CCI loses gain before COMPAT: Analysis of the COMPAT order in the matter of Indian Jute Mills Association

Background

In 2011, the Indian Sugar Mills Association, the National Federation of Co-operative Sugar Factories Ltd and All India Flat Tape Manufacturers Association (Informants) had alleged before the Competition Commission of India (CCI) that Indian Jute Mills Association (IJMA) and Gunny Trades Association (GTA) had cartelised and have entered into anti-competitive agreement which is violative of Section 3 of the Competition Act, 2002 (Competition Act).

The CCI in its order dated October 31, 2014 (CCI Order) held that impugned acts of IJMA and GTA are in contravention of the provisions of the Competition Act.

While overturning CCI’s order, Competition Appellate Tribunal (COMPAT) in the matter of IJMA and others v. The Secretary, CCI and other (Appeal No.: 73 of 2014) vide its order dated July 1, 2016 (COMPAT Order) held that there was no express or tacit agreement or understanding between IJMA and GTA for fixing the price of jute bags and the Director General-Investigation (DG) and the CCI committed grave error by holding that IJMA had acted in contravention of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Competition Act.

Some salient features of the COMPAT Order and points to ponder

There are several interesting procedural and substantive jurisprudential issues discussed by the COMPAT in its 586 pages order. Some of the salient features of the COMPAT Order are discussed below:

Practice of preliminary conference

In terms of Section 26(1) of the Competition Act read with Regulation 17 of the Competition Commission of India (General) Regulations, 2009 (General Regulations), before forming a prima facie opinion and ordering for investigation by the DG, the CCI may call for a preliminary conference with the informants and such other persons, if it deems necessary. The preliminary conference is not a mandatory requirement and there are no set or standard procedure followed by the CCI for conducting such meeting and in practice the CCI seems to have preliminary conferences with the parties concerned on case to case basis and such meetings are ad hoc in nature.

The COMPAT in the COMPAT Order observed that:

“the Commission could have invited Indian Jute Mills Association (IJMA)( Appellant in Appeal No. 73 /2014) and Gunny Trade Association (GTA) against whom the allegation of cartelization had been levelled by Respondents Nos. 2 to 4 for preliminary conference but without undertaking that exercise, it passed an order dated 02.08.2011 under Section 26(1) of the Act.”

The COMPAT seems to suggest, that the CCI should have undertaken the exercise of preliminary conference with IJMA and GTA and had that meeting happened, perhaps the CCI’s preliminary view may have been diluted. This observation, in my humble opinion should not act as a binding force for the CCI to follow in future cases especially in cases involving allegation of cartelization (where concrete evidences are produced by the informants) and the CCI believes that conducting dawn raid in terms of Section 41(3) of the Competition Act is the only solution.

However, a preliminary conference may be considered by the CCI in behavioural cases involving abuse of dominance and other anti-competitive agreement cases (except cartel offences) where the evidences and supporting documents submitted by the informants are feeble and not very strong in nature. This practice, will in turn save the precious time of the DG and the CCI.

Only the person who hears can decide

In the instant case, one of the Member of the CCI (Mr. U.C. Nahta), had joined the CCI much after the proceedings of the case had begun (important steps such as perusal of the information of the Informants, passing of order under Section 26(1), hearing of the case on two dates etc., were already done) and still he participated in the final CCI Order. Also, the Chairperson including the other Members and Mr. Nahta himself were not able to produce an affidavit to submit that Mr. Nahta had been properly briefed by the other Members or the Chairperson about the matter.

The COMPAT noted:

“It can thus be safely inferred that when he signed the impugned order Shri U.C. Nahata did not have any inkling about the nature of the allegations contained in the information, the investigation conducted by the DG by obtaining replies/submissions of the informant and IJMA and GTA, Ministry of Textile and Jute Commissioner, Government of India, the statements of representatives of Respondent Nos. 2 and 3 herein and IJMA and GTA as also the replies given by the members of IJMA and he mechanically endorsed the conclusion recorded by the Chairman and other Members as if he was deciding an administrative matter in the Government. Thus, there is no escape from the conclusion that participation of Shri U.C. Nahata in the impugned order is per se contrary to the basics of natural justice and has the effect of vitiating the impugned order.”

