M&A Under The Competition Act: Reasons For Delay in Notification

It has been more than year since S.3 and S. 4 of the competition act, 2002 dealing with anti competitive agreements and abuse of dominant position respectively were notified by the MCA. However, S. 5 and S. 6 of the act dealing with mergers& acquisitions is still to become operational. This post looks at some of the reasons why both the sections dealing with M&A have not been notified.


M&A under the act: A Brief Overview

S.6(1) of the act prohibits any person or enterprise from entering into a combination which has an “appreciable adverse effect” on competition in India (Note, S. 32 also confers the CCI with extra territorial powers) . Further, S. 6(2) stipulates that any enterprise which to enter into a combination (as prescribed in s. 5 of the act) shall give notice to the CCI furnishing details of the proposed merger within thirty days of (i) approval of the merger by the board of directors of the concerned enterprise or (ii) execution of any agreement relating to acquisitions referred to in clause 5(a) & (b) of the act. S. 6(2A) provides a period of 210 days to the CCI to complete the investigation relating to such combinations (if the CCI is unable to come to any conclusion within this period then the combination is deemed to be approved)

S.5 of the Act lays down the transactions which will qualify as combinations for the purposes of the Act. The following is the threshold limit for mergers and amalgamation:

• transactions among Indian companies with combined assets of Rs. 1000 crores or Rs 3000 crores in turnover of the merged entity;

• cross-border transactions involving both Indian and foreign companies with combined assets of $500 million or $1.5 billion in turnover; and

• transactions that have a territorial nexus with India, where the acquirer has $125 million in assets or $375 million in turnover in India.
The following is the threshold limit for acquiring groups:
• Rs 1000 crores in assets and Rs 3000 crores in turnover in India respectively;

• assets in excess of $2 billion; or

• turnover of more than $6 billion outside India
Once any transaction reaches the threshold limit as specified in S.5, the enterprise has to take recourse to the procedure laid down u/s 6 of the Act. S. 5 and S. 6 are primarily ex ante whereas S.3 and s. 4 are ex post facto.


Some Reasons for non notification

The reasons for non notification are directly related to the concerns expressed by the Industry with regard to the provisions relating to M&A under the Act. The following are the suggestions and concerns expressed by FICCI:

• The breadth of Section 5 is so wide that it would require notification of transactions that constitute an increase in shareholding by a promoter of a listed public company (including possible internal reorganizations within a corporate group). It is important to note that these transactions are exempted under the SEBI Takeover Code.


• Section 5 be modified and a single sales/turnover test be adopted along the following lines:


I.
a) Combined world-wide turnover of the parties to the “combination” in excess of Rs.
______________; and
b) each of at least 2 of the parties to the “combination” must have turnover in India in excess of
Rs. ___________;


• Section 6(2)(b) of the Act uses the term “other document” and essentially an execution of such “other document” triggers an obligation to notify the Competition Commission. It is important to clarify that the mere execution of a non-disclosure agreement or a letter of intent or memorandum of understanding (and other similar documents that do not constitute the definitive acquisition agreement) will not trigger the notification requirement. There are cost implications as well because if a non-binding letter of intent were to trigger a notification requirement, the notifying parties would need to pay filing fees of Rs. 20 lakhs, in addition to the devastating impact that such a notification would cause in terms of loss of confidentiality in respect of such a transaction.


• All types of intra-group combinations, mergers, demergers, reorganizations and other similar transactions should be specifically exempted from the notification procedure and appropriate clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do not have any competitive impact on the market for assessment under the Competition Act, Section 6.


• The maximum turnaround time for CCI should be reduced from 210 days to 90 days. To compare anti-trust laws prevalent globally, either the notification is optional as is the case in UK and Australia or the review period is short, where notification is mandatory, for example, in USA review period is 30 days.

(Readers would note that the above mentioned points have been compiled from the article available here)

Apart from this it seems that there would also be a regulatory overlap in the Banking, Insurance and Telecom sector among others. As presently M&A in these sectors are regulated by sector specific regulators such as the RBI, IRDA and TRAI. The article here is useful.