Competition new amendment
Competition (Amendment) Bill, 2022 (“Bill”) which introduces significant changes to the Competition Act, 2002 (“Act”).
The Bill, inter alia, introduces changes to the merger control regime, seeks to broaden the scope of anti-competitive agreements and introduces a settlement and commitment framework to reduce litigation.
The key changes in the merger control regime and their impact are as follows:
- Approval of the Competition Commission of India (CCI) would be required not only on the basis of the assets and turnover of the entity, but also on the basis of the transaction value
- Negative control is control?
- Defining “turnover” for merger control
- Time period for notifying a combination
- Time limit for passing an order reduced
- Exemptions to FPIs, VCFs etc
- Enabling provision for deemed approvals
- Open offers
- Investigation of combinations
- Modifications to a combination can be proposed by a party
- Changes in penalties
- Framing of rules and regulations
- Savings provision
APPROVAL OF THE COMPETITION COMMISSION OF INDIA (CCI) WOULD BE REQUIRED NOT ONLY ON THE BASIS OF THE ASSETS AND TURNOVER OF THE ENTITY, BUT ALSO ON THE BASIS OF THE TRANSACTION VALUE
Current requirement
Currently, CCI’s prior approval for an acquisition or merger is required only if certain thresholds in terms of assets and turnover of the parties to an acquisition or the relevant group to which the target would belong, are met. The thresholds are given below:
There is also an exemption from the requirement of seeking CCI’s approval if the value of the assets being acquired, taken control of, merged or amalgamated is not more than Rs. 350 crore (Rs. 3.5 billion) in India or turnover of not more than Rs. 1,000 crore (Rs. 10 billion) in India.
2. New requirement
Henceforth, CCI’s prior approval will also be required if:
- the value of any transaction exceeds Rs. 2,000 crore (Rs. 20 billion); and
- the enterprise which is being acquired, taken control of, merged or amalgamated has substantial business operations in India.
As a result of the amendment, the number of transactions which would potentially require CCI’s approval has certainly increased.
3. Some issues that may arise
What is ‘substantial business operations’?
The new provision is dependent on further regulations being framed. What constitutes ‘substantial business operations’ is yet to be defined. A substantive analysis would be involved in determining whether an enterprise has ‘substantial business operations’ in India.
While the final regulations are awaited, one may refer to European jurisdictions such as Austria and Germany where transaction value thresholds have been introduced by the Austrian Federal Competition Authority and the German Federal Cartel Office. Under Austrian and German competition law, a merger would be subjected to merger control provisions if the company to be acquired has substantial domestic operations in Austria or Germany, respectively. A systemic analysis of, inter alia, the following criteria is undertaken to determine whether the target company has substantial domestic operation:
- measurement of the domestic activity;
- geographical allocation of the domestic activity;
- market orientation; and
- significance of the domestic activity.
Scope of the term ‘value of transaction’
‘Value of transaction’ has been given a broad and inclusive definition. The term is defined as including every valuable consideration whether direct or indirect, or deferred for any acquisition, merger or amalgamation. By using the word ‘includes’ in the definition, the intent is to make the definition non-exhaustive and as broad as possible.
Issues may still arise while calculating the value of a transaction. For instance, the manner of factoring in any amount to be paid which is contingent on the happening of certain events, earnouts, post-closing adjustments etc may pose a challenge. Another question that can arise is that, if there are multiple investors in an investment round, would the value be calculated qua an investor or the entire round.
1. CCI’s prior approval is required in case of an acquisition of control of an enterprise, if the asset or turnover test (mentioned above) is met. The scope of the definition of ‘control’ has been broadened by the Bill.
2. Earlier, ‘control’ was defined as including controlling the affairs or management of an enterprise or group.
3. Now, it is not required to be shown that there is control over the affairs or management of an enterprise or group. The ability to exercise material influence, in any manner whatsoever, over the management or affairs or strategic commercial decisions, would be sufficient to demonstrate ‘control’. Defining ‘control’ in terms of ‘material influence’ certainly reduces the threshold for determining ‘control’. What is interesting is that the 52nd Report of Standing Committee on Finance (2022-23) noted the Ministry of Corporate Affairs’ comments that under the Competition Act “in case of notifiability as well as substantive assessment of combinations, acquisition of negative control may be vital.”
