An earlier post on this blog noted the concerns of the industry relating to the merger regulations proposed by the Competition Commission and also certain comments made by the acting chairman of the Competition Commission of India to allay any fears of the industry.The proposed draft of the Competition Commission of India (Combination) Regulations, 200_ that deal with merger regulation were made available on the website (here) of the Commission a couple of days ago. This development has somehow failed to catch the attention of the mainstream business media as yet.
The draft regulations do address some of the concerns raised by the industry, but several issues still remain open. Upon a quick review of the draft regulations, the following appear to be the key aspects of the regulations:
1. De minimis transactions and other exceptions
The regulations seek to keep certain types of transactions outside the purview of the regulations by deeming these categories as not likely to cause an appreciable adverse effect on competition in India.
First of these relates to acquisition of shares or voting rights by a party solely as an investment or in the ordinary course of business so long as such acquisition does not exceed 26% shares in the target company. These are a fairly common type of transactions in the realm of mergers and acquisitions. However, the transaction should not result in the acquirer obtaining “control” of the enterprise being acquired. This is clearly intended to allow transactions by acquirers that do not seek to take majority stakes in companies. A stake of 26% (that is not likely to cause an appreciable adverse effect on competition) would enable the acquirer to exercise negative rights by blocking special resolutions that require 75% majority in order to be approved.
One area that seems to be ambiguous and needs further clarity pertains to the meaning of “control”. This is important as the exemption from pre-merger notification does not apply to transactions where the acquirer takes control. What are the parameters for defining control? Would the existence of board nomination rights by the acquirer and its other management related provisions amount to control? Do supermajority voting rights given to the acquirer (whereby its approval is required for the company to carry out a set of defined actions) amount to control? These matters are left to interpretation in the present draft of the regulations, and further clarity would be required if disputes are to be avoided. Past experience indicates that despite the existence of a detailed definition of “control” under the SEBI Takeover Regulations, the issue has been a subject-matter repeated discussions and deliberation between corporates, advisors and regulators. In that background, a broad definition of control (as there presently exists in the Competition Act and regulations) would only exacerbate the problem.
Other transactions that do not cause appreciable adverse effect on competition include:
- acquisition of assets 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;
- acquisition of shares of a subsidiary by a parent company;
- acquisition resulting from gift or intestate or testamentary succession or transfer by a settler to an irrevocable trust;
- acquisition of current assets in the ordinary course of business;
- acquisition by underwriter in the ordinary course of business and in the process of underwriting;
- acquisition under a bonus or rights issue.
2. Timeframe for Approval
A key objection from the industry to merger regulation has been the inordinate delay that the merger regulation and approval process can cause to the implementation of a transaction. The Competition Act, 2002 (as amended in 2007) grants a period of 210 days (or approximately 7 months) for the Competition Commission to revert on a pre-merger notification, until which time the transaction cannot be given effect to. Industry’s argument was buttressed by the fact that other key competition regulators globally (such as the US and EU) had imposed a much shorter period of 30 days for approval.
The draft regulations arrive at some sort of a compromise by introducing the requirement of the Commission’s opinion on prima facie case within 30 days from the date of a pre-merger notification by the parties. Where the Commission forms a prima facie opinion that the combination is not likely to cause an appreciable adverse effect on competition within India, the Commission would convey the same to the parties. Where the opinion is formed the other way, then the transaction would be subject to the detailed investigation process that could potentially last 210 days.
While this compromise evidences the intention of the Commission to act much faster than it is mandated to under the Act, the proof of the matter will lie essentially in its implementation. This would also depend on the staffing of the commission, the speed with which its administrative machinery moves and such other matters that are beyond the letter of the law. What is surprising is that the intention to shorten the time frame for approval is not accompanied with any sanctions. For instance, it is not clear as to what happens if the Commission does not communicate its prima facie opinion within the time frame of 30 days. While there is a fairly strong sanction if the Commission does not act within the 210 day period for approval (where the transaction will be deemed approved by the Commission), no such provision exists for the 30-day prima facie opinion provision. This is a matter that requires fine-tuning by the imposition of incentives (or disincentives, as the case may be) on the Commission to ensure that it acts within the 30-day period, failing which there could be problems relating to the implementation of this shortened time frame.
These are just some observations on the key provisions of the combination regulations, and I will post further if I find any other matters that are noteworthy on this count.
(Update: The Economic Times carried a column on February 1, 2008 that discusses the implications of the merger regulations)