BHARUCHA’S ARJUN ANAND LEAVES TO JOIN SINGHANIA & PARTNERS

(As published in Bar and Bench available on this link .)

Bharucha Partner Arjun Anand has recently left the firm to join Singhania & Partners in Delhi.

Managing Partner Ravi Singhania, said,

“We are glad to have Arjun Anand as a partner in our team. He supplements our M&A practice and brings in valuable experience in Private Equity and Venture Capital sphere”.

Anand has almost 13 years of experience focusing on M&A and transactional practice.

ICC TRIBUNAL IN SINGAPORE DECIDES LIMITATION ISSUE UNDER INDIAN LAW

(As published in China Business Law Journal published by Vantage Asia available on this link.)

On 25 October 2017, International Chamber of Commerce’s (ICC) sole arbitrator, Cameron Hassall, agreed to hear the claims of China’s Sinosteel Equipment & Engineering (Sinosteel) against an Indian iron ore processor and exporter, MSPL. Claimant Sinosteel is China’s second-largest importer of iron ore in the business of management, supervision, design and manufacture of mechanical and electrical products in sectors including metallurgy, mining and energy.

The sole arbitrator, before proceeding with the merits of the dispute, at the outset decided to deal with the limitation issue related to the claims and counterclaims of the parties, and a partial award was delivered with regard to the same.

The arbitration was conducted in accordance with the ICC Rules, 2012 in Singapore as required under contracts signed between the parties, with the law of India being the governing law of the contracts. The law of Singapore was the law governing the arbitration agreements within the contracts, as well as the procedural law governing arbitration proceedings.

The companies had entered into three contracts relating to design, engineering, supply and technical services with respect to a pellet plant in the state of Karnataka with a capacity of 1.2 million tonnes per annum.

According to the contract, the equipment testing was to be done in three stages. The first two tests were conducted successfully, but the companies could not successfully conduct the third test.

The dispute arose after MSPL failed to fulfil its obligation and pay the claimant its dues for the completed part of the work under the contracts between them. The parties proceeded to make claims and counterclaims to prove how the claims of the other party were barred by limitation. All three contracts consisted of an arbitration clause and the dispute was accordingly referred to the arbitration.

The claims of the claimant concerned payments in stages under the three contracts, which the respondent had failed to make. The respondent’s counterclaims, on the other hand, hinged on reimbursement for the expenditure incurred to rectify the damage to the pellet plant due to the claimant’s non-performance of contract, and liquidated damage for the breach of the contracts.

Indian law of limitation and the effect of acknowledgment. In India, as per the Indian Limitation Act, 1963, the parties have the right to sue for dues unpaid, until the period of three years from the date on which the right to sue arose. A suit filed after the period of three years is barred by limitation and there lies no valid claim after that. Section 18 of the Indian Limitation Act 1963, stipulates that the period of limitation will be extended in the event of an acknowledgment of liability made by the debtor before the expiration of the period of limitation to initiate the recovery process.

Acknowledgment means a definite admission of liability; it is not necessary that there should be a promise to pay, and the simple admission of a debt is sufficient. Acknowledgement is a statement in writing that a debt is due and unpaid.

The main legal point of contention between the parties was regarding the relevance of “conditional acknowledgment of liability” in determining time limitation. The acknowledgment/conditional acknowledgment of liability by a party against whom a claim is made will extend the limitation period. According to section 18 of the Indian Limitation Act 1963, a fresh limitation period will be computed from the date of such acknowledgment of liability.

Objections raised by the parties regarding the time limitation issue. The respondent had raised time limitation objections on the claims of the claimant, citing that the cause of action would accrue once the credit period mentioned on the invoices raised by the claimant expired. The claimant was resisting this objection on the basis of the respondent’s acknowledgment of debts in terms of section 18 of the act. Once the respondent acknowledges its debt, a fresh period of limitation begins from that date.

The entire contention of the respondent, on the other hand, was that there was no acknowledgment at all, rather the acknowledgment was contingent on the condition that the payment must be made only when the claimants successfully conduct the guarantee test contemplated under the contract. The respondent had argued that the fulfilment of the condition was mandatory so that acknowledgment under section 18 could be formulated, and such condition had in fact never been fulfilled.

Another interesting objection raised by the respondent to the claimant’s reliance on acknowledgments was that such acknowledgments had been made via emails, whereas Indian limitation provided that acknowledgments should be in writing. However, the claimant relied on the Indian Information Technology Act, as well as various case laws, to establish that acknowledgment via emails amounts to acknowledgment in writing.