The CCI Order was signed by six individuals (one Chairperson and five Members which included Mr. Nahta). In my humble opinion, the absence of one of the Members in the preliminary stages of the case should not be the sole reason for the COMPAT to overrule the orders of the CCI. In terms of Section 22 of the Competition Act, the quorum of the meeting of the Members is satisfied if the minimum number of Members attending the meeting is three in number. Subtracting the presence of Mr. Nahta in this case, will result in the order given by five Members (which include Chairperson too). My point here is that any proceedings of the CCI should not be vitiated only because, a vacancy is caused due to absence of the Member or there is a mere procedural irregularity not affecting the merits of the case (as long as the quorum requirements are met). It must be understood that the proceedings before the CCI are not regular court proceedings and if a case is properly heard by the minimum quorum prescribed under the Competition Act and the merits of the case are not compromised, then certain leeway should be given to the CCI.

I wish the CCI now appeal before the Supreme Court to clarify this proposition i.e., whether the absence of one of the Members in tribunal (in cases where quorum requirements are met), make the order of the tribunal per incuriam. Reference may be taken from a Patna High Court (Patna HC) decision of Ram Autar Santosh Kumar v. State of Bihar and others (AIR 1987 Pat 13), where the Patna HC, with approval quotes the decision of Supreme Court in the case of Ishwar Chandra v. Satya Narayan Sinha (AIR 1972 SC 1812):

“It is also not denied that the meeting held by two of the three members on the 4th April, 1970, was legal because sufficient notice was given to all the three members. If, for one reason or the other, one of them could not attend, that does not make the meeting of others illegal. In such circumstances, where there is no rule or regulation or any other provision for fixing the quorum, the presence of the majority of the members would constitute it a valid meeting and matters considered thereat cannot be held to be invalid.”

The Patna HC also quoted, the case of The Punjab University, Chandigarh v. Vijay Singh Lamba (AIR 1976 SC 1441), where the Supreme Court held:

“If the quorum consists of 2 members, any 2 out of the 3 members, can perform the functions of the Standing Committee, though the Committee may be composed of 3 members. When Regulation 32.1 speaks of the Committee being unanimous, it refers to the unanimity of the members who for the time being are sitting as the Committee and who, by forming the quorum, can validly and lawfully discharge the functions of the Committee and transact all business on behalf of the Committee.”

Establishing cartel offenses

COMPAT after perusing the facts of the case along with the evidences submitted came to the conclusion that, IJMA and GTA have not entered into an agreement for fixing the price of jute bags (A-Twill jute bags).

The COMPAT noted:

“A careful scrutiny of the record shows that neither the informants produced nor the DG could collect any substantive evidence to prove that there was an agreement between GTA and IJMA about fixation of price…The material produced by the informants or collected by the DG unmistakably show that neither there was any meeting between the representatives of the two entities, namely, IJMA and GTA and no deliberation had taken place between their members on the issue of fixation of price of A-Twill jute bags…On its part, the Commission did not independently analysed the documents produced by the informants/collected by the DG and simply approved the findings recorded by the latter.”

The case for proving a cartel offence essentially boils down to production of viable evidences (direct or circumstantial) which should be substantial and impactful so that an act of collusion can be established in terms of Section 3(3) of the Competition Act. Robust and modern techniques for investigations (such as e-discovery examination etc) should be developed by the DG for establishing the cartel offences. Further, dawn raid exercises should be adopted if the DG and the CCI wants to reach and get the direct and substantial evidences.

However, I understand the above may not be as easy, given the litigations CCI has been involved in relation to search and seizure of electronic documents / hard disks and necessity of dawn raids before the Supreme Court and the Delhi High Court. I am sure these things will get more clarity with the passage of time.

Procedure for prosecuting the members/ office bearers and employees

As per the COMPAT, only after the ingredients mentioned under Section 48(1) and 48(2) (Contravention by companies) are satisfied (which is - there must exist an affirmative finding by some competent authority (i.e., CCI) that the company has contravened the provisions of the Competition Act), the proceedings can be initiated against the person who was in-charge (including any director, manager et al) of the business of the company at the time the antitrust offence was committed by the company.

The above proposition was also held by the COMPAT recently in the matter of M/s. Alkem Laboratories Limited v. CCI (Appeal No. 09 of 2016).

