Manupatra article merger control provisions a step in the right direction
1. 2012] B-161
Merger control provisions – A step in the right direction
Sujit Ghosh*, Nitin Savara** with inputs from Shveta Kalra***
Indian economy has been significantly liberalised in the last two decades and the
growth story continues. Consequently, Indian laws are also evolving to keep in
line with the dynamic economy. Competition laws were first introduced in 2002
and more recently in 2011, merger control provisions/combination regulations
have also been introduced. Indian Combination Regulations are broadly in line
with international anti-trust laws and provide guidance on scrutiny of
transactions, to assess impact on basic competitive nature of markets. The
regulations are only 10 months old and are at a nascent stage. There are certain
areas, which will merit consideration, based on the Indian experience as more
deals are scrutinised. Having said that, competition law is an essential
pre-requisite to be assessed by companies embarking on M&A.
“Competition is not only the basis of protection to the consumer,
but also is the incentive to progress.”
Herbert Hoover (American President, 1874-1964)
India – Growing economy, evolving laws This change is inevitable and the reasons
Winds of change are sweeping through are understandable. Over the past
Indian laws! The list is endless – Takeover 20 years, India has responded to the
Regulations have been amended recently, trend of globalisation by liberalising its
Securities Laws continue to see regular economy and removing the strong
changes based on capital market Government controls imposed earlier.
requirements, revamped Corporate Laws Liberalisation brings with it a host of
are ready for launch; Direct Tax Code and challenges, and the need to have dynamic
Goods and Service Tax (GST) are set to regulations, aligned to the country’s
bring a new era to direct and indirect economic situation.
taxation. Amidst all these changes, Competition
Law is one such law that has been
* Partner, BMR Legal
** Partner (M&A), BMR Advisors
*** Vice President (M&A), BMR Advisors
COMPETITION LAW REPORTS APRIL, 2012 203
2. B-162 Competition Law Reports [Vol. 1
introduced in India and is a clear Drawing reference from various
indication of India’s evolving legal international anti-trust regulations,
framework. Combination Regulations for
regulating M&A were introduced last
Introduction of Competition Law – year as part of Indian Competition Law
Paradigm shift in regulating the markets with effect from 1 s t June, 2011.
Combination Regulations sought to
In terms of history, Competition Law was
regulate big ticket M&A transactions,
first introduced in India in 2002 as a
which could potentially have an
successor of The Monopolies and
Appreciable Adverse Effect on
Restrictive Trade Practices Act
Competition (AAEC) in India. The
(MRTP Act), which had been around
regulatory body for Competition Law
since 1969 for the past 33 years,
in India is the Competition
substantially in its original avatar! As
Commission of India (CCI), which
can be expected, MRTP Act had become
oversees adherence to the law, and
obsolete, and out of place in India’s
scrutinises combinations (mergers
current economic scenario. This was
acquisitions), which fall within the
especially so, since the economic boom
purview of Combination Law and the
required a paradigm shift from restricting
related regulations.
monopolies to promoting competition,
which was sought to be achieved with In the international context, US and EU
the introduction of Competition Law to are mature markets and anti-trust laws
replace MRTP Act. Competition Law, have been in existence for some time now.
by its very nature, is designed to operate BRICS countries have also put in place
at a macro level to regulate large anti-trust laws to regulate domestic
anti-competitive actions, which are markets, especially given the significant
committed against (or have an interest and investment inflows from
impact on) a market rather than against international players. China is an
a particular business or person within example, where a new anti-monopoly
the market. law was introduced in 2008, and came
into the limelight in 2009, when
Coca Cola’s $ 2.3 billion bid to acquire
Competition law, by its very China Huiyuan Juice Group Ltd
(China’s leading fruit juice company)
nature, is designed to operate was rejected.
at a macro level to regulate Let us look at some salient features of the
large anti-competitive actions Combination Regulations, in the context
of global anti-trust laws, and
developments over the past 10 months
Further, with India Inc participating in since introduction.
many big ticket M&A deals (both
domestic and global), impact of M&A on Scope of Combination Regulations
Indian markets and competition Basic parameters have been set out to
continued to be a burning topic for define the scope of Combination
debate. From an economic perspective, a Regulations, in terms of combinations,
merger or acquisition involves which would fall within the purview of
concentration of power in the hands of Competition Law.
fewer persons than before and less
operating players in the market.