The claimant also raised limitation objections to the claims of the respondent on both counts, i.e., the liquidated damages as well as the expense claims.

THE FINDINGS
Ld. sole arbitrator, with the help of various precedents and as cited by the parties, explained that even if an acknowledgment is accompanied by a refusal to pay, it is sufficient acknowledgment for the purposes of section 18 of the Indian Limitation Act 1963. To see whether an acknowledgment is valid or not has to be construed liberally, but fairly. In view of the same, the Ld. sole arbitrator held that all the ingredients of acknowledgment under section 18 were satisfied by the conditional acknowledgment made by the respondent and its denial to pay does not affect the acknowledgment for the purposes of section 18 of the Indian Limitation Act 1963. In view of the same, the claims of the claimant were held to be within limitation.

The respondent’s claims relating to liquidated damages, on the other hand, were rejected as being barred by time limitation. The expense claim of the respondent was left open to be contested on limitation at a later date.

Limitation bars the remedy; it does not extinguish the right. Therefore, provisions under section 18 of the Indian Limitation Act 1963, aid in restoring such rights. The claims of Sinosteel were saved by section 18 of the Indian Limitation Act 1963. This provision refreshes the prescribed three-year limitation period when an acknowledgment of liability is made by the opposite party before the expiration of the period prescribed.

Singhania & Partners was counsel to Sino Steel. The team included partners Ravi Singhania and Shambhu Sharan, senior associate Gunjan Chhabra, and associate Shashaank Bhansali.

Ravi Singhania is the managing partner and Gunjan Chhabra is a senior associate at Singhania & Partners in New Delhi

Mergers and Acquisitions

  • The term “merger” finds substantial mention in the Companies Act,2013 (CA13) as well as 1956(CA56), the Income Tax Act, 1961(IT Act) and various regulations of Securities and Exchange Board of India(SEBI), none of them have clearly laid down an exhaustive and absolute definition of merger. However, the framework of merger laid down in these legislations connotes that merger is the blending of two or more companies into one.
  • It is an amalgamation where all properties and liabilities of transferor are merged with the properties and liabilities of the transferee company. In essence, it is a merger of assets and liabilities of two or more companies. The IT Act defines an amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company.
  • All assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company. The shareholders with at least nine-tenths in value of the shares in the amalgamating company (or companies) become shareholders of the amalgamated company. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
    • Equity shares in the transferee company
    • Debentures in the transferfee company
    • A mix of the above mode
  • An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the share capital, or all or considerably all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile and may be effected through agreements between the offer or and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the target’s shares to the entire body of shareholders.
  • Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target.
  • Merger through Absorption:- An absorption is a combination of two or more companies into an ‘existing company’. All companies except one lose their identity in such a merger.
  • Merger through Consolidation:- A consolidation is a combination of two or more companies into a ‘new company’. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or share exchange.
  • Horizontal merger: – Is a combination of two or more firms in the same area of business.
  • Vertical merger: – Is a combination of two or more firms involved in different stages of production or distribution of the same product.
  • Conglomerate merger: – Is a combination of firms engaged in completely different lines of business activity.
  • Acquisition refers to the process of acquiring a company at a price called the acquisition price or acquisition premium. The price is paid in terms of cash or acquiring company’s shares or both.
    There are two types of business acquisitions, friendly acquisition and hostile acquisition.