This means that an order passed by the CCI under Section 27 determining the guilt of a company for violation of Competition Act is a condition precedent for any investigation conducted by the DG under Section 48(1) and 48(2).

However, if we read some of the recent Section 26(1) orders of the CCI, the CCI categorically mentions that:

“During the course of investigation, if involvement of any other party is found, the DG shall investigate the conduct of such other parties who may have indulged in the said contravention”.

These are very broad wordings and there is an apparent dichotomy between the views of the COMPAT (as held in the present case as well as the Alkem Laboratories case) and the practice adopted the CCI.  With due respect to the COMPAT, in my humble opinion, given the drafting of the Competition Act, the practice adopted by the CCI appears to give more credence and purpose to the ideals of the Competition Act. The investigation by DG can simultaneously proceed against the company as well as the individual concerned. Performing these two processes divergently may be counter-productive and time consuming. The words (such as word ‘committed’) under Section 48 should be given a purposive interpretation and not merely a literal understanding.

Concept of turnover for assessing penalty

This is the issue over which the COMPAT and the CCI are at loggerhead since the decision by the COMPAT in the matter of M/s. Excel Crop Care Limited v. CCI (Appeal No. 79 of 2012) in October, 2013.

As per COMPAT, as recently held in the case of M/s. ECP Industries and another v. CCI (Appeal No. 47 of 2015), in relation to interpretation of word ‘turnover’:

“Therefore the term, ‘turnover’ used in Section 27(b) and its proviso will necessarily relate to the goods, products or services qua which finding of violation of Section 3 and/or Section 4 is recorded and while imposing penalty, the Commission cannot take average of the turnover of the last three preceding financial years in respect of other products, goods or services of an enterprise or associations of enterprises or a person or associations of persons.”

“Since the legislature has not laid down any criteria for imposing penalty, the Commission is duty bound to consider all the relevant factors like – nature of industry, the age of industry, the nature of goods manufactured by it, the availability of competitors in the market and the financial health of the industry etc. and also take note of the law laid down by the Supreme Court, the High Courts and the Tribunal.”

The above legal fiction as to the interpretation of word ‘turnover’ is sub judice before the Supreme Court in the matter M/s. ECP Industries v. CCI (Appeal No. 4342 of 2014) along with couple of other similar matters. It will be interesting to see how the Supreme Court view the concept of ‘turnover’.

Salient features of CCI’s order approving PVR’s acquisition of DLF’s film exhibition business

Recently in an order (Notice given by PVR Limited (PVR) (C-2015/07/288)) dated May 4, 2016 the Competition Commission of India (CCI), by majority, conditionally approved the proposed combination between PVR and DLF Utilities Limited (DLF) under the provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) (CCI Order). The proposed combination was in relation to acquisition by PVR of DLF’s film exhibition business comprising of 39 screens in the respective relevant markets of Delhi, Gurgaon and Noida (described below). 

In terms of the CCI Order, among other commitment,

PVR was:

·         required to terminate its agreements in the relevant markets of Noida and Gurgaon and DLF (costing it around 22 screens);

·         submit an certificate that, it will not expand organically or inorganically in Noida and Gurgaon (for next three years) and in South Delhi (for next five years); and

·         submit a certificate that, for the next five years it will not acquire directly or indirectly any interest in the properties in which it is terminating the agreement

DLF was:

·         required to submit an undertaking that it will either continue to operate for a period of five years or sell/ lease or transfer some of the assets in the relevant market of South Delhi (of 7 theatre screens) to an effective and viable competitor of PVR

The competition assessment process took the CCI three hundred two days (as against the maximum of two hundred ten days prescribed under Section 6(2A) of the Competition Act) to approve the proposed combination. This blog seeks to highlight some of the salient features of the CCI Order.

Determination of relevant market

The delineation or defining of relevant market (comprising of relevant product market and relevant geographic market) in a combination transaction is the backbone for any merger analysis. In the instant case, the CCI has taken the purposive and pragmatic interpretation of the term ‘relevant market’ (in line with its decisional practice in the matter of Carnival Cinemas/ Big Cinemas (C-2015/01/236) and have defined the relevant product market as market for exhibition of films in multiplex theatres (in Gurgaon, Noida and Chandigarh) and at some geographies such as South Delhi and North, West & Central Delhi it also include high-end single scree theatres.

