CIRC in MEDIA - March 2011

  • Countdown to Merger Controls
    Moneycontrol/CNBC, March 14, 2011


Countdown to Merger Controls
Moneycontrol/CNBC, March 14, 2011

After months of waiting, we can finally declare the game is open and say let the competition begin. Now I know that is cheesy but last week the Ministry of Corporate Affairs notified Sections 5 & 6 and others of the Competition Act 2002 bringing into effect the much dreaded Merger Controls that will regulate mergers and acquisitions (M&A) and combinations and deals that may result in an Appreciable Adverse Effect or AAE on competition in the country.

Now last week as well, the Competition Commission also put out new draft guidelines and proposed raising threshold limits by 50%, a pre-merger consultation process, an endeavor to reduce the response time and fees ranging from Rs 10 lakh to 40 lakh. So the big question, do the oncoming Merger Controls balance India Inc’s needs for speed with India’s need for competition.

To discuss that, CNBC-TV18's Menaka Doshi caught up with Pallavi Shroff of Amarchand Mangaldas, Suhail Nathani of ELP and for broader stakeholder perspective, non-corporate that is, with Navneet Sharma, the Director of the Cuts Institute for Regulation & Competition.

Below is a verbatim transcript of the interview. Also watch the video.

Doshi: For the past several months, we have been waiting for an ordinance. Some of the changes that have now been effected through a notification were expected to be done through an ordinance and a subsequent change or amendment to the law. Do these changes via the notification stand up to scrutiny if they have been done through a process that was not what was expected?

Shroff: I think there are three or four notifications that have been recently issued and if you take each one of them, the first one is the one that provides for the de-minimus, as I call it, exempting anything if target has assets in less than 250 crore or turnover less than 750 crore. There is nothing like this in the Section itself. So by way of an exemption, if you are trying to bring this in, I am not sure if it can be done. If you look at the second notification, which exempts that group – now group is already defined under the Act- by way of a notification, I don’t think you can - using the garb of an exemption you are actually changing the definition of group which is prescribed under Section 5. I don’t think that is permissible. You needed an ordinance or a legislation to amend the existing Act.

Nathani: Yes, there can be several challenges mounted but I think we should appreciate the fact finally we have merger control in India.

Doshi: I do appreciate it. I am just worried if someone will challenge this in any fashion in a court of law and say you cannot change the group definition, you cannot make this exemption for the target or you cannot enhance the threshold by 50% because you haven’t done it through a legislative route which you should have.

Nathani: As a lawyer, I have learnt in India that you can challenge everything and the courts will have a view. In fact the Sections 3 & 4 have also come through a hard test of the Supreme Court. So yes, it could well be challenged and the courts will of course rule on this, it is a matter of time.

Shroff: I don’t think corporate India is going to challenge it; that is my view because this is increasing the thresholds, bringing in de-minimus- all with good intention, just probably not very well handled though you cannot rule out a PIL for anything in India.

Sharma: I don’t see that anybody from the consumer or other stakeholders group would like to challenge because we have been fighting long and hard for it that this has to come into place; so better late than never I would say.

Doshi: I am going to come to the remaining issues, which are broadly classified into three broad themes- who files, when is the filing required to be done and what will the Competition Commission of India’s (CCI) response time be.

Let me start with who files. The answer to that is any transaction involving a target that has assets of not more than Rs 250 crore or turnover of not more than Rs 750 crore is exempt from filing with the CCI for the next five years. The group threshold has been enhanced from 26% or 50% for five years and the overall thresholds have been raised by 50%. That means only deals resulting in a combination in India that is worth Rs 1,500 crore and more in assets or Rs 4,500 crore or more in turnover or a combination worldwide resulting in USD 750 million of assets or USD 2.25 billion in turnover have to file with the CCI. There are de-minimus conditions applicable to those worldwide transactions. This is exactly what corporate India was asking for- an enhancement of thresholds- does this enhancement meet the requirement?

Nathani: These are not insubstantial numbers by any standard and anywhere else in the world, if you have acquisitions of this size, they would come under the scrutiny of a competition authority. So I am fully in favor of these thresholds.

Doshi: The CCI chairman Dhanendra Kumar said in an interview to a newspaper that, “The exemptions and the increased thresholds have already put 90-95% of M&A out of intense scrutiny. All such cases would be cleared within 30 days. That leaves a handful of large M&A cases for which 210 days is not too much if we go by international practices.” Do you agree?

