By way of an August 30 2016 order,(1) the Competition Appellate Tribunal (COMPAT) upheld the penalty imposed by the Competition Commission of India (CCI) on SCM Soilfert for failing to notify its combination under Section 6(2) of the Competition Act 2002.
Deepak Fertilizers and Petrochemicals Corporation Ltd (DFPCL), a listed company, was engaged in manufacturing and trading industrial chemicals and fertilisers. SCM is DFPCL's wholly owned subsidiary.
On July 3 2013 SCM purchased shares of Mangalore Chemicals and Fertilizers Limited (MCFL) on the Bombay Stock Exchange, which amounted to 24.46% of the paid-up capital of MCFL. DFPCL issued a press release stating that the purchase was a "very strategic and good fit with the company's business". The acquisition was not notified to the CCI under Section 6(2) of the act.
SCM also acquired additional equity shares representing 0.8% of MCFL, thus entitling SCM to hold more than 25% of the voting rights in MCFL. SCM filed a notice under Section 6(2) of the act within 29 days of the acquisition of the shares beyond 25%.
The CCI issued a notice under Section 43A of the act to the appellants on the grounds that they had failed to provide notice in accordance with Section 6(2) of the act in regard to the purchase finalised on April 23 2014 and the acquisition made in 2013.
SCM contended that the acquisition was "solely for investment" purposes, as understood under Item 1 of Schedule 1 of the Combination Regulations and hence did not require notification to the CCI. The CCI considered whether the phrase "solely as an investment" indicated passive investment instead of strategic investment.
The CCI noted that the press release was indicative of the fact that the acquisition was made neither solely as an investment nor in the ordinary course of business. Further, as per media reports, SCM and Zuari Group had been involved in a takeover bid for MCFL since April 2013. Further, Zuari Group had purchased shares amounting to 16.43% of MCFL's share capital just before SCM made the first acquisition.
SCM also contended that the second acquisition amounting to 0.8% of the equity shares of MCFL was not finalised, as the shares were kept in an escrow account and they were not entitled to exercise any legal or beneficial rights over them until approval from regulatory bodies (including the CCI) was obtained.
The CCI rejected the contention that where a buyer acquires shares but decides not to exercise legal or beneficial rights in them, no notice must be filed under Section 6(2) of the act. The CCI thus imposed a Rs20 million penalty under Section 43A of the act for violation of Section 6(2) of the act.
COMPAT held that the press release strongly supported the view that DFPCL's objective was not solely to make an investment in a competitor. The press release referred to the acquisition as a "very strategic and a good fit with the company's business". The press release also demonstrated DFPCL's intent in comments such as that it looked forward to working closely with MCFL to "enhance long term value for the shareholders of both companies". A mere investment through the stock market – where holders of MCFL's shares (ie, sellers) are substituted by the buyer (in this case SCM) – would not have increased the value for MCFL shareholders, unless SCM planned to take on a strategic role, one beyond mere investment.
In relation to the acquisition of 0.8% of the equity shareholding of MCFL by SCM, it was contended that the business of hostile purchase is affected by day-to-day rates and as the same was undertaken by SCM without any agreement, notice under Section 6(2) had to be made within 30 days of the purchase, which had been done. COMPAT held that Section 6(2A) of the act validates the prior notification requirement by stipulating that no combination can come into effect until 210 days have passed from the date on which notice was given to the CCI or the CCI issues an order under Section 31, whichever is earlier. Creation of the escrow account did not eliminate the statutory requirement of prior notice.
Finally, COMPAT held that the phrase "shall impose" in Section 43A of the act means that the failure to notify a combination under Section 6(2) of the act will carry a penalty under Section 43A, even if there is no mens rea or bad faith intention. The CCI has discretion regarding the quantum of a combination and, as the CCI considered the facts and circumstances of the case at hand when imposing the penalty, COMPAT saw no reason to interfere. The appeal was thus dismissed.
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(1) August 30 2016 order. For full text see COMPAT's website.