Assessment of appreciable adverse effect on competition (AAEC)

·         Market concentration (determination by Herfindahl Hirschman Index (HHI)): HHI is calculated by summing the squares of the market shares of all the firms active in the market.  Both the absolute level of the HHI and the change in HHI as a result of merger can provide an indication of whether a merger is likely to raise competition concerns.

It may so happen that the entire market share (because not all players market share is known) is not known. In that event, it would be appropriate to calculate delta of HHI (i.e., difference between HHI pre and post-merger).  Delta is also calculated as 2ab, where ‘a’ and ‘b’ denotes the market share of the respective firms.

In the instant case, the CCI has for the first time has come out with guidance as to the absolute HHI and delta HHI, which provides for a safe harbour to the parties to combination for assessment as under the Competition Act and Combination Regulations.

The CCI has categorically mentioned that:

“Keeping in view the thresholds used in the advanced jurisdictions, it is observed that the markets with post-merger HHI more than 2000 are considered as highly concentrated and markets with post-merger HHI between 1000 and 2000 as moderately concentrated, with the indication of concern of an adverse effect on competition in the market, if: (a) the post-merger HHI is above 2000 and increase in HHI is 150 or more; or (b) the post-merger HHI is between 1000 and 2000 and increase in HHI is 250 or more”.

·         Efficiency: The parties (in relation to relevant market in Noida and South Delhi) stated that the proposed combination is expected to bring operational and organizational efficiency by pooling resources together and utilizing them optimally, reducing overheads etc.

However, the CCI observed:

“The efficiencies are not combination specific; and

No evidence has been provided as regards the efficiencies translating into lower prices or better quality foe customers on a lasting basis”.

It may be mentioned that, proving efficiencies in combination cases is often very difficult and competition authorities around the world including the CCI require a high evidentiary standard to prove such a case. Further, the quantification of combination specific efficiencies is also challenging and is perhaps one of the most speculative single element of combination review.

·         Non-compete and Non-Solicitation Agreement:  Like in several previous cases, the CCI was concerned about the period and geography of the non-compete clause entered between PVR and DLF.

In the instant case, PVR amended the non-compete and non-solicitation agreement to reduce the terms from five years to three years and geographical extent from India to Delhi-NCR and Chandigarh.

Concept of ‘merger remedies’ explained

Under the competition law domain, there are two kinds of remedies for combination cases, namely, (a) structural remedies, and (b) behavioural remedies. Under the structural remedy, the competition authority orders or at times the parties to combination voluntarily submits to divest certain assets or undertakings and for cases involving behavioural remedy, the competition authority orders or the parties offers for certain commitments (such as altering the business plan, amending the agreements such as non-compete/ non-solicitation, price caps, quality commitments etc.) for a specific period of time for a specific defined relevant market.

The CCI has dealt with the concept of merger remedies in quite a few orders now including ordering of divestiture in atleast two cases. 

While explaining about merger remedies, in the context of the present case, the CCI mentioned:

“The purpose of remedies is to preserve to the extent possible the pre-combination level of competition by recreating as far as possible the competitive status quo in the affected markets…Behavioural commitments (such as price caps and quality commitments offered by PVR) would not effectively alleviate the competition concerns in the relevant market for exhibition of films in multiplex theatres…apart from the fact that behavioural commitments would be difficult to formulate, implement and monitor and run the risk of creating market distortions. This is in line with international best practices wherein structural remedies as they directly address the cause of competitive harm arising from the elimination of a vigorous competitor and have durable impact by way of creating an effective competitor to the combined entity, are preferred to behavioural remedies for horizontal combinations.”

It further noted:

“In case of divestiture, there would be no need for ongoing oversight or intervention. It is also noted that international best practices suggest that in the absence of a suitable remedy, such as when divestiture is not possible, in a case where a structural remedy is required to address AAEC, the only alternative may be to direct that the proposed combination shall not take effect”

The CCI appears to be a view that in a highly concentrated market where post-transaction the market share of the parties is very high (for e.g., more than 75% as was the situation in this case) then, behavioural remedy may not be the solution and the only option left is divestment or structural remedy. And in a situation the divestment is not possible than the only alternative the CCI has is to block the combination transaction.

