A Perspective On Recent Legal Changes In The Merger Control Framework Of India

2017 witnessed several changes in Indian competition law that are likely to have an impact on both antitrust enforcement as well as domestic and cross-border M&A transactions in the country. Some of these changes included the substitution of the Competition Law Appellate Tribunal with the National Company Law Appellate Tribunal (“NCLAT”) as the first appellate authority against decisions of the Competition Commission of India (“CCI”), the amendment of Section 6(2) of the Competition Act, 2002, the notification on target exemptions and on the calculation of relevant assets and turnover while testing whether a merger is notifiable to the CCI, important judgments such as the Supreme Court’s decision on imposing penalties on the basis of ‘relevant turnover’ of the offending enterprise in the Excel Crop Care[1] case, among other changes. In relation to merger control in particular, there have been three major changes that are likely to have a positive impact on M&A transactions taking place within CCI’s jurisdiction.
 
Exemption from notification of combinations within 30 days under Section 6(2) of the Competition Act, 2002
 
Prior to the notification introduced in March, 2017, Section 6(2) of the Competition Act, 2002 (“Act”)required qualifying parties (subject to the jurisdictional thresholds specified in Section 5 of the Act) proposing to enter into combinations, to notify the CCI of such combinations within 30 days of any triggering event. Triggering events are specified in clauses (a) and (b) of Section 6(2). Gun jumping, which includes the failure to notify the CCI of potential combination transactions in accordance with Section 6(2), and either partial or complete consummation of M&A transactions without CCI approval, has been penalised in several instances by the CCI. Penalties are levied against gun jumping as per Section 43A of the Act. Earlier this penalty used to apply in the event of delayed merger notifications as well.
 
Notable instances include the Tesco/Trent[2] merger, where a penalty was imposed by the CCI for a delay of around 73 days in notifying the combination. In this instance, the delay was caused due to an ambiguity in the interpretation of the relevant provisions. This made it difficult for the merging parties to determine the triggering event precisely and to comply with the 30-day deadline. As a consequence of this order, persons who were to enter into combinations hereafter had to exercise extreme caution while determining the triggering event to ensure that they were not penalised under Section 43A for delayed filings.
 
In light of such issues arising out of this restrictive time limit and to bring the Indian competition regime in line with international best practices, the Central Government introduced a notification dated 29 June 2017[3] exempting parties to a combination from notifying combination transactions within 30 days from the triggering event. This comes as a much-needed relief for companies looking to enter into M&A transactions within the jurisdiction of the CCI.
 
Notification on target exemption
 
Another significant change was with respect to the de minimis exemption provided to parties from notifying combinations to the CCI. The 27 March 2017[4] notification replaced the 4 March 2016 notification on target exemptions. The 2016 notification exempted combinations arising out of acquisitions from being notified to the CCI if the target company’s assets in India did not exceed INR3.5 billion or turnover in India did not exceed INR10 billion. However, this notification only provided this exemption in case of acquisitions and the benefit of the same could not be availed in case of any other type of combination.
 
The 27 March 2017 notification has extended this benefit to mergers and amalgamations as well, thus exempting smaller market players undertaking M&A transactions from going through the detailed filing and review procedure prior to consummation of their mergers/acquisitions/amalgamations.
 
Relevant assets/turnover for computing jurisdictional thresholds
 
The 27 March 2017[5] notification also clarified the methodology for computing the jurisdictional thresholds prescribed under Section 5 of the Act. This notification has specified that, for the purpose of calculating the jurisdictional thresholds under Section 5 of the Act, only the relevant assets and turnover of the particular portion of the enterprise, division or business being acquired/merged/amalgamated need to be considered.
 
The notification further states that the value of the relevant assets shall be inclusive of the good-will and intellectual property of the said entity and shall be calculated on the basis of the book value of assets in the financial year immediately preceding the financial year in which the proposed combination is to take place, less any depreciation. The value of the relevant turnover shall be the turnover of the particular portion of the enterprise/division/business as certified by the statutory auditor, or based on the last available audited accounts of the company.
 
This clarification regarding the computation of relevant assets and turnover in determining whether a transaction must be notified to the CCI is a step forward in the right direction. In doing so, mergers taking place between smaller units of business having little or no impact on the level of competition in the relevant markets will not be subject to regulatory hurdles, or to detailed filing procedures merely because the parties to the combination have total assets or total turnover above the thresholds under Section 5.
 
From CCI’s point of view, this notification as a whole – including target exemption provisions and the stipulation for considering the relevant assets/turnover for computing the jurisdictional thresholds under Section 5 – is likely to reduce the number of relatively smaller and insignificant (from a competition law perspective) mergers and acquisitions that need to be reviewed by the CCI. This will reduce the burden on the CCI to a great extent, which has been witnessing an increasing number of combinations to be reviewed every year.
 
Summary
 
On the whole, changes in the law in 2017 with respect to merger control are likely to lead to an ease in doing business for both smaller as well as larger market players entering into combinations. Removal of the 30-day period for notifying mergers is likely to reduce any fear of attracting heavy penalties for delayed filings.
 
In addition, the 27 March 2017 notification is likely to give a boost to smaller domestic and cross border mergers as these transactions may have one less regulatory hoop to jump. In the long run, these changes could boost the inflow of foreign investment in to India.