DEFINING “TURNOVER” FOR MERGER CONTROL
1. As mentioned above, CCI’s prior approval is required if the turnover test is met. Under the Act, ‘turnover’ is defined as including the ‘value of sale of goods and services’.
2. Now, a more elaborate definition of ‘turnover’ is proposed to be added. While calculating ‘turnover’, it is now explicitly stated that the following shall be excluded:
- intra-group sales
- indirect taxes
- trade discounts
- all amounts generated through assets or business from customers outside India
3. This is a welcome change as it provides clarity on the exclusions while calculating ‘turnover’. Previously CCI had discussed the scope of the term ‘turnover’ and had held that intra-group sales are excluded from the computation of turnover.
TIME PERIOD FOR NOTIFYING A COMBINATION
1. When the Act was initially notified, all combinations satisfying the asset and turnover test (unless exempted) had to notify CCI within 30 days of the approval of the merger or execution of the agreement for acquisition etc. Subsequently, CCI issued a notification S.O. 2039(E) dated June 29, 2017 pursuant to which the requirement of giving a notice within the said 30 days was exempted.
2. The Bill incorporates what the notification stated and amends the Act to state that CCI has to be notified after the approval of the merger or execution of the agreement for acquisition etc., but prior to the consummation of the combination. Hence, the time period of 30 days will no longer be mentioned in the Act.
TIME LIMIT FOR PASSING AN ORDER REDUCED
Currently, no combination can come into effect until 210 days have passed from the date on which notice has been given to CCI or CCI has passed orders, whichever is earlier. The Bill reduces this timeline to 150 days.
1. Currently, the Act exempts acquisitions by public financial institutions, foreign institutional investors, banks and venture capital funds from the requirement of seeking CCI’s prior approval if the acquisition is pursuant to any covenant of a loan agreement or investment agreement. However, these entities are required to notify the combination within 7 days from the date of the acquisition.
2. The Bill continues with the exemptions and now includes all category I alternative investment funds. However, the exempted entities will no longer be required to notify the combination within 7 days from the date of the acquisition.
ENABLING PROVISION FOR DEEMED APPROVALS
1. An enabling provision has been introduced pursuant to which if a combination fulfils such criteria as may be prescribed and is not otherwise exempted, then notice for such combination may be given to CCI in such form as may be specified by regulations, disclosing the details of the proposed combination and thereupon a separate notice seeking CCI’s prior approval would not be required to be given for such a combination.
2. Upon filing of the above notice and its acknowledgement by CCI, the proposed combination would be deemed to have been approved by CCI. However, if CCI finds that the combination does not fulfil the requirements for the relaxation, or that the information or declarations provided in the form are materially incorrect or incomplete, then the deemed approval shall become voidab initio, and CCI can pass an order after giving the parties to the combination an opportunity of being heard.
3. Further, the Bill provides that if the notice is found to be void ab initio then a notice may given by the acquirer or parties to a combination, as may be applicable, within a period of 30 days of the order of the CCI. Furthermore, the CCI cannot take any action till the 30 day period is expired.
1. Under the Act, a combination which requires the prior approval of CCI cannot be implemented unless CCI approves the same. This gave rise to certain difficulties in case of open offers to public shareholders of a public listed company under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 as well as in case of on-market transfers. On one hand, as per SEBI’s regulations, the transaction had to be completed within a given time frame, and on the other hand, the transaction could not be consummated till CCI gave its approval.
2. The Bill addresses this concern. Now, an open offer or acquisition of shares or securities convertible into other securities from various sellers, through a series of transaction on a regulated stock exchange can be implemented if the following two conditions are met:
- The notice of the acquisition should be filed with CCI within such time period as may be prescribed by CCI; and
- The acquirer should not exercise any ownership or beneficial rights or interest in the acquired shares or convertible securities, including voting rights and receipt of dividends or any other distributions, except as may be specified by CCI, till the approval of such an acquisition by CCI.