M&A regulations: Competition Commission irons out rough edges

Recent amendments in merger regulations will help bring clarity in M&A deals, especially big ticket international mergers, which will need Competition Commission's approval as the parties concerned have businesses in India



Almost three years after issuing the notification that mergers and acquisitions (M&As) above certain thresholds would require the Competition Commission of India’s (CCI) approval, the CCI amended certain provisions relating to combination regulations, effective March 2014. At a cursory glance, these amendments suggest that the clearance process for mergers and acquisitions would become simpler, besides also making it a more consumer friendly set of regulations.



Over 166 combinations have been approved by the CCI since the merger regulations came into effect. While mergers are intended to create synergy for the companies involved, they can result in reduced competition in the marketplace. The CCI’s mandate is to check a combination that causes “appreciable adverse effect on competition” which may result from the combined economic power of the merging companies.



The changes in merger regulations have come at a time when the corporate and the legal worlds are awaiting amendments to the Competition Act, 2002, which are expected to have larger ramifications on combinations that take place once the amendments are enacted. For instance, under the changed definition of “group” (section 5) in the proposed amendments to the Act, a 50:50 joint venture will be deemed to fall within the definition of “control” (through voting rights), which will require notifying the CCI. Currently, the concept of joint ventures is a grey area not explicitly dealt with in the Act. Also, the time-period required by the CCI to pass an order or issue directions with respect to combinations has been reduced to 180 days from the current 210 days.



However, amendments to the Competition Act, 2002, can only be executed through a Parliamentary ratification. Meanwhile, amendments to merger regulations (which don’t need to be routed through the cumbersome Parliamentary approval), will help bring clarity in M&A deals, especially big ticket international mergers which will need CCI’s approval as the parties concerned have businesses in India.



Highlights of the amendments to merger regulations:



Widened Scope



To begin with, the CCI has made it possible for a wider set of deals to come under its purview. Post amendment, the CCI can look into the substance or the intention of a proposed merger and not be limited to the filling of the required forms. Hence, in situations where it is assumed that notifying the CCI is not required because the assets, turnover or local nexus criteria are not being met, the CCI has clarified that it can look into the substance of a deal. This would enable the CCI to fulfil its mandate more effectively, if need be, by taking suo motto cognizance of deals that are deliberately structured with an intention to avoid scrutiny from the CCI. In other words, it has empowered itself to scrutinize deals which would otherwise escape its attention.

Currently, two merging Indian firms or groups with a combined turnover of Rs4,500 crore and Rs18,000 crore respectively will need CCI’s approval before merging. Similarly, the thresholds for two global firms and global groups with a presence in India are combined global sales of $2.25 billion and $9 billion respectively, with a combined sales of Rs2,250 crore in India.



Clarifying Taxonomy



The CCI, through the amendment, has also deleted item 10 of schedule 1, thus removing ambiguity around the term “insignificant local nexus”. Item 10 referred to the effective exemption available to combinations taking place entirely outside India. So while the overseas merging companies will not have to deal with ambiguties about their transactions in India; the CCI will save time deciding whether the said deal falls within its purview or not. The CCI has also made filings in Form I, or the simplified form, more unambiguous. It changed the term “vertical arrangement” to “vertical relationship” in Schedule II, which is a more defined business terminology. It is a different matter that some people may think of this as merely a semantic exercise.



Appeals



The amendments have allowed anybody who feels that the decision of the CCI on a combination has not been fair, to appeal to the Competition Appellate Tribunal (COMPAT), the quasi-judicial body to which an appeal can be made against any order of the CCI. This has been done by deleting regulation 29, which dealt with the provision relating to appeal to the COMPAT. So far, this regulation allowed only certain individuals and entities who were parties to the proceedings in a combination review, and those who were aggrieved by any direction, decision or order of the CCI to file an appeal. Further, this deletion also ensures that the CCI does not inadvertently get into a self made trap. For, any subordinate legislation (in this case the merger regulations brought out through an executive order) cannot override the primary legislation (in this case the Competition Act 2002). Regulation 29, thus could have been challenged in court .



Financial Reporting



Finally, in the more detailed form- Form II- the CCI has brought in more clarity by asking for the latest available financial documents on assets and sales of companies getting into combinations. The amendment specifies that value of assets/turnovers as per audited annual accounts of the immediately preceding two financial years be provided, as against the earlier regulation which required submitting “current and preceding years” audited annual accounts. This will help the CCI take an informed decision on an application seeking its approval. For the merging parties, this will allow them to furnish the latest financial statements rather than facing uncertainty over CCI’s view on current year’s statement.



NOTE: Views expressed in this article are personal



(KK Sharma is chief executive of KK Sharma Law Offices as well as former former director general of CCI. Sangeeta Singh is director for project operations at Nathan Economic Consulting, India)