Keeping out divestiture process under the Competition Act

In this instant case, in its proposal for modification under Section 31(3) of the Competition Act, the CCI suggested for divestment of assets in relevant market of South Delhi and provided for aspects for appointment of MA, divestiture agency etc.

Regulation 27 of the Combination Regulations mandates the CCI to appoint a monitoring agency (MA) in case the CCI orders for certain structural remedies. This is in contrast to the practice followed in some of the major jurisdictions such as EU and US, where the parties to combination transaction appoint the MA. 

There are no guidelines/ stated parameters for selection/ appointment of MA, however, in practice the CCI appoints the MA on the basis of RFP floated by it to a select consultancy firms and basis certain criteria such as independence, conflict etc., it select the MA on the basis of two bid system process (technical bid and financial bid). This process typically takes 2-3 weeks to complete and is often burdensome for parties to combination as it involves payment to MA along with some legal costs.

PVR seems to have taken a pragmatic approach (based on the learning of the past cases, i.e., divestiture in the matter of Sun Pharma Industries Limited/ Ranbaxy Laboratories Limited (C-2014/05/170) and Holcim Limited/ Lafarge SA (C-2014/07/190), which involved appointment of MA, were mired with legal proceedings before the courts and took a lot of time for consummation / closing of the transaction) by requesting the CCI that, it prefers the mechanism of amending the respective transaction documents to exclude certain theatres of DLF over acquiring the theatres and thereafter divesting (as proposed by the CCI). This request was accepted by the CCI.

Basis the above request, among other things, the CCI has sought for undertaking from (a) PVR to amend its agreement with DLF in relation to acquisition of theatre screens, and (b) DLF to provide effective competition to PVR in the relevant market in South Delhi by continuing the operations itself or transferring/ selling the assets to the effective and viable competitor, independent of PVR.

Epilogue

PVR and DLF had to re-work on the terms of the original deal which perhaps was not envisaged by them when they had signed the term-sheet for the transaction. In my humble opinion, PVR should have challenged the proposal of modification or the refusal of the CCI to accept the terms of hybrid proposal, proposed by it as the competition assessment issues such as threat of substitutes, threat of new entrants, industry rivalry, bargaining power of distributors and buyers was not extensively discussed (these issues were also mentioned in the minority order), which should have clarified some of the concepts under the Indian competition law jurisprudence. However, I understand that the main motive of the parties (after ten months of deliberations with the CCI) in the best interest of business was to close the transaction and move ahead with the integration process rather than prolonging the legal battle.

Market practice – Letter of offer for takeovers filed with SEBI

In Indian capital markets and M&A transactions (especially in relation to listed company takeovers), a lot depends on the market practice, a term heavily used by lawyers and bankers assisting the companies in a specific acquisition deal.

Many a times while advising a client on aspects of a takeover transaction from the point of view of obtaining approval from Securities and Exchange Board of India (SEBI) (technically there is no approval granted by SEBI, it issues an observation letter for the takeover process in relation to disclosures made and other compliances), the lawyers look at past precedents i.e., past successful takeover transactions which were approved by SEBI.

In this piece, I would like to capture some of the peculiar or some-what different transaction structures adopted by the parties to an acquisition transaction, where after review SEBI has granted approval for the takeover process under the SEBI Takeover Code. I have selected 6 important deals undertaken by reasonably decent bankers in India.

       I.            Acquisition of Astec Lifesciences Limited by Godrej Agrovet Limited (Merchant Banker: Kotak Mahindra]

1.      Additional Equity Shares: In terms of the SPA, the Acquirer has the option to additionally acquire upto 9,79,055 Equity Shares from the Sellers for a price of INR 190 for each additional Equity Share, if after the Offer the Acquirer does not hold 50.32% of the Voting Share Capital

Takeaways: SEBI is fine with the call option available to the acquirer in the event the acquirer is not able to acquire minimum number of shares it seeks to acquire.