Shroff: I think that is true. One, I think, the move of increasing the thresholds is very welcome so the CCI is going to look at the large transactions and not every transaction. I think there is still scope for improving the de-minimus or what we call the nexus to India- if that is done, then even the overseas global transactions are liable to be scrutinized only if they raise a territorial nexus where both parties have some territorial nexus because otherwise what is going to happen is that if a company in the US is acquiring something in Peru and the US company has assets or turnover in India through its indirectly held subsidiaries, they will be liable to file in India. There is nothing to do with India but because of the way it is unless they prescribe that the target must also have these basic assets of Rs 250 crore or Rs 750 crore of turnover- if they do that, then I would think it would be good for us and it would put India on a world equal level with most of the countries and also the International

Competition Network (ICN) merger control guidelines that are generally followed by most countries.

Doshi: So expand the de-minimus but both of you seem to be happy and that is a rarity with lawyers.

Shroff: The thresholds are actually more than in most countries of the world today.

Doshi: So in fact there is no scope now for complaint at all.

Nathani: There should be no scope for complaint.

Shroff: I hope not.

Doshi: But you did bring up, in your very first answer, some confusion with regards to the exemption given to targets where assets are not more than Rs 250 crore or turnover is not more than Rs 750 crore. And you said you weren’t sure whether this was Indian or global, right?

Shroff: I would assume it is global, but the way I think it should have been worded is that the target should have, in India, assets of at least Rs 250 crore or turnover of more than Rs 750 crore. Then that is really the correct thing where you bring the territorial nexus of both the acquirer and the target.

Doshi: Since both of you are happy, I am going to introduce a slight negative in this, I understand that there are three types of Forms to be filled, now the third type is for banks, FIIs, public financial institutions, venture capital funds, and they have to file without paying a fee, which is good news, but they still have to file. Form 1, which I think most people expect to be the fast track clearance form, requires several transactions that I wasn’t expecting to still file. For instance, acquisition of shares by underwriters will still have to file in Form 1, even if they are accorded fast track clearance. Acquisition via bonus or stock split will still have to file. I mean acquisition of stock-in-trade will still have to file. Isn’t this still going to expand the net to include all kinds of transactions that really may have no impact on competition?

Nathani: Two things. One, the way the Competition Act is drafted, it includes shares and assets, shares, voting rights, whatever and assets so therefore the Form is in consonance with what the Act wants. The second issue here is that these are draft regulations. And there are several issues that need to be addressed. But I think we have till June 1st, people need to bring in their comments, put it to the Competition Commission and lot of this will be cleaned up. I think this is a good start.

Doshi: But that needs to be cleaned up. Because in Form 1 you got less than 15% acquisitions, you have got creeping acquisition if I could put it broadly, you have got diversification via asset purchases as long as you are not acquiring control of the entity that owns the asset, you have got cross border transactions where only one entity is in India and has over Rs 250 crore in assets or Rs 750 core in turnover- all those are fair in Form 1. But stock-in-trade, underwriters, stock splits, all of these, to some degree, need to go.

Shroff: Even a rights issue. If there are two shareholders and you do a rights issue for increase in capital, it is acquiring new shares in a company.

Nathani: I need to disagree with Pallavi over here. The situation here is that people can transfer control through bonus or rights, because one party will renounce them, one party will wave them; so all these things are required.

Doshi: I understand that but in order to catch the big fish; you are bringing a lot of small unnecessary fish into the net as well. Look at the filing requirements and with each of Form 1 filing, you got a hefty fee to pay.

Nathani: I can’t agree with you that the small fish is also getting caught. The small fish are excluded by the thresholds. So now this we are only talking about big fish. I just think that bonus shares, rights and the like, are one form of transfer in control everywhere in the world and they need to come under scrutiny.

Shroff: To the extent that they are transferring control- that gets captured under acquisition of control, not acquisition of shares, because there are different methods of acquisition. Acquisition is very wide. Not only shares but it is also control. So if you are transferring control through rights or bonus, bonus you have to issue to all shareholders otherwise it is dividend if you don’t issue to everybody. So if you are doing that, I agree with you, that rights issues could be, or a preferential allotment. Those can be captured, but certainly that will be under control, not under the acquisition of shares.

Nathani: I am sorry I again beg to disagree because the way the definition of the Section 5 is its acquisition of shares, assets. Control is a consequence of acquiring these issues.

Shroff: Acquisition of control is independent of shares and assets. It is a comma between the three. So there are three different aspects of acquisition, that you can be acquiring shares, you can be acquitting assets or you could be acquiring control.

Doshi: So you would rather see some of these trimmed out of Form 1 filing requirements, correct?

Shroff: I would think some of these actually should be exempted. The government had to exempt them. I know the Competition Commission cannot do it, but if the government is ready to exempt so many things and these are the kind of transactions that should be exempted. And again if you look at the last one, which is the intra group transfers, if they are a single economic entity then whether A, or B or C holds, it doesn’t make a difference.

