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.

CISG and India

The convention on International Sale of Goods (CISG) is arguably one of the most successful international conventions in terms of the number of countries that have ratified it. Most of the leading trading countries, common law and civil law alike have adopted the convention with the exceptions of UK and India.

One would argue that with India extensively  engaged in International Commercial transaction, it would be apt for it to sign the CISG. However, some leading commentators and practitioners have outlined the difficulties for India in signing the CISG. In this regard two articles would be relevant. One by Monica Kilian, "CISG and The Problems with Common Law Jurisdictions" and the other one by Shishir Dholakia, "Ratifying the CISG-India's Options".

With the proposed changes being made in the Indian Arbitratin law discussed by Mihir here India would also boost its legal framework relating to International Commercial Transactions by ratifying the CISG. I would make an attempt to illucidate on these issues in some future posts.

Perspectives on Government Outsourcing and Private Contractors

Outsourcing of sovereign duties to private contractors is not novel to the government of developed economies especially the United States of America. However, this concept is relatively new to the India government, but is fast catching up in the wake of increased workload and the absence of trained employees. In a recent development last year the Indian government decided to hire private professionals to scrutinise companies registered with the RoC inorder to increase the scrutiny of corporate financial statements and ensure better regulatory compliance. Such a move would naturally lead to the question of transparency and accountability of these private professionals. In light of this, a recent article published by Edward Rubin titled ‘the possibilities and limitations of privatization’ in 123 Harv. L. Rev. 890 (2010) is of great importance.

Rubin in his article has reviewed the book “Government by Contract: Outsourcing and American Democracy”. Rubin analyses and brings out the debate surrounding government outsourcing in four broad sub- parts as discussed under:

Historical Perspective: Privatization
Rubin whilst analysing the essays in the book points out that critiques of privatization which revolve around the point of stringent demarcation of Public-Private duties are simplistic and highly flawed. Rubin in support of the above assertion cites several historical evidences to suggest that historically, there was no function which was inherently public.

Critiques of Privatization
The author conceptualizes the problem through a contemporary example i.e. use of private contractors by the U.S. in Afghanistan and Iraq. These Private contractors were engaged in paramilitary activities, worked on surveillance and planning. Ironically, the U.S. government appointed another private party to monitor the above mentioned private contractors. The author points that out that such a model imposes several problems. Firstly, there does not exist any competitive bidding (prime reason for the efficiency of private players) in the allocation of these private contractors as there are hardly any non-government for such works. Secondly, the private employees cannot be monitored as they lie outside the hierarchical structure which is fundamental in any government set up. Finally, legal and moral norms cannot be imposed due to lack of democratic accountability.

Proposed Reforms of the Privatization Process
Whilst analysing the essays in the book Rubin puts forth the suggestion of the scholars in three broad categories:
Constitutional Reforms:
Rubin points out that the scholars suggest an expanded role of the judiciary in the monitoring of private contractors in light of the fact that the executive and the legislature has failed to do so. However, Rubin underlines the impediments before the judiciary in doing so. One of the looming impediments before the judiciary is the restricted interpretation of the State Action Doctrine. The doctrine stipulates that the due process doctrine can only be applied to private contractors if they are deemed to be “state actors”. As Rubin points out, the current position of law limits the finding that a private contractor can only be deemed to be a “state actor” if it is performing public functions which are traditionally done by the sovereign for or on behalf of the people.
Such concerns also exist in India as the scope of judicial review (rights based, administrative or constitution compliance review) is limited to “state action” alone. However theoretically if there is to be a change in this regard, it would still be pragmatically impossible as the Indian judiciary is already burdened with pending cases.
Statutory Reforms:
As Rubin rightly points out that several authors have recommended statutory changes inorder to bring transparency and accountability on the part of the private contractors. One of the changes recommended is to the Freedom of Information Act (FOIA), so as to make it applicable to private contractors. Such a reform can be undertaken in India as well through the newly enacted Right to Information Act (RTI).
Common Law Reforms:
The other measure proposed by eminent scholars is in the form of common law reforms. It stipulates that the judiciary should ensure that contractual terms are used to import public values such as fairness, transparency and accountability into the realm of private contracting.

Criticism to these Reforms
However, there are several authors who disagree with the above stated reforms. According to these authors such reforms would be unnecessary and would create complexities in an already complex area of government outsourcing and private contracting. Further, it would lead to an environment of uncertainty, a situation which is detrimental to the efficiency of private players. These authors point out that the solution lies in firstly; discontinuing the rigidity with the civil services exam so as to enable the government to hire well trained employees and secondly, expand the federal monitoring system.
It seems that in the coming years India would be rapidly moving towards a similar phenomenon of privatization where the government’s role would be that of an enabler. Hence, it would be useful to learn from the experiences of already developed jurisdictions on this subject.

Voluntary Guidelines, MCA

Last year December the "corporate week" was conducted by the ministry of corporate affairs(MCA). The "corporate week" was a unique initiative by the MCA to showcase the contribution of the corporate sector in the social and economic development of the country.

Mr. Khursheed while delivering his formal speech on the occasion pointed out the challenges before the country and the global community. As for the country: Mr. Khursheed pointed out that there were urgent development issues like poverty, illiteracy, malnutrition etc. As for the global community: Mr. Khursheed underlined the menace of climate change.

Mr. Khursheed proposed a collaborative solution to the above mentioned challenges. In this regard the following part of the speech is apposite:

"The scale of these challenges warrant a collaborative solution in which the Government, the business sector, the civil society organizations and the common citizens need to partner. The Ministry of Corporate Affairs is addressing these issues by providing an enabling environment in which the corporate sector can not only grow and flourish but also bring more and more sections of the society within its value-generation process. It is with this objective in view that the Ministry has chosen the theme of India Corporate Week , 2009 as 'Corporate Sector and Inclusive Growth'. "

It is in light of this objective, the ministry introduced the voluntary guidelines on corporate governance and voluntary guidelines on corporate social responsibility. In the upcoming posts I shall be discussing both the guidelines in detail.

The entire speech is available here http://www.mca.gov.in/Ministry/Minister.html