I. Introduction
India has embraced globalisation and liberalisation by throwing open its doors for large corporate houses, both Indian and foreign. Earlier restrictions have been removed, barriers reduced, etc. Even the Monopolies and Restrictive Trade Practices Act which, for quite some time, was the bane of the Indian Industry has been watered down to near insignificance. It is in this background that the Parliament thought it fit to introduce a legislation to curb monopolies and promote competition. Competition is essential for the working of any economy to reduce economic inequalities. The Competition Act, 2002 (‘the Act’) is a step in this direction. The Act contains two aspects, one dealing with anti-competitive agreements, abuse of dominant position, etc., and the other dealing with the regulation of certain business combinations, such as mergers, acquisitions, etc. which have an adverse effect on competition. Recently, the Government has appointed the Chairman and two members of the Commission. The Commission is expected to begin hearings on matters of anti-competitive agreements and abuse of dominant positions soon. This Article deals with some of the salient features of the Act dealing with the regulation of business combinations. The provisions of the Act have overriding effect on any other inconsistent statute, e.g., Companies Act, Stamp Duty, FEMA, etc.
II. Background
2.1 Many countries such as the USA have an Anti-trust Law which aims at preventing monopolies and mega mergers which impede competition. These laws need to be also considered while structuring a cross-border merger. In UK, mergers and acquisitions may need the approval of the Monopolies and Mergers Commission. For instance, in the USA certain business combinations require filings and clearances with the Federal Trade Commission (FTC) or Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). The HSR Act requires parties to a merger to file certain information before the FTC and the DOJ before the merger proceeds. There is a minimum waiting period after filing the information with these agencies.
For instance, the acquisition of Honeywell by GE, ran into various problems under the Anti-trust provisions especially with the European Union. It was probably one of the rare acquisitions in which Mr. Jack Welch failed.
2.2 The U.K. Competition Act, 1998 is also a legislation in this direction. Similar provisions exist under the European Commission Regulations.
2.3 The Act seeks to ensure fair competition in India by the creation of a Competition Commission of India. The Commission would have a Principal Bench and several Additional Benches, including Merger Benches.
III. Business Combinations
3.1 Ss. 5 and 6 of the Act deal with the regulation of certain business combinations. While s. 5 defines the combinations which are covered within the purview of the Act, s. 6 lays down the regulations which would apply to such business combinations.
3.2 Combinations covered by s. 5
In certain cases the :
(i) acquisition of any enterprise(s) by any person(s); or
(ii) merger/amalgamation of enterprises
shall be treated as a combination of such enterprises and persons (in case of an acquisition) or enterprises (in case of an merger/amalgamation). These cases are as stated hereunder.
3.3 Acquisitions treated as combinations
Any ‘Acquisition’ where :
(a) the Acquirer and the Target Enterprise (i.e., whose control, shares, voting rights or assets are being acquired) jointly have :
(i) in India assets of a value exceeding Rs.1,000 crores; or
in India a turnover of a value exceeding Rs.3,000 crores; or
(ii) in India or abroad, in aggregate :
(A) assets of a value exceeding US$ 500 million; or
(B) turnover of a value exceeding US$1,500 million
(b) the group to which the Target Enterprise would belong post-acquisition would jointly have :
(i) in India assets of a value exceeding Rs. 4,000 crores; or
in India a turnover of a value exceeding Rs. 12,000 crores; or
(ii) in India or abroad, in aggregate :
(A) assets of a value exceeding US$ 2 billion; or
(B) turnover of a value exceeding US$6 billion
Any acquisition of control by a person over an enterprise in a case where he already has direct or indirect control over another similar enterprise which is engaged in the production, distribution or trading of similar/identical/substitutable goods or services, if :
(a) the Acquirer and the Target Enterprise jointly have :
(i) in India assets of a value exceeding Rs. 1,000 crores; or
in India a turnover of a value exceeding Rs. 3,000 crores; or
(ii) in India or abroad, in aggregate :
(A) assets of a value exceeding US$ 500 million; or
(B) turnover of a value exceeding US$1,500 million
