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Merger Control Regime & M&A in India

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M&A in India may trigger merger control and Competition Law issues. Avimukt Dar recently spoke about combinations, thresholds and some of the notification triggers that you need to be aware of and potential exemptions that might apply

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Merger Control Regime & M&A in India

  1. 1. Merger Control Regime Key Considerations Avimukt Dar | 4 April 2018
  2. 2. 2 OVERVIEW Provided on request only. Private and Confidential. | Combinations | Statutory Thresholds | Calculation of Thresholds – Key Considerations | Exemptions from Notification – Blanket Exemptions | Exemptions from Notification – Discretionary Exemptions | Filing Notice | Structuring the Content – Factors considered by the CCI | Non-compete Restrictions | Other Considerations | Timelines | Scope of CCI’s Powers – Types of Directions | Gun Jumping
  3. 3. COMBINATIONS | Regulatory Authority – the Competition Commission of India (the "CCI") | Rationale for regulating combinations - Deemed that both entities will cease to compete post combination - Price competitiveness - Market concentration - Impact on consumers | What qualifies as a ‘combination’? - Any acquisition of control, shares, voting rights or assets of one or more enterprises by one or more enterprises or any merger or amalgamation of enterprises, where the parties to the transaction jointly cross either of the prescribed assets or turnover threshold limits (whether on an individual or a group level) set out under Section 5 of the Act. Provided on request only. Private and Confidential.
  4. 4. Provided on request only. Private and Confidential. In India Assets (INR) Turnover (INR) Individual 2,000 crores (approx. USD 307.6 million) 6,000 crores (approx. USD 922.8 million) Group 8,000 crores (approx. USD 1.23 billion) 24,000 crores (approx. USD 3.58 billion) In India and Outside India Assets Turnover Total (USD) Min. aggregate in India (INR) Total (USD) Min. aggregate in India (INR) Individual 1 billion 1,000 crores (approx. USD 153.8 million) 3 billion 3,000 crores (approx. USD 461.4 million) Group 4 billion 1,000 crores (approx. USD 153.8 million) 12 billion 3,000 crores (approx. USD 461.4 million) STATUTORY THRESHOLDS
  5. 5. CALCULATION OF THRESHOLDS KEY CONSIDERATIONS | Manner of Calculation - Value of assets - book value of assets as shown in the audited books of accounts of the enterprise or as per statutory auditor’s report (where the financial statement have not yet become due to be filed) for the financial year immediately preceding the financial year in which the date of proposed transaction falls, as reduced by any depreciation - Value of turnover - value of sale of goods or services less indirect taxes, to be calculated in a similar way | ‘group’ - two or more enterprises which directly or indirectly are in a position to - appoint more than 50% of the board of directors in the other enterprise - control the management or affairs of the other enterprise - exercise 50% or more of the voting rights in the other enterprise | ‘control’ - includes controlling the affairs or management by - one or more enterprises, or - one or more groups, either jointly or singly, over another enterprise or group Provided on request only. Private and Confidential.
  6. 6. | Target-level exemption - Any transaction where the value of assets being acquired or taken control of is less than INR 3.5 billion (approximately USD 53.9 million) or the value of the turnover is less than INR 10 billion (approximately USD 154 million). - Mergers and amalgamations – what would be the target? - Transfer of a business undertaking/ division • Background - Eli Lilly and Company and Novartis AG – Combination Registration No. C- 2015/07/289 dated July 14, 2016 | Exemption to certain combinations involving: - regional rural banks, - central public sector enterprises or their wholly or partly owned subsidiaries, operating in the oil and gas sectors, and - all cases of reconstitution, full or partial transfer or amalgamation of nationalized banks. Provided on request only. Private and Confidential. EXEMPTIONS FROM NOTIFICATION BLANKET EXEMPTIONS
  7. 7. | Exercise of discretion for availing exemption – notice need not normally be filed - Whether AAEC exists - Decisional practice | Combinations which are ordinarily not likely to cause an AAEC – Combination Regulations - Acquisition of shares or voting rights of any target enterprise, solely as an investment or in the ordinary course of business such that the resultant direct or indirect holding is less than 25% and does not lead to acquisition of control • Solely as an investment • Any acquisition of less than 10% is treated solely as an investment provided • Same rights to acquirer as available with sellers • Not a member of the board, no intention to participate in affairs or management - Acquisition of shares or voting rights pursuant to bonus issue, stock splits, consolidation of face value of shares, buy back of shares or subscription to rights issue of shares, not leading to acquisition of control Provided on request only. Private and Confidential. EXEMPTIONS FROM NOTIFICATION DISCRETIONARY EXEMPTIONS