204 COMPETITION LAW REPORTS APRIL, 2012
3. 2012] Merger control provisions – A step in the right direction B-163
Specified thresholds for trigger of In fact, it is well understood that
Combination Regulations anti-trust regulations, being reactive,
would have open-ended parameters and
In line with the overall intention of
only provide guiding principles for
Competition Act to scrutinise only those
determining whether a combination
transactions which may have a
could have any adverse implications or
significant impact in India, certain
AAEC in light of specific facts. We all
threshold limits are prescribed for trigger
appreciate that it is virtually impossible
of Combination Regulations. Prior filings
to foresee every kind of factor that is to be
under Combination Regulations would
examined for combinations to identify
not be required where a particular
an AAEC.
combination does not fall within the
thresholds. Thresholds are based on: Combination Regulations in India are no
• Size of business test (asset/turnover) different in this respect. An inclusive list
of guiding factors is provided in
• Size of domestic acquirer (entity/
Competition Act for taking a decision on
group)
the potential impact of a combination,
• Size of global acquirer (entity/ and these factors include consideration
group) and the India presence of entry barriers in a particular market
as also the combination’s contribution
Combination Regulations are to economic development.
predictive; decisions are based on
Following the experience in other
futuristic analysis of facts, in light of
countries, it is expected that over a period
certain guiding factors of time, CCI will lay down principles for
As is the case for anti-trust laws globally, AAEC in specific transactions as part of
Combination Regulations are predictive detailed orders, based on its scrutiny of
and not reactive, since a decision on facts and consideration of potential
potential impact of combination is consequences. This is an important area,
required to be taken, relying on futuristic where references could also potentially
analysis of data, rather than a clear be imported into the Indian context from
analysis of past events and actions. international precedents, since similar
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principles would have been examined Cola would have a dominant position in
in the past in most jurisdictions. the fruit juice market.
Over the past 10 months since the It is therefore imperative for acquirers to
introduction of Combination Regulations, maintain appropriate documentation to
there has not been any acquisition highlight future business operations, no
of a leading market player as such AAEC and also factor the impact of
(primarily due to the prevailing economic various economic theories applicable to
environment), and no rejection of any combinations while filing for CCI
proposed combination by CCI till date, approval.
hence Combination Regulations have not
been tested extensively to that extent. Some Newly introduced exemption for
key takeaways based on analysis of intra-group mergers
orders passed by CCI till date are:
This is an interesting area, which will
(1) Maximum filings were in respect continue to evolve over a period of time,
of intra-group mergers (Shriram and more relaxations are expected.