(b) the group to which the Target Enterprise would belong post-acquisition would jointly have :
(i) in India assets of a value exceeding Rs. 4,000 crores; or
in India a turnover of a value exceeding Rs. 12,000 crores; or
(ii) in India or abroad, in aggregate :
(A) assets of a value exceeding US$ 2 billion; or
(B) turnover of a value exceeding US$ 6 billion
Any Merger or Amalgamation in which:
a) the merged enterprise would have:
i) in India assets of a value exceeding Rs. 1,000 crores; or
in India a turnover of a value exceeding Rs. 3,000 crores; or
ii) in India or abroad, in aggregate:
A) assets of a value exceeding US$ 500 million; or
B) turnover of a value exceeding US$l,500 million
b) the group to which the merged enterprise would belong post-merger would have:
i) in India assets of a value exceeding Rs. 4,000 crores; or
in India a turnover of a value exceeding Rs. 12,000 crores; or
ii) in India or abroad, in aggregate:
A) assets of a value exceeding US$ 2 billion; or
B) turnover of a value exceeding US$ 6 billion
3.4 The Value of the assets are to be computed as under:
Book Value of the Assets as per the last Audited Accounts
(-) Depreciation
(+) Value of Intangible assets such as value of
brand,goodwill, copyright/patent/ registered trademark / designs / registered user /permitted use, etc.
The last audited accounts means those pertaining to the financial year immediately prior to the financial year in which the date of the proposed merger falls. Interestingly, a similar provision has not been drafted in case of acquisitions.
3.5 Definitions
The Act defines certain terms which are used in
s.5 and s.6. These are as follows:
a) Acquisition means directly or indirectly acquiring or agreeing to acquire:
i) shares, voting rights or assets of any enterprise; or
ii) control over management or control over assets of any enterprise.
b) Control includes controlling the affairs or management by :
i) one or more enterprises, either jointly or singly, over another enterprise or group; or
ii) one or more groups, either jointly or Singly, over another ern-r pr ise or group.
c) Group means two or more enterprises which directly or indirectly are in a position to:
i) exercise 26% or more voting in the other enterprise; or
ii) appoint more than 50% of the Board of Directors in the other enterprise; or
iii) control the management or affairs of the other enterprise.
d) Enterprise means:
i) a person or a Government department engaged in any activity (including profession or occupation).
ii) of production/ storage/ distribution/ supply / acquisition/ control of articles or goods or providing services.
iii) investment or the business of acquiring, holding, underwriting or dealing with any securities of any other body corporate
iv) either directly or indirectly through its uni ts / divisions / subsidiaries.
e) Person has been defined to include an individual, HUF, firm, company, AOP /BOl, corporation, body corporate incorporated abroad, co-operative society, local authority and every artificial juridical person.
f) Shares means shares carrying voting rights and includes:
(i) any security which carries voting rights; stock unless otherwise distinguished. Thus, preference shares would not be covered.
IV. Regulation of Business Combinations
4.1 No person or enterprise can enter into a combination which causes an appreciable adverse effect on competition within the relevant market in India and if they do then such a combination shall be void. Such agreements are known as Anti-competitive Agreements. For this purpose the term relevant market means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographical market of both markets. Relevant geographic market means a market comprising the area in which the conditions of combination of supply of goods or provision of services or demand for the same are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas. Relevant product market means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer. However, these provisions do not apply to any share subscription or acquisition by a Fl, Bank, VC Fund pursuant to a loan agreement. The Central Government has power to exempt any class of enterprises in public interest.
4.2 Any person or enterprise which proposes to enter into a combination, must give a notice to the Competition Commission, in the prescribed form disclosing the details of the proposed combination, within 30 days of :
a) the approval of the proposal relating to the merger or amalgamation, by the board of directors of the enterprises concerned with such merger or amalgamation;
b) the execution of any agreement or other document for an acquisition or acquiring of control.