    • In a friendly acquisition, a company invites other companies to acquire its business.
    • In a hostile acquisition, the company does not want to sell its business. However, the other company determined to acquire the business takes the aggressive route of buying the equity shares of the target company from its existing shareholders.
  • Amalgamation is an arrangement where two or more companies strengthen their business to form a new firm, or become a subsidiary of any one of the company. The terms amalgamation and merger are used interchangeably but there is a slight difference.
  • Merger is the integration of two or more companies into a single company where the identity of some of the companies gets dissolved. Whereas, amalgamation involves dissolving the entities of amalgamating companies and forming a new company having a separate legal entity.
  • There are two types of amalgamations.
    • The first one is similar to a merger where all the assets and liabilities and shareholders’ of the amalgamating companies are combined together. The accounting treatment is done using the pooling of interests method. It involves laying down a standard accounting policy for all the companies and then adding their relevant accounting figures like capital reserve, machinery, etc. to arrive at revised figures.
    • The second type of amalgamation involves acquisition of one company by another company. In this, the shareholders of the acquired company may not have the same equity rights as earlier, or the business of the acquired company may be discontinued which is similar to the purchase of a business. The accounting treatment is done using a purchase method. It involves recording assets and liabilities at their existing values or revaluating them on the basis of their fair values at the time of amalgamation.
  • Joint venture is a contractual arrangement between two or more parties who agree to come together for the purpose of undertaking a business project. All the parties contribute capital and share profits and losses in a decided ratio. Joint ventures are a type of partnership that is always executed through a written contract known as a joint venture agreement (JVA).
  • The contracts registered under JVA are legally binding on the parties. Furthermore, they are temporary in nature because they are implemented for a definite period of time to attain a specific goal. The contract automatically dissolves after the expiry of the decided time period.
  • Where the business of an entity comprises two well defined ‘undertakings’, it is possible to split up the entity into two entities. Generally, shareholders of the original entity would be issued shares of the new entity. Where a demerger is completed through a court process and fulfills certain conditions prescribed under the Tax Act, it will not result in capital gains for the seller (section 2(19AA) of the Tax Act) or sales tax liability. In addition, tax losses of a demerged company responsive to the demerged ‘undertaking’ can be carried forward and balance the profits of the resulting company, subject to fulfillment of certain conditions.
  • An acquisition of shares is acceptable with prior approval of the audit committee and board of directors. Share sale between related parties may also require prior shareholders’ approval. Earlier mergers or demergers were largely governed by sections 391-394 of the Companies Act, 1956.
  • Recently, with effect from 15 December 2016, sections 230-240 of the Companies Act, 2013, were notified(except Section 234 of Companies Act, 2013), following to which all the Schemes of Arrangement now require approval of the National Company Law Tribunal (NCLT) as against the High Court earlier.
  • As per the procedures, any scheme is first approved by the audit committee, the board of directors, stock exchanges (if shares are listed) and then by the shareholders/creditors of the company with a requisite majority (i.e. majority in number and 3/4th in value of shareholders/creditors voting in person, by proxy or by postal ballot).
  • NCLT gives its final approval to the scheme after considering the observations of the Regional Director, Registrar of Companies, Official Liquidator, income tax authorities, other regulatory authorities (RBI, stock exchanges, SEBI, Competition Commission of India [CCI], etc.) and any other objections filed by any other stakeholder interested in or affected by the scheme.
  • Implications under the Income Tax Act, 1961 Tax implications can be understood from the following three perspectives:
    • Tax concessions to the Amalgamated (Buyer) Company. If the amalgamating company has incurred any expenditure eligible for deduction under sections 35(5), 35A(6),35AB(3), 35ABB, 35D, 35DD, 35DDA, 35E and/or 36(1)(ix), prior to its amalgamation with the amalgamated company as per section 2(1B) of the Act and if the amalgamated company is an Indian company, then the benefit of the aforesaid sections shall be available to the amalgamated company, in the manner it would be available to the amalgamating company had there been no amalgamation. Also under section 72A of the Act, the amalgamated company is entitled to carry forward the unabsorbed depreciation and unabsorbed accumulated business losses of the amalgamating company provided certain conditions are fulfilled.
    • Tax concessions to the Amalgamating (Seller) Company.Any transfer of capital assets, in the scheme of amalgamation, by an amalgamating company to an Indian amalgamated company is not treated as transfer under section 47(vi) of the Act and so no capital gain tax is attracted in the hands of the amalgamating company.
    • Tax concessions to the shareholders of an Amalgamating Company. When the shareholder of an amalgamating company transfers shares held by him in the amalgamating company in consideration of allotment of shares in amalgamated company in the scheme of amalgamation, then such transfer of shares in not considered as transfer under section 47(vii) of the Act and consequently no capital gain is attracted in the hands of the shareholder of amalgamating company. Where an Indian target entity is sought to be acquired by a foreign entity, it may be noted that the corporate laws permit only domestic companies to be amalgamated. So the foreign acquirer have to create a local special purpose vehicle (SPV) in India to give effect the amalgamation with the Indian company and more over the SPV avails the tax benefits on amalgamation under the Act since the same are subject to the amalgamated company being an Indian company.
  • In the case of foreign companies holding shares of Indian companies, on amalgamation or de-merger of the foreign company with another foreign company, the transfer of shares would enjoy exemption from capital gains tax, subject to the following conditions:
    • At least 25% shareholders of the amalgamating foreign company 75% of shareholders of the de- merged company continue to remain share holders of the amalgamated foreign company/resulting foreign company and
    • Such transfer does not attract tax on capital gains in the country of incorporation of the amalgamated/resulting company. Amalgamation when effective: – Date of amalgamation. Every scheme of amalgamation provides for a transfer date from which the amalgamation is effective i.e., the Appointed Date‘. The effective date‘ is the date when the amalgamation actually takes place after obtaining the jurisdictional Court Approval and furnishing of the relevant documents with the Registrar of Companies. The effective date thus differs from the appointed date.
  • Tax Implications on Mergers and Acquisitions Mergers and acquisitions (M&As)
    • Tax Implications on Mergers and Acquisitions Mergers and acquisitions are an accepted strategy for corporate growth. While they may create value, mitigate agency problems associated with a firm’s free cash flow, enhance the firm’s market power, or help utilize tax credits.
    • The tax impact of properly structuring the disposition and acquisition of a company can have a very material impact on the economics of the transaction to both parties. , there are numerous tax planning opportunities that allow each party to obtain its specific tax and economic objectives without harming the other party.
  • Any acquisition of shares of more than 25% of a listed company by an acquirer would trigger an open offer to the public shareholders. Any merger or de-merger involving a listed company would require prior approval of the stock exchanges and SEBI before approaching NCLT.
  • Further, under the Takeover Code, a merger or de-merger of a listed company usually does not trigger an open offer to the public shareholders.
  • Foreign exchange regulations Sale of equity shares involving residents and nonresidents is permissible subject to RBI pricing guidelines and permissible sectoral caps.
  • A merger/demerger involving any issuance of shares to non-resident shareholders of the transferor company does not require prior RBI/government approval provided that the transferee company does not exceed the foreign exchange sectoral caps and the merger/demerger is approved by the Indian courts.
  • Issuance of any instrument other than equity shares/compulsorily convertible preference shares/ compulsorily convertible debentures to the non-resident would require prior RBI approval as they are considered as debt.
  • Where an acquisition relates to a sector where foreign investment is restricted and therefore needs prior regulatory approval from the central government, the waiting period for such approvals can range from six to eight weeks. The central government has delegated authority to the Foreign Investment Promotion Board (FIPB) under the support of the Ministry of Finance to grant such approvals on its behalf. In practice, delays are not uncommon and the definitive timing to obtain FIPB approval is hard to predict.
  • Foreign investment in the insurance sector is restricted to 49 per cent of the share capital of the Indian insurance company. In addition, the Indian insurance company is required to obtain a license from the Insurance Regulatory and Development Authority and adhere to several reporting, solvency and accounting requirements.
  • Tax residency certificate
    • Non-resident taxpayers are mandatorily required to furnish a tax residency certificate along with the prescribed information such as status of the taxpayer, country of incorporation, tax identification number, etc, for claiming the benefit of an applicable tax treaty.
  • Withholding tax
    • Where the payee is a non-resident or a foreign company, there is a legal obligation on the payer (whether resident or non-resident) to deduct tax at source when making any remittance to the former, if such payment constitutes income which is chargeable to tax under the Tax Act read with the applicable tax treaty.