2.      Downward adjustment: The price agreed to be paid by the Acquirer to the Sellers is INR 190 (Rupees One Hundred Ninety) per Sale Share, which price is subject to downward adjustments (if applicable) in accordance with the terms of the SPA, including but not limited to a reduction of INR 20,00,00,000 (Rupees Twenty Crore) from the Sale Consideration if the sale of ACCPL is not completed within 270 (Two Hundred Seventy) days from August 28, 2015 (i.e. date of execution of the SPA). ACCPL is a wholly owned subsidiary of the Target Company and as a condition to the transactions contemplated under the SPA the shares of ACCPL held by the Target Company will be sold within 270 days from August 28, 2015 (i.e., date of execution of the SPA).

Takeaways: SEBI is fine with the price adjustment clause amongst the sellers and the buyers in case of the SPA. However, such readjusted sale price is independent of the price offered to the shareholders (under Regulation 8 of the SEBI Takeover Code).

3.      Non-compete fees: The Sale Consideration to be paid by the Acquirer to the Sellers also includes an aggregate non-compete fee of INR 50,00,000 (Rupees Fifty Lacs).

Takeaways: The consideration of Rs. 50 Lakhs appears to be less considering the stakes involved in the transaction. Perhaps, the amount negotiated for the offer price had taken into consideration/ factored-in the non-compete payment involved in this transaction. Additionally, the amount for non-compete here is a show-case amount intended to lessen the stamp duty burden and also an instrument to capture all the typical provisions involed for non-compete such as time period, area of operation, relevant product and geographic market etc.

4.      Reps & Warranties and Indemnity: In this context, the Sellers have set aside a certain sum of money in an escrow account which may be drawn on by the Acquirer upon (a) suffering any losses from the breach or inaccuracy of the representations and warranties, and (b) occurrence of certain identified events.

Takeaways: This is a typical clause in a M&A SPA agreement. However, the time period of keeping the money in escrow account is important, which could vary from 12 months to 18 months post-closing depending on the transaction. SEBI is fine with such clauses as this does not have an impact on shareholders who are tendering the shares in the open offer.

5.      Continuing Shareholding of Mr. Ashok Hiremath: Mr. Ashok V. Hiremath will continue to hold 10% of Voting Share Capital assuming the Acquirer does not acquire the Additional Equity Sharesin the Target Company,and subject to other terms of the SPA for a period of two (2) years from the completion of the acquisition of the Sale Shares, in accordance with the SPA and will continue as a Promoter of the Target Company.

Takeaways: This is matter of private agreement between the parties.

6.      Sellers not to acquire Equity Shares under the creeping acquisition method: The Sellers have agreed that (a) till two (2) years from the completion of the acquisition of the Sale Shares in accordance with the SPA, or (b) till the time the Sellers cease to be classified as 'promoters' as per the SEBI (ICDR) Regulations, the Sellers or their affiliates will not acquire any shares of the Target Company without the prior written approval of the Acquirer.

Takeaways: This is matter of private agreement between the parties.

7.      Tag Along Right: For a period of upto two (2) years from the completion of the acquisition of the Sale Shares in accordance with the SPA, if the Acquirer intends to sell any equity shares of the Target Company, then Mr. Ashok V. Hiremath will have the right to 'tag along' and sell the equity shares of the Target Company held by him along with the Acquirer, in accordance with the terms of the SPA.

Takeaways: This is matter of private agreement between the parties.

8.      In this transaction the price per share offered to public shareholders was more than as was negotiated between the acquirer and the sellers under the SPA.

    II.            Acquisition of ADI Finchem Limited by FIH Mauritius Investments (Merchant Banker: ICICI Securities]

1.      As per the terms of the SPA, the Sellers have the ability to undertake inter-se transfer amongst themselves after the execution date of the SPA i.e. November 4, 2015, provided that such Sellers complete such transfer within 30 (Thirty) days from the date of execution of the SPA i.e. November 4, 2015 

Takeaways: The stage between the signing and closing of the agreement is addressed here. Under Regulation 10 of the SEBI Takeover Code, inter-se transfer of shares amongst the promoters is exempted from making an open offer. Such an eventuality is addressed here. SEBI appears to be fine with the inter group or inter se transfer of shares amongst the promoters for the purposes of internal restructuring before selling the shares as per the terms of the open offer.