  8. 8. | Acquisition of additional shares or voting rights of an enterprise (where the acquirer or its group already holds 25% or more of the shares or voting rights) such that the resultant holding is less than 50%, provided that there is no resultant acquisition of sole or joint control by the acquirer or its group | Acquisition of shares or voting rights (where the acquirer already holds 50% or more of the shares or voting rights) – not extended where transfer from joint to sole control | Merger or amalgamation where one enterprise already has more than 50% or if more than 50% held within same group – not extended where transfer from joint to sole control. | Acquisition of assets, not directly related to the business activity of the acquirer or made solely as an investment or in the ordinary course of business, not leading to control of the target enterprise – not extended to deals where assets being acquired represent substantial business operations in a particular location or for a particular product or service of the target, irrespective of whether such assets are organized as a separate legal entity or not | Intra-group acquisitions – not extended where target is jointly controlled by enterprises not part of the same group | Acquisition of shares, control, voting rights or assets approved by the CCI pursuant to and in accordance with its order under Section 31 of the Act Provided on request only. Private and Confidential. EXEMPTIONS FROM NOTIFICATION DISCRETIONARY EXEMPTIONS
  9. 9. | Section 6(2) of the Act – Notification to the CCI | Level of detail – determining which form to be filed - Form I to be filed ordinarily for any ‘combination’ which is necessitated solely on account of triggering the threshold • Situations where AAEC would normally not come into play as market consolidation would be minimal • Fee - INR 15,00,000 - Form II to be filed if the ‘combination’ is likely to lead to a 15% (horizontal) or 25% (vertical) concentration or market share in the ‘relevant market ‘or if the CCI requires it, pursuant to a specific request • Fee - INR 50,00,000 - Form III to be filed post facto within 7 days from any acquisition by a public financial institution, bank, venture capital fund or foreign institutional investor pursuant to a covenant in an investment or loan agreement – no payment of fee required Provided on request only. Private and Confidential. FILING NOTICE
  10. 10. | Key Differences between Form I and Form II | When to file – after the occurrence of a notification event but prior to consummation - Acquisitions - execution of any agreement or other binding document conveying an intent to acquire - Mergers or Amalgamation - approval of the proposal for merger or amalgamation by the boards of directors of the merging/ amalgamating companies Provided on request only. Private and Confidential. FILING NOTICE Parameter Form I Form II Financial Data Broad and consolidated Detailed and specific, group data Competitors 5 nearest competitors HHI required to be calculated, rationale for identified competitors Documentation Understanding the structural overview, non – compete Detailed understanding including impact assessment reports Relevant Market Checking for overlapping business interest and the extent – horizontal and vertical Overlapping interest is assumed, detailed information on products and services, data of market consolidation, entry barriers
  11. 11. | Determining the Relevant Market - keep it broad - Relevant Geographic Market - Relevant Product Market - Defining different geographic markets may become necessary depending on distinguished market conditions in neighbouring areas | Market share and concentration based on the relevant market - Determination of dominance - HHI (Herfindahl Hirschman Index) • Formula - squaring the market share of each entity competing in a market, and then summing the resulting numbers. Range - close to 0 to 10,000 • competitive market (1500 or less), moderately concentrated market (1500-2500), highly concentrated market (2500 or more) - Incremental market share/ change in the level of concentration – a difference in the HHI (pre and post combination) of 200 or more raises antitrust concerns Provided on request only. Private and Confidential. STRUCTURING THE CONTENT FACTORS CONSIDERED BY CCI
  12. 12. | Demonstration of low regulatory trade barriers, low transportation costs, product and demand substitutability, adequate distribution facilities, multiple competitors and comparable prices are good to have and useful in delineating the relevant market | Local specification requirements, national procurement policies, specific consumer preferences, industrial product classification and inelastic demand are generally seen to be problematic | Highlighting the actual and potential level of competition or constraints exerted by competitors is important. It is also important to establish that the combination will not result in the removal of a vigorous and effective competitor or competitors | Price Regulation – helpful to determine whether the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins | A high number of combinations in a particular sector would indicate market consolidation | Extent of vertical integration in the market – ideally this shouldn’t be a concern if the market share of the resultant combination is likely to be negligent | Stakeholder comments – preemptively anticipate concerns which may arise Provided on request only. Private and Confidential. STRUCTURING THE CONTENT KEY CONSIDERATIONS – FACTORS CONSIDERED BY CCI
  13. 13. | Factors to consider – duration, subject matter, geography, scope of applicability, nature of the business | Direct relation – economically related, ancillary to main object, intended to allow smooth transition post combination | Necessary – absence would imply no implementation of the combination, uncertain conditions, substantially higher cost, appreciably longer period or considerably higher difficulty | Reasonable - Restriction to only apply to parties related to the combination – sellers, subsidiaries, agents, controlling shareholders, parties to a joint venture - Restricted to products and services comprising main activity and the area where they are offered or proposed to be offered (substantiated by investment) combination - Duration • transfer of goodwill and know-how (upto 3 years), transfer of only goodwill (upto 2 years) • JV – standing period Provided on request only. Private and Confidential. NON-COMPETE RESTRICTIONS
