Changing the M&A game: issues for foreign investors

By Simran Dhir and Palash Ranjan Gupta, S&R Associates
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The Competition Act, 2002, stipulates that the formation of “combinations”, i.e. mergers, acquisitions and amalgamations is to be regulated by the Competition Commission of India (CCI). It also prohibits anti-competitive agreements and abuse of dominant positions. This raises some interesting issues for foreign investors seeking to acquire assets, shares or voting rights in India.

While discussing the procedure for regulation of combinations, this article analyzes the factors that determine whether a combination is prohibited under the act and offers suggestions for foreign investors. While the sections of the act dealing with combinations will come into effect on 1 June 2011, the draft CCI (Combination) Regulations have not yet been finalised.

Palash Ranjan Gupta,Associate,S&R Associates
Palash Ranjan Gupta
Associate
S&R Associates

Regulation of combinations

The Competition Act prohibits combinations that are likely to cause an “appreciable adverse effect on competition” on a relevant market in India. All combinations that are being proposed must be notified to the CCI and approval must be obtained before they take effect.

Section 5 of the act stipulates that an acquisition of shares, assets, voting rights or control; or a mergers or amalgamation of enterprises will amount to a combination if it meets certain asset or turnover thresholds. Section 32 of the Act states that the CCI may also inquire into combinations entered into outside India or between parties outside India if such a combination is likely to cause an appreciable adverse effect on competition in India.

Foreign institutional investors, banks and certain other entities do not need clearance from the CCI for share subscriptions or finance facilities that follow loan or investment agreements. Nevertheless, they have to notify the CCI of any such combination.

Notification and timelines

The CCI must be notified of a combination within 30 days of the board of directors of a company approving a merger or amalgamation, or the execution of any other document “for acquisition”, including documents “purporting to convey the intention to acquire control, shares, voting rights or assets”. The burden for notification (and liability for payment of fees) falls upon the acquirer in case of an acquisition, and on all parties in case of a merger.

The CCI will issue a prima facie decision on a combination within 30 days of the notification. If the CCI is of the view that the proposed combination is likely to cause an appreciable adverse effect on competition, it will investigate further and make a final decision within 210 days, failing which such combination will be deemed to be approved.

Appreciable adverse effect

The phrase “appreciable adverse effect” is not defined specifically in the act. Section 20(4) of the act sets out factors for assessing the effects of a combination on competition which include: the concentration of economic power, the extent of barriers to entry, the availability of substitutes, the market share of the newly formed combination, the degree of countervailing power and potential effect on prices and profit margins. The advantages of a combination, such as economic development or benefits to a market, may also be taken into account. The CCI is likely to approve a combination if its benefits outweigh any adverse effects.

Under the draft regulations a special shorter format is available for notifying certain transactions such as: (i) acquisition of less than 15% of shares or voting rights in a company not engaged in a similar business as the acquirer and not leading to a change in control; (ii) acquisitions of assets not directly related to the business activity of the acquirer; (iii) acquisitions of shares in an enterprise where the acquirer already controls such enterprise; and (iv) acquisitions of shares as a result of a bonus or rights issue.

Notes of caution

Foreign investors will need to determine whether a proposed investment amounts to a combination. If so, it would be useful to conduct a preliminary risk analysis to assess the likelihood of the combination having an appreciable adverse effect on competition.

It is worth noting that foreign entities making indirect acquisitions may also fall within the purview of this act.

Further, it is possible that foreign investors transferring or acquiring shares may also require Central Government approval under the Companies Act, 1956 if the conditions stipulated in section 108G regarding “dominant undertakings” are satisfied.

Finally, as the obligation to notify may be triggered by the execution of any document purporting to convey the intention to acquire, parties must be cautious while executing documents such as term sheets and memorandums of understanding, in order to avoid a premature obligation to notify.

Simran Dhir and Palash Ranjan Gupta are associates at S&R Associates, a law firm based in New Delhi and Mumbai. They can be contacted at sdhir@snrlaw.in and pgupta@snrlaw.in respectively.

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