Doshi: So why do they need to file, all of these either need to be exempted or trimmed out of this list. I am going to take it to Navneet who has been very quiet till now. The two-fold question- to which I want a quick answer- firstly do you believe that the enhancement of threshold, while it meets corporate India’s requirement, meets the requirements of all other stakeholders? Do you think that we may now cast the net, too narrow so to speak?

Sharma: I think it meets the expectations of everyone. So I have a little point here that some of the smaller transactions which may be critical in terms of impact; for example in pharmaceuticals, or fertilizers, or seeds, some of the transactions, size wise may not be that big, but sometimes, on select occasion, please mind it, they may exert Appreciable Adverse Affect in competition and CCI may better watch out for that.

Doshi: Even if you don’t meet the thresholds and therefore do not have to report with the CCI, if they believe your transaction which is may be small in amount, but has an appreciable adverse impact on the competition in that sector, they can in fact still ask for some form of modification, right?

Nathani: There is a residual power for that.

Doshi: There is a residual power for that right?

Shroff: But that residual power or what I call a suo motto power, would apply, in my mind, only to transactions that meet the thresholds. Otherwise the CCI can review some of these agreements even suo motto under Section 3.

Doshi: So at least the CCI can look into those transactions to Navneet’s first point. Secondly I am going to come to you on the issue of exemptions and this has to do with industries asking for exemptions. For instance the banking industry saying we are already being regulated by the RBI, no deals take place without the RBI’s prior approval, so why do we have to go through CCI clearance? Tomorrow you may have the insurance industry say the same with the IRDA, and who knows, telecom and aviation may also make the same claim for exemption.

Sharma: As far as the sectoral carve-outs are concerned, I am completely against it. We have always said that no sector should be outside the ambit of CCI, because there is an international best practice that all structural issues may be left to the sectoral regulators but all behavioral issues must be dealt with by the Competition Commission of India. And interestingly, I would like to bring this to your notice, that if you look at AERA act, this is the newest regulatory body- the Airports Economic Regulatory Authority- they have clearly carved-out that all competition issues will be covered by the CCI and not by the sectoral regulators. So exactly same has to be approached in other sectors as well.

Doshi: Let me move to the second broad issue that is when do you have to file? Now, in particular, the first issue that faces us is the June 1st implementation date and what happens to transactions that are in the works? According to the notification of the draft guidelines, these regulations do not apply if a combination has taken effect prior to June 1. Now what is that has taken effect?

Nathani: The only way to interpret it is if the combination is complete as per a matter of law.

Doshi: But complete as in?

Nathani: If it is a merger, if it is an acquisition of shares it just has to be completed before the June 1st and if it is a merger, there is a court process, to my mind even the court process needs to be completed before the 1st.

Doshi: So they need to have gotten court approval?

Nathani: That is when the merger is complete.

Doshi: Do you agree it's as simple as that?

Shroff: I think there is a little bit of an ambiguity because if you take a court merger, passing of the court order is step one. There is still another procedural step nevertheless but under the law, the merger becomes effective once you file the order and the minute of the order with the Registrar of Companies and for that you get 30 days. So what happens if the merger order has been passed by the court before June 1st but the statutory filing is not complete because you have time, something is passed on May 29, Delhi High Court remains open the whole month of May and what happens when there is completion of a transaction when the completion happens in say stages or tranches- stage 1, stage 2, stage 3- and may be 2 stages have completed, you have got 51% but the balance- a 10%, 12%- still needs to come in phase 3; do you still need to go and notify, do you not need to go and notify?

Doshi: In the same way, it's not transactions that happened in and around June 1, is it clear through the notification and the draft guidelines what the trigger event will be for all transactions here onwards?

Shroff: The trigger event on the one side is a board resolution of both the companies in the case of a   merger or an amalgamation. The second aspect is when there is an agreement to acquire, an agreement to acquire or any other document. Now the word ‘other document’ has been defined in the draft regulations to mean any document of any nature which expresses an intension to acquire. This may create problem, particularly if it is a publicly listed company because under the takeover code, you need to trigger the public announcement if you have agreed to acquire and that's the way it has worked. Here it is nearly an intension, so would a term sheet, on a term sheet state do you need to file?

Doshi: So would a term sheet qualify as ‘any the other document’ and therefore would you need to file with the CCI?

Shroff: A term sheet may indicate an intension to acquire. 

Nathani: If it is a binding term sheet, yes, arguably yes. But if you just have an intension, no. It says proposal to acquire. From corporate India's perspective, the SEBI trigger needs to be the trigger that drives the entire process.

