Trends in Combination Filings in India

This month the merger control regime in India will celebrate its fourth birthday. The regime was born after nine years of gestation period on June 1, 2011, when the provisions under section 5 & 6 (dealing with regulation of combination) 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) came into force. Since its inception, the Combination Regulation in keeping with the market dynamics has been amended three times and the fourth amendment is on cards this year.

Competition Act provides for a mandatory and suspensory regime which requires acquisitions, mergers and amalgamations (Combinations) meeting the prescribed thresholds of assets and turnover to the notified by the parties to a Combination transaction to the Competition Commission of India (Commission or CCI)for its prior approval. While undertaking the analysis for review of the Combination, the CCI undertakes an extensive analysis of whether the Combination reported causes or is likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market in India.

Trends in Combination notification

Number of notifications: The CCI has received around 270 Combination notifications (in both Form I (short-form) and Form II (long or detailed form, similar to Form CO under the EU merger regulations or a second request pursuant to Hart–Scott–Rodino Antitrust Improvements Act, 1976 of the US). The Combination filings peaked to 82 filings in year 2012 only to plateau down to 64 and 69 filings in years 2013 and 2014 respectively. CCI has so far approved 248 proposed Combinations of these 270 notifications within the span to 30 days as required under the Competition Act.

Days for clearing Combination and stopping of clock: Under the Combination Regulation, CCI is required to scrutinize the Combination filings and give its prima facie opinion within thirty days of filing of the notification (Phase I review). In case, the CCI believes that the Combination require some more analysis and scrutiny, the review goes to Phase II stage and the CCI is mandated to approve or reject or approve with modification the Combination within 210 days of the filing of the notification. For its review, the CCI may “stop the clock” during the Phase I or Phase II reviews to seek additional information or clarification from the parties. This effectively means that the review periods provided in the Competition Act (of 210 days) are not absolute.

CCI is generally taking 35-45 calendar days for reviewing and approving or approving with modification of the Combination and this review period is increasing in last year or so to around 60-70 days, which is an area of concern for the parties to Combinations. Additionally, in 184 cases (i.e., 74% of the cases) out of the 248 approved Combinations the CCI has stopped the clock.

Modifications/ Conditions: CCI has imposed behavioral and structural commitments in six cases so far. Two of which related to the scope and duration of non-compete clauses between enterprises in the pharmaceutical sector. In one case, CCI sought undertakings from the acquirer, to the effect that post-transaction, the acquirer will comply with the provisions of the Petroleum and Natural Gas Regulatory Board Act, 2006, and the regulations made thereunder and will also review the customer contracts entered into between the target and its customers and submit a report to the CCI within a period of six months post the closing of the transaction, to ensure that such contracts are in compliance with the provisions of the Competition Act. In another case, CCI directed the parties to pass requisite board resolutions in relation to amendment of certain clauses (on lock-in-period, minimum shareholding clause, no restriction in transfer of shares) along with certain commitments. In two cases, CCI ordered for structural commitments and appointed Monitoring Agencies in these cases.

Penalty for belated filings: If the notifiable transaction has not been notified, CCI can impose a penalty of up to 1% of the combined assets or turnover of the parties to the Combination, whichever is higher. CCI has imposed penalties in nine cases so far with penalties ranging from INR 5 million to INR 30 million. In practice, in the case of belated Combination filings, the CCI initiates parallel proceedings to determine penalty, despite granting approval to the Combination.

Reasons for approving Combination: As per a recent EY-FIDS study (2015), major reasons for approving the Combination transaction (some of these may overlap) are (a) insignificant/ non-existent horizontal or vertical relationship (84 cases); (b) insignificant market share of the resulting entity (65 cases; and (c) large number of players and low barriers to entry (58 cases). Interestingly, CCI has approved about 4 cases which appeared to be exempt under Schedule I of the Combination Regulations. In fact in one of the cases it has acknowledged that and in spite of that gone ahead with approving the Combination.

Concept of Control

Another perplexing issues which the parties to Combination and the CCI face is the concept of ‘control’. CCI is taking an expansive view in defining ‘control’. The ‘ability to exercise decisive influence over the management or affairs’ of another enterprise (including its division(s)), is tantamount to ‘control’ over such enterprise, whether such influence is being exercised by way of majority shareholding, veto rights (attached to minority shareholding) or contractual covenants. Further, in one matter, CCI recognized the existence of certain reserved matters in the a share purchase agreement to constitute control such as (a) appointment and removal of the managing director and the chief financial officer; (b) increasing or decreasing the number of directors on the board or any committees thereof; and (c) approv­ing, adopting, amending or modifying the annual budget and business plan (including any capi­tal expenditure budget, operating budget and financing plan) etc. Due to such precedent, there is a huge confusion about the concept and meaning of control as certain genuine minority protection rights and control may in some circumstance leads to a change in control situation.

Road Ahead

At times there appears to be lack of legal as well as economic analysis in the CCI’s order approving the Combination. It is expected that in its speaking orders, the CCI will devote some more efforts in analysing a particular Combination and which in my view will act as a solid foundation for the competition law jurisprudence in times to come. Further, issues have been raised in the industry that for review of Combination, CCI is asking for information/ documents which are very confidential and have nothing to do with its analysis of AAEC of the Combination transaction. It is expected that CCI will rationalize its practice of information requests with the ultimate objective of examining the AAEC for the proposed combination in question. As regards the clarity on the issues of meaning and extent of ‘control’ it is expected that the CCI should soon come up with some guidelines/ notification in relation to how it views the concept of control.