After giving the Notice, for a period of 210 days thereof, the combination will not come into effect. Hence, the minimum waiting period is 210 days from the date of the Notice. Such a long waiting period is not only unusual compared to international anti-trust statutes but also undesirable.
The Commission shall inquire:
a) whether the disclosure made in the notice is correct;
b) whether the combination has, or is likely to have, an appreciable adverse effect on competition.
4.3 On receipt of the above Notice, the Commission shall or alternatively it may suo moto if it is of the opinion that the combination is likely to cause, an appreciable adverse effect on competition within the relevant market in India, issue a show cause notice to the parties to respond within 30 days of the receipt as to why an investigation in respect of such combination should not be conducted. Any person may also complain to the Commission that a proposed combination is likely to cause an appreciable adverse effect on competition or that it would abuse its dominant position.
4.4 In case the Commission is prima facie of the opinion that the combination has such an adverse effect, it shall, within 7 days from the date of receipt of the response direct the parties to publish details of the combination within 10 working days for bringing the combination to the knowledge or information of the public and persons affected by such combination. Any objection must be filed within 15 days. The Commission has power to call for further information.
4.5 Under section 31, the Commission has power to accept, reject or accept subject to modifications the combination. In all cases where the Commission is of the opinion that the combination has an appreciable adverse effect on competition it has powers to order that:
a) the acquisition;
b) the acquiring of control; or
c) the merger or amalgamation
shall not be given effect to. This provision is quite unusual as it gives the Commission powers to undo even a Court approved scheme of merger. Keeping in mind the fact that a merger scheme involves payment of stamp duty and consists of such other issues it would be quite interesting to learn how the merger would be undone.
4.6 The Commission has a maximum of 210 days to pass its Order in the absence of which it is deemed to have approved the Combination.
4.7 An appeal against the order of the Commission lies directly before the Supreme Court.
4.8 Concession under Regulations
The Draft Regulations issued by the Competition Commission of India have held that certain combinations are not likely to cause an appreciable adverse effect on competition in India and hence, they would be exempted from applying to the CCl. Some of the important combinations proposed to be exempted include:
i) an acquisition of shares or voting rights by the parties, solely as an investment or in the ordinary course of business, of not more than 15% of the total shares or voting rights of the company;
ii) an acquisition of assets by the parties, 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 enterprise whose assets are being acquired except in certain cases;
iii) an Acquisition of or Acquiring Of Control or Merger or Amalgamation, where the assets or turnover of Rs.1,OOOcrores or Rs.3,OOO crores respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination; or
iv) an acquisition of or acquiring of control or merger or amalgamation, where the minimum assets or turnover, in India, of Rs.500 crores or Rs.1,500 respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination;
Thus, several overseas acquisitions by Indian companies of Foreign Companies which do not have any presence in India would not be covered within the purview of the CCL This is a welcome step towards encouraging overseas buyouts. For example, the acquisition by Tata Motors of Jagaur of UK, would not fall within the CCI’s purview, since Jaguar does not have any presence in India and the Rules provide that both the parties must have at least Rs.600 crores of turnover in India.
4.9 Till the draft regulations get finalised and the operative sections for regulation of business combinations get notified by the Government, the Commission cannot entertain any hearings in respect of business combinations. Hence, till such time, these provisions would not have any effect.
V. Directors’ Responsibilities
5.1 Under the provisions of the Act, where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company as well as the company would be directly liable to be punished.
5.2 Further, any director with whose connivance, neglect or active consent any offence has been committed by the company, shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.
VI. Role of CAs
6.1 Chartered Accountants are authorised to appear before the Commission to represent the Complainant or the Defendant. This is a new area of practice for Chartered Accountants as the number of mergers and acquisitions which India is witnessing is only the tip of the iceberg.
6.2 In case of mergers or acquisitions of the auditee which satisfy the above tests and thus, fall within the purview of the Commission, the CA in his capacity as the Auditor should alert his client about the provisions of the Act and the action which can be taken by the Commission under the Act. By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby provide value added services to his client.
