The acquisition rules of the Competition Commission of India go beyond the mandate of the law.
Merger control provisions of the Competition Act, 2002, are now set to be effective from June 1, 2011. In anticipation, the Competition Commission of India (CCI) has issued its revised draft merger control regulations. These draft regulations have invited criticism for requiring excessive information for covered transactions. The regulations, if they become effective in the current form, may likely be subject to judicial challenge as the CCI appears to be asserting jurisdiction over many more types of transactions than the Act permits.
What's the problem?
The merger control provisions of the Act give the CCI the power to review qualifying transactions before they close, to see whether they might cause an appreciable adverse effect on competition. So, beginning June 1 this year, the CCI can clear nonproblematic deals or, where the transactions adversely affect competition, it can require modifications to or even completely prohibit the deal. The CCI’s powers relating to M&A under the Act are broad.
However, the Act only covers the ‘acquisition of one or more enterprises’. The problem is that the CCI’s draft regulations demonstrate that the commission believes that the Act covers any acquisition, regardless of whether an ‘enterprise’ is being acquired. That simply is not correct, as the Act is clear that the transaction must involve an acquisition of an enterprise.
There are some everyday occurrences in corporate life — and even in the lives of ordinary people — that appear to be covered by the draft regulations that make little sense from a competition policy perspective.
For example, according to the CCI, assuming the parties to the transaction meet the jurisdictional thresholds (see accompanying graphic), even the purchase of a single share in a company on the open market by an individual could be notifiable, which simply cannot be the case.
Another example is where the draft regulations require the purchase of raw materials or stock in trade and internal reorganisation, wholly internal or otherwise, to be notifiable. While such routine business transactions largely do not raise competition issues, the point is actually much simpler than a policy question: the merger control provisions of the Act simply do not cover many of these transactions.
The draft regulations seem to take the position that, even though these transactions are notifiable, they can be notified on a shorter form — which itself has received considerable criticism from several quadrants in India and around the world, as being excessive in its scope — and are informally referred to as ‘fast-trackable’ transactions. That implies the CCI will quickly dispose of these notifications.
However, this does not address the fundamental legal issue that the CCI does not have merger control jurisdiction over these transactions. Moreover, the CCI is attempting to say that it has the prior right of refusal over these transactions and can require the parties to pay as much as . 40 lakh in filing fees. This expansive reading of the CCI’s jurisdiction may to be ignored or be subject of litigation, or both. Either way, it does not augur well for the introduction of the country’s new merger control regime.
‘Acquisition of one or more enterprises’
Let us look at how this phrase plays out when acquiring a single share, which, in almost all instances, does not result in the acquisition of one or more enterprises.
To reiterate, the merger control provisions of the Act relate to ‘[t]he acquisition of one or more enterprises’. An acquisition of an enterprise refers, in almost all instances, to something more substantial than, for example, simply acquiring a single share in that enterprise, or acquiring raw materials from an enterprise. An ‘enterprise’, as defined in the Act, essentially equates to something like a going concern rather than a mere asset.
Section 5 of the Act sets out the three types of transactions that are required to be filed before the CCI for pre-clearance, assuming the thresholds are met by the parties:
• Section 5(a): Any transaction where ‘control, shares, voting rights or assets’ are being acquired,
• Section 5(b): Transactions where two actual or potential competitors are involved as parties and one is acquiring ‘control’ over the other, and
•Section 5(c): A merger or amalgamation. The second and third points clearly mean something greater than the mere acquisition of a single share or an asset. Indeed, the acquisition of control of a business by a competitor is probably the most critical from a competition law perspective, as it means that the CCI gets a mandatory shot at reviewing a transaction potentially involving a real change in competition.
The third point, a merger or amalgamation, is also a profound event.
In both cases, something more substantial than an acquisition of a single share is clearly involved. Let us focus on the second point. Logic and basic competition policy dictates that an acquisition involving competitors in the same field has a greater likelihood — all other things being equal — of reducing competition than when two noncompetitors come together in an M&A.
Ironically, Section 5(b) of the Act, covering competitor acquisitions, is triggered only when there is an acquisition of control. In contrast, Section 5(a), which covers noncompetitor acquisitions, has been read by the CCI to cover as little as the acquisition of a single share or an asset. From a competition law and policy perspective, there is a real incongruity with this approach.
The phrase ‘acquisition of one or more enterprises’ refers to all three types of transactions — this phrase holds the answer to resolving whether the CCI is on solid ground in claiming it has jurisdiction over these kinds of transactions. Reading this phrase in conjunction with the first point, which is required as a matter of law, the only mandatorily notifiable transactions are where ‘control, shares, voting rights or assets’ are being acquired to the extent that (a) the thresholds are met, and (b) the transaction involves ‘an acquisition of one or more enterprises’.
This reading — which does not appear to be the understanding of the CCI — seems to be the more harmonious interpretation of the Act’s merger control provisions as it covers something far more profound than, for example, an acquisition of a single share. Such a reading could mean that the acquirer must either acquire all shares, voting rights or assets of the entity or take control over the entity.
Either way, it is more substantial than the mere acquisition of a single share. It also comes much closer to the meaning of ‘acquisition of one or more enterprises’ than buying a single share.
The draft regulations miss the point that all the transactions must relate to an acquisition of one or more enterprises. On that basis alone, the CCI’s apparent claim to have merger control jurisdiction over ‘stock in trade’ must fail, as these are mere assets not amounting to an enterprise.
Similarly, many transactions that the CCI claims to have merger control jurisdiction on — for instance, acquisition of stock in trade, internal reorganisations, etc — does not lead to an acquisition of an enterprise. Moreover, such acquisitions do not generally raise competition issues.
There are no problems, only solutions
Such interpretation would likely reduce the number of transactions that are required to be filed with the CCI for pre-clearance and allow the CCI to focus on transactions that are far more likely to cause competition issues in India. The interpretation of the phrase ‘acquisition of one or more enterprises’ is a critical one — particularly since its resolution holds huge implications for Indian industry, foreign investors and the country’s economy as a whole. There are concerns that the Act could actually stifle growth, innovation and investment if it proves to be overreaching. But the Act itself does not go overboard; rather, it appears that the draft regulations cover far more transactions than the law provides.
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