Doshi: Let me now move on to the last big issue that I want to come upon and this is the crucial one- the response time that the CCI will take post filing. Now I am told that the CCI has 30 days to form a prima facie opinion on whether the deal will cause or has caused an Appreciable Adverse Effect, post which it has 210 days statutorily to pass its order or issue direction. But it has very kindly in the draft regulation said that it will endeavor to do so within an 180 days- now that's a nice welcoming gesture by the CCI, but it's not binding on them, this was one of the key issues that corporate India was perturbed about saying our deals will get blocked for too long as we wait for the CCI to respond.

Nathani: In all fairness to the CCI, this is a new generation regulator and this matter was considered by the SC in a case concerning a cartel investigation. The SC themselves deemed it appropriate to lay down very strict timelines, which were to apply until the government notified their own timelines. I am pleased to say that Competition Commission notified their own timelines which are even more efficient than what the SC had laid down. So the intension is there, the mechanism is there and I believe that we need to start looking towards a new generation regulator and the Competition Commission is one of those several ones that we are in the process of setting up and strengthening in the country. So I believe that it will happen.

Doshi: Are you looking at it as kindly because Dhanendra Kumar says 180-210 days is comparable to international timelines?

Shroff: I agree with Mr. Kumar and I agree with what Mr Nathani has said. Now first thing, 210 days is not something way out of what you find in other jurisdictions. We are almost, maybe a little more here and there but I think on the whole it is fine. What happens in European Union (EU) and other jurisdictions is that the pre-consultation process goes on for months even after agreements are signed because they want to file an application that is almost perfect and they know will go through. And because they don't have any timeline within which they must file the application, Form 1 or Form CO, what they call. Here we have the timeline and that is within 30 days. So given the two things, I think we are pretty much on par on the timelines. I don't have such a huge grievance on that and to the extent that this whole anxiety that Corporate India has had whether CCI will do everything on time or not, I think they will do it, there is the will, there is the intent and two, they have been trained, they have been receiving very extensive training over the last year that they have been in existence and you have to give a new regulator time.

Doshi: If Bharat Vasani is watching the show, I have a feeling he is nodding his head in disagreement with both of you right here because I do remember that one of the bones he had to pick with earlier draft regulations was the 210 day timeline and he was not very sure because if the CCI was to ask for additional information then the timeline would keep getting expanded.

Shroff: I can only say one thing, having practicing, I have practiced over the last one and a half years before the Commission more regularly- both Mr Nathani and I and I think one thing I can say that the way they have pushed the investigations on Section 3 and Section 4 cases, if that is any indication to go by. I think they will do. Let's have faith in our Commission. In fact some of us complained that the Commission goes a bit too fast on the investigation. That's our complaint for the respondents in those cases. But if that's an indication, I think they mean business.

Doshi: I must also add here, one of the good things introduced in this draft regulation or new set of draft regulations is the pre-merger consultation opportunity that firms will have with the CCI and that should help iron out several chinks especially in the initial years. That brings me in a sense to the last question that I wanted to put to all 3 of you. Ms Shroff has endorsed the working of the CCI in the last year and a half; you have represented several cases in the issues of Section 3 and 4 the CCI has come out with more than 40 judgments in the last year and a half. How do you think or how do you assess their preparedness- both with regards to training, regards to investigation skills, man power resources- to be ready to implement merger controls?

Nathani: I believe that we are there. There is always scope for improvement because that's just the nature of the beast. But the fact of the matter is that, you said 40 decisions on the Sections 3 and 4, there is only 1 decision on merits and if you see that decision, I think it displays a great amount of understanding, a great amount of commercial clarity.

Doshi: Is that the prepayment one?

Nathani: Absolutely, that is the loan prepayment one. Interestingly the DG held absolutely the other way and recommended that there should be a sanction on the banks. The Competition Commission in a split decision decided no, there are two parts of the judgment, the dissent and the main judgment and I think that reveals the maturity of regulator already.

Doshi: So they have got a second vote of confidence. Mr Sharma, what do you make of the CCI's preparedness? I know you have been waiting very keenly for merger controls to be implemented. You have got all thumbs up for June 1?  

Sharma: Yes, all thumbs up to June 1 deadline but I think there is something to be said about it. The Competition Law, as Mr Nathani says, is a new generation regulation. It requires an extremely professional approach and even though the will is there, the act is there, the training is there but it is yet to be seen that CCI and other participants in this whole process also use the most modern professional tech tools and techniques and use the law to protect the competition and not just to protect competitors.

Shroff: As I said, I have faith in this Commission and I am sure it's a new law. It's very complex in nature, economics and business. It's not simple. The Commission is doing its very best and I think India Inc must have faith in this Commission.

Doshi: This marks a sea change in the mood that prevailed a few months or a year ago when everybody across India Inc as well as the legal fraternity was dreading the arrival of merger controls. Today you got all three guests, including two hard-nosed corporate lawyers, in fact welcoming the implementation of merger controls on June 1.

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