Limited (C-2016/02/373); LT Foods Ltd and LT Foods Middle East DMCC (C-2016/04/387) and PVR Ltd (C-2015/07/288)).
If the parties will gain substantial market power as a result of the transaction, the commission is likely to initiate a Phase II review. In determining this issue, the commission will place significant emphasis on the incremental market shares that result from the transaction and utilise the Herfindahl-Hirschman Index to scrutinise the concentration of market shares.
While to date the commission has not prohibited any transactions, deals that lead to a high concentration will in all probability require modifications from the parties (Sun Pharmaceutical Industries Ltd and Ranbaxy Laboratories Ltd (C-2014/05/170); Holcim Ltd and Lafarge (C-2014/07/190); PVR Ltd (C-2015/07/288)). In order to avoid modifications in such cases, the parties must sufficiently demonstrate that the transaction will not have an appreciable adverse effect on competition despite high levels of concentration in the market. However, the commission has not been very receptive to such arguments. The modifications typically required involve structural divestments.
Does the legislation allow carve-out agreements in order to avoid delaying the global closing?
No specific provisions address carve-outs and transactions which are global in nature require prior approval before closing in any jurisdiction. Thus, if a transaction is subject to a notification requirement in India, the parties cannot close in any jurisdiction, including India, until approval has been granted (Eli Lilly Inc (C-2015/07/289) and Baxalta Inc (C-2015/07/297), order under Section 43A). This position has been reaffirmed in the commission’s decisional practice, in which it has prohibited a special India carve-out.
Test for joint ventures
Is a special substantive test applied for joint ventures?
No special substantive test applies for joint ventures. All joint ventures notified to the commission are assessed under the same rules as for all transactions.
What are the potential outcomes of the merger investigation? Please include reference to potential remedies, conditions and undertakings.
A merger investigation can have the following outcomes:
- unconditional approval of the transaction;
- conditional approval, subject to the parties undertaking certain structural or behavioural remedies; or
- prohibition of the transaction.
During a Phase I review, the commission typically grants unconditional approval. However, if the commission has potential concerns, the parties can voluntarily offer certain structural or behavioural modifications to alleviate these concerns (Mumbai International Airport Pvt Ltd, IOCL, BPCL, HPCL and Mumbai Aviation Fuel Farm Facility (C-2014/04/164); Abbott Laboratories, USA, (C-2016/08/418) etc).
In a Phase II investigation, the commission will conduct a detailed investigation to determine whether the transaction will have or is likely to have an appreciable adverse effect on competition. If the commission believes that the proposed structure of the transaction presents significant issues, it will consider possible modifications which could substantially address them. Structural remedies are considered more effective than behavioural remedies in addressing such concerns (PVR Limited (C-2015/07/288)).
If the commission is not satisfied with any alternatives, it can issue a prohibition decision blocking the transaction. To date, however, no such decisions have been issued.
Right of appeal
Is there a right of appeal?
Parties which are aggrieved by decisions of the Competition Commission can appeal to the National Company Law Appellate Tribunal (NCLAT).
Do third parties have a right of appeal?
Anyone aggrieved by a decision of the commission to challenge the decision before NCLAT. However, the appellant must establish its standing as an aggrieved party (Appeal 44/ 2014, Jitender Bhargava v Competition Commission of India). The exact position on third-party appeals is still uncertain, as decisional practice in this regard is limited. However, this issue is likely to be clarified in the next few years as merger litigation gains traction.
What is the time limit for any appeal?
An appeal must be brought within 60 days of the date on which the parties receive the commission’s formal decision.