  14. 14. | Request for confidentiality over the competitively sensitive information | A summary in 2000 words or less without confidential information is required to be submitted to the CCI along with the notice in the relevant form - Products, services and businesses - Values of assets and turnover - Relevant markets of operation - Details of agreements and other documents and board resolutions relating to the combination - Nature and purpose - Likely impact on state of competition in the defined relevant markets | An additional summary of the combination in 500 words or less describing the names of parties, type of combination, area of activity and the relevant market, is required to be given to the CCI which shall then be published on the website of the CCI Provided on request only. Private and Confidential. OTHER CONSIDERATIONS
  15. 15. | The ‘combination’ is not to take effect until the expiry of a period of 210 (two hundred and ten) days from the date of application, or until the date on which the CCI has passed orders under section 31 of the Act, whichever is earlier | CCI may invalidate an application or ask for removal of defects – time taken is excluded from the 210 days’ timeline | The CCI may request for additional information - time period for such requests and receipt of additional information is excluded from the 210 days time limit | The CCI may ask a party who has filed information in Form I to refile the information in Form II – the clock on the timeline resets and kicks in when Form II is filed | If the CCI in its prima facie opinion feels that a combination is likely to cause and AAEC, it may direct the parties to provide and publish detailed information in Form IV - to be published within 10 working days of CCI’s direction - CCI may seek stakeholder comments thereon within 15 working days from publication, additional information may be called for within 15 working days thereafter – to be furnished within 15 working days - Resume dealing with combination within 45 working days therefrom Provided on request only. Private and Confidential. TIMELINES
  16. 16. SCOPE OF CCI’S POWERS TYPES OF DIRECTIONS | The CCI has the power to initiate an inquiry into a combination, upon its own knowledge or information. This power can be utilised by the CCI until the expiry of a period of one year from the date on which the combination took effect | The CCI, upon an application for a proposed combination, may - requisition additional information, - approve the combination as is - propose modifications to the combination, or - direct that the Combination shall not take place (in which case the acquisition or merger contemplated shall be deemed to be void) | Modifications may be accepted by the parties or amendments to the modification may be submitted by the parties. The Commission may approve the amendments or allow a further period for the parties to accept the modification initially suggested by the Commission Provided on request only. Private and Confidential.
  17. 17. | Types of modifications - Divestment - Behavioural change - Terms of contract(s) - Future business plans | Decisional Practice - Sun Pharmaceutical Industries Limited and Ranbaxy Laboratories Limited – Combination Registration No. C-2014/05/170 dated December 5, 2014 - PVR Limited and DLF Utilities Limited – Combination Registration No. C-2015/07/288 dated May 4, 2016 | Harmonizing of outcomes under section 31 with section 4 (abuse of dominance) Provided on request only. Private and Confidential. SCOPE OF CCI’S POWERS TYPES OF DIRECTIONS
  18. 18. | Case I – Application not filed and transaction consummated in whole or in part - Eli Lilly and Company and Novartis AG – Combination Registration No. C-2015/07/289 dated July 14, 2016 - Zuari Fertilisers and Chemicals Limited and Zuari Agro Chemicals Limited – Combination Registration No. C-2014/06/181 dated February 10, 2015 | Case II – Application filed and transaction consummated in whole or in part prior to obtaining approval - Etihad Airways PJSC and Jet Airways (India) Limited – Combination Registration No. C- 2013/05/122 dated November 19, 2013 | Section 43A of the Act - Penalty for may extend to 1% of the total assets or turnover of the ‘combination’, whichever is higher. Provided on request only. Private and Confidential. GUN JUMPING
  19. 19. BANGALORE DELHI 101, 1st Floor, “Embassy Classic” 2nd Floor, Block D, The Mira #11, Vittal Mallya Road Mathura Road, Ishwar Nagar Bangalore, 560 001 New Delhi 110 065 T: +91 80 4072 6600 T: +91 120 472 8100 E: bangalore@induslaw.com E: delhi@induslaw.com HYDERABAD MUMBAI 204, Ashoka Capitol 1002A, Tower 2, Indiabulls Financial Center Road No.2, Banjara Hills Senapati Bapat Marg, Lower Parel (W) Hyderabad, 500 034 Mumbai, 400 013 T: +91 40 4026 4624 T: +91 22 4920 7200 E: hyderabad@induslaw.com E: mumbai@induslaw.com DISCLAIMER This presentation is for information purposes only. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Although we have endeavored to accurately reflect the subject matter of this presentation, we make no representation or warranty, express or implied, in any manner whatsoever in connection with its contents. No recipient of this presentation should construe it as an attempt to solicit business in any manner whatsoever. CONTACT

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