Transport, Goldman Sachs, Initially, the Combination Regulations
Reliance Group, Tata Chemicals) – provided an exemption to intra-group
This prompted an inclusion of “acquisitions”, and hence it was
exemption for certain intra-group interpreted to mean that mergers were not
mergers in February 2012 covered, thus requiring a prior filing –
(2) There would be no AAEC where This was also clarified by CCI in the order
combined market presence on sales for merger of Wyoming Mauritius with
volume/value basis continues to be Tata Chemicals. Accordingly, prior filings
very minimal (Sumitomo-Nippon, were required for intra-group mergers of
Standard Chartered-Barclays, wholly owned/substantially owned
Reliance-Bharti AXA) companies, which were actually harmless
(3) Control has not been expressly transactions from a competition law
defined in Competition Law. CCI standpoint, and akin to intra-group
concluded that there is no change acquisitions. Subsequently, in February
in control, since there is no change 2012, a limited amendment was made and
in constitution of Board of Directors following intra-group mergers were
or management, and shareholding included as exempt transactions in
increased from 14.95 per cent to Combination Regulations, hence not
24.95 per cent (KKR’s investment requiring a prior filing:
in Magma FinCorp) (1) Holding company and direct/
While there has not been an opportunity indirect wholly-owned subsidiary
for CCI to debate on certain aspects due to of the group
limited transactions, it would be interesting (2) Subsidiaries wholly owned by
to see how complexities regarding same group
“definition of market” are addressed in However, as is evident from the
combinations, since internationally this diagrammatic illustrations below, the
has been a widely debated aspect. US exemption has a very limited scope and
antitrust laws have issued extensive does not cover certain intra-group
guidelines to explain how antitrust mergers, which could also have been
markets should be defined. In China, one included. We expect that this exemption
of the debates after rejection of Coca Cola’s will be expanded further to cover more
acquisition was the possibly narrow intra-group mergers in its ambit, in the
definition of “relevant market” adopted by near future.
the Government, while stating that Coca
206 COMPETITION LAW REPORTS APRIL, 2012
5. 2012] Merger control provisions – A step in the right direction B-165
Given that the Combination Regulations Value of assets/ turnover in a series of
specifically provide an exemption for transactions leading to a combination
“mergers” only, another related
A recent concept introduced in February
interpretation issue that sometimes
2012 in the Combination Regulations is
arises is applicability of exemption to a
with respect to chain (or related
demerger of business. We believe that
individual) transactions leading to a
given the conceptual similarity of a
combination and guidance has been
merger and a demerger, it is reasonable
provided on the basis for calculation of
to apply all applicable provisions for a
assets/turnover for threshold purposes.
merger to demerger as well.
This is illustrated below:
In the event Step 1 and Step 2 above are fairly common structure adopted by large
considered as chain transactions, corporate, for divestment of an identified
Seller Co’s entire assets and turnover business, and has been extensively used
would also be attributed to Buyer’s Co’s in the past. There is no time frame
assets and turnover, for purposes of specifically prescribed for treating
Combination Regulations, instead of a series of transactions as chain
only considering new SPVs identified transactions.
business assets/turnover. Now, there will be numerous instances,
Basically, this amendment covers where small transactions (otherwise
structures wherein part of a company’s within prescribed exemption thresholds)
business is first transferred to a Special routed through an SPV by a large
Purpose Vehicle (SPV), post which the company would be covered within the
SPV enters into some agreement of purview of Combination Regulations,
acquisition/merger. This is, in fact, a and require prior filing, since seller
COMPETITION LAW REPORTS APRIL, 2012 207
6. B-166 Competition Law Reports [Vol. 1
company’s entire assets/turnover business per se, rather a new SPV is set
would be considered, even though the up on the basis that the partners would
actual business being transferred is generate fresh revenues through
much smaller in size. collaborative efforts. Such JVs may not
This is not a desirable situation, since the fall within the asset/turnover thresholds
relevant data points that should be initially and there are arguments to state
considered are with respect to the business no requirement for a prior filing with CCI.
being sold rather than the seller company. So does this mean that two powerhouses
A transaction with similar sequence was can form a Greenfield JV for carrying on
presented to the CCI for approval few future business in the JV Company,
days prior to this amendment, in respect without any prior filing requirement?
of the acquisition of ductile iron pipe Going forward, there will always be other
manufacturing business by Saint-Gobain anti-competitive regulations, which can
from Electrotherm India Limited. While impact the JV (abuse of dominant
the business was housed in a separate position, etc.), but the JV could potentially
subsidiary immediately prior to sale, be formed without any prior filing. It is
Electrotherm India’s entire assets likely that there is a new JV formed every
and turnover were considered while week with business projections that
calculating thresholds, and on that basis, would definitely breach all thresholds,
a filing with CCI was preferred. though it may be set up with a de minimis
capital contribution by existing players.