 III.            Acquisition of Igarshi Motors India Limited by Igarhsi Electric Works Limited, MAPE (PAC 1), Alpha FDI Holdings (PAC 2), TCGF-I (PAC 3), IEW HK (PAC 4)AGILE (PAC 5) (Merchant Banker: Religare Investment banking]

1.      The Public Announcement at paragraph 3, stated that PAC 4 is not acting in concert with the Acquirer or MAGPL for the purpose of the Offer, but subsequently, PAC 4 has joined as a person acting in concert with the Acquirer and other PACs for the purpose of the Offer.

2.      Pursuant to the completion of the underlying transaction under the SPA, PAC 5 has joined as a person acting in concert with the Acquirer and other PACs for the Offer

Takeaways: The above two disclosures suggests that post initial public announcement for the takeover, the acquirers can name one or more person acting in concert in the following documents such as detailed public statements, letter of offer or for that matter in a addendum issued after the public announcement is made as to the inclusion of new PACs.

  IV.            Acquisition of IIFL by FIH Investments, HWIC Asia Fund (PAC 1), I Investments (PAC 2), FIH Private Investments (PAC 3) [Merchant Banker: ICICI Securities]

1.      The offer was subject to approval by SEBI (Mutual Fund Division) and the Cabinet Committee on Economic Affairs

2.      The Offer is not made pursuant to any transaction

3.      The Offer to the Equity Shareholders of the Target Company is being made pursuant to Regulation 3(1) of the SEBI (SAST) Regulations involving substantial acquisition of the Equity Shares without any change in control/ management of the Target Company. The Acquirer and PAC do not intend to control the management of the Target Company or induct additional directors representing the Acquirer and/or the PAC on the board of the Target Company. There will be no change in the promoters of the Target Company.

Takeaways: The acquirers are making a disclosure that they are merely sleeping partners with no control rights. Even though, the acquirer is a white knight or fear that somebody in future will take over the company, it is a good idea to acquire as much share as possible and disclose to the SEBI that they are not in control but just the strategic investor.

4.      The Acquirer and PAC have provided the following undertakings to SEBI (separately referred to as “Undertaking” and jointly as “Undertakings”) in respect of the Offer by way of letter dated October 01, 2015 (“Reply Letter”):

i.        The Acquirer and PAC shall not exercise voting rights on resolutions placed before Equity Shareholders of the Target Company in relation to such number of Equity Shares held by the Acquirer and the PACs that represent more than 25% (Twenty Five percent) of the paid up equity share capital of the Target Company at the time of voting on the relevant resolution; and

ii.      The Acquirer and PAC shall not acquire additional Equity Shares after the completion of the Offer to exceed the Aggregate Fairfax Threshold, including by way of a creeping acquisition of upto 5% (Five percent) of the equity share capital under Regulation 3(2) of the SEBI (SAST) Regulations, unless the Acquirer and PAC make an open offer or obtain the prior consent of SEBI for such acquisition.

Takeaways: This is an interesting piece of undertaking. Perhaps this undertaking may be given by the acquirer and the PAC after SEBI had specifically demanded it from them. 

     V.            Acquisition of McNally Bharat Engineering Limited by EMC Limited [Merchant Banker: ICICI Securities]

1.      This offer was pursuant to preferential allotment of equity shares

  VI.            Acquisition of Tasty Bite Eatables Limited by Kagome Co. Ltd (Acquirer), Preferred Brands Foods (India) Private Limited (PAC) [Merchant Banker: ICICI Securities]

1.      This Offer is made by the Acquirer and the PAC to all Eligible Shareholders, to acquire up to 6,61,490 (six lakhs sixty one thousand four hundred and ninety) Equity Shares, representing 25.78% shares of the target company.

Takeaways: This was a case where the public shareholding (i.e., shareholding other than the acquirers and PACs), was 25.78% and under the SEBI Takeover Code, the minimum shares to be acquired is 26% as per Regulation 7 of the SEBI Takeover Code. Further in terms of Regulation 7(4), if the acquirer acquires shares so as to result in public shareholding less than 25%, then in terms of SCRR the acquirer is required to shred out the extra shareholding so as to keep the minimum public shareholding upto 25%. In this case, as per the post-offer report, the number of shares acquired were 300 shares i.e., 0.01% shares of the target company.