More clarity required for Joint Ventures An argument in favor of the “no prior
JVs are generally understood as a very filing required” position for Greenfield
convenient form of investing (and also JVs is clearly that a new entity has merely
most widely used) in a new territory, been set up and there is no existing
product or line of business, to overcome business. Given the uncertainties in
any weaknesses one person might have, today’s economy, future projections
while leveraging on own strengths. would remain theoretical till they are
While JVs can be formed in different actually achieved, and hence there is no
ways, this discussion is centred around need to regulate such new entities
equity JVs, i.e. a JV, which is set up in a initially.
separate legal form, with JV partners as Another related controversial aspect for
equity shareholders. JVs is the exclusion from classification
Combination Regulations do not have as “anti-competitive agreements” under
specific provisions for JVs, and no the Competition Act if the JV results in
particular distinction has been created vis- increase of certain defined business
à-vis other enterprises. Of course, where a efficiencies (no monetary threshold
JV is formed for an existing business, it is prescribed). Logically speaking, every JV
relatively easier to apply the asset/ should fall within this exception since
turnover thresholds and also review the very purpose of creating a JV is to
applicability of the regulations, at the time increase business efficiencies.
of induction of a new JV partner through Given the above, Combination
share sale. Typically, JVs for existing Regulations will need to consider JV
businesses, which are set up in a separate situations and, if required, set out specific
SPV, would be covered within the “chain guidelines for this purpose. Reference
transactions combination” provisions can be drawn from international anti-
(discussed above). trust laws, since JVs are a focus area
The challenge arises in Greenfield JVs, across jurisdictions, and checks are
which do not involve a transfer of introduced (or guidelines laid out in past
208 COMPETITION LAW REPORTS APRIL, 2012
![2012] B-161
Merger control provisions – A step in the right direction
Sujit Ghosh*, Nitin Savara** with inputs from Shveta Kalra***
Indian economy has been significantly liberalised in the last two decades and the
growth story continues. Consequently, Indian laws are also evolving to keep in
line with the dynamic economy. Competition laws were first introduced in 2002
and more recently in 2011, merger control provisions/combination regulations
have also been introduced. Indian Combination Regulations are broadly in line
with international anti-trust laws and provide guidance on scrutiny of
transactions, to assess impact on basic competitive nature of markets. The
regulations are only 10 months old and are at a nascent stage. There are certain
areas, which will merit consideration, based on the Indian experience as more
deals are scrutinised. Having said that, competition law is an essential
pre-requisite to be assessed by companies embarking on M&A.
“Competition is not only the basis of protection to the consumer,
but also is the incentive to progress.”
Herbert Hoover (American President, 1874-1964)
India – Growing economy, evolving laws This change is inevitable and the reasons
Winds of change are sweeping through are understandable. Over the past
Indian laws! The list is endless – Takeover 20 years, India has responded to the
Regulations have been amended recently, trend of globalisation by liberalising its
Securities Laws continue to see regular economy and removing the strong
changes based on capital market Government controls imposed earlier.
requirements, revamped Corporate Laws Liberalisation brings with it a host of
are ready for launch; Direct Tax Code and challenges, and the need to have dynamic
Goods and Service Tax (GST) are set to regulations, aligned to the country’s
bring a new era to direct and indirect economic situation.
taxation. Amidst all these changes, Competition
Law is one such law that has been
* Partner, BMR Legal
** Partner (M&A), BMR Advisors
*** Vice President (M&A), BMR Advisors
COMPETITION LAW REPORTS APRIL, 2012 203](https://image.slidesharecdn.com/manupatraarticlemergercontrolprovisions-astepintherightdirection-120504103302-phpapp02/85/Manupatra-article-merger-control-provisions-a-step-in-the-right-direction-1-320.jpg)