Any acquisition requires prior approval of CCI if such acquisition exceeds certain financial thresholds and is not within a common group. While evaluating an acquisition, CCI would mainly scrutinize if the acquisition would lead to a dominant market position, resulting in an adverse effect on competition in the concerned sector.

  • The Indian Stamp Act, 1899, provides for stamp duty on transfer/issue of shares at the rate of 0.25%. In case the shares are to be withdrawn, there would be no stamp duty on transfer of shares.
  • Conveyance of business under a business transfer agreement in the case of a slump sale is charged to stamp duty at the same rate as in the case of conveyance of assets. Typically, a scheme of merger/demerger is charged to stamp duty at a concessional rate as compared to conveyance of assets. The exact rate levied depends upon the specific entry under the respective state laws.
  • Among the key issues which an investing company is confronted with, is the tangle of labour and employment laws in India which govern employee rights. Provisions for termination of employment are contained in the Industrial Disputes Act, Shops & Establishment Act of the State in which the establishment is located, Standing Orders Act, and the Service Contracts of employees.
  • Restructuring which involves merger of one unit with another where the original unit loses its identity or becomes part of another entity, or one unit acquires another but the existing unit retains its status as an entity, are all events which lead to change of owner for the employees, or reallocating (transfer) employees between the existing and acquired units, or termination of employment contract, and designing settlement packages, or even re-writing employment agreements require to be within the permissible limits under the local laws.
  • Divestment of a Unit or Undertaking.
    • Divestment of a Unit or Undertaking is when a running business undertaking is acquired by another company and the ownership of the business changes from the old company to a new company. This leads to a sale of assets and purchase by a new company with or without the employees (assuming these to be “workman”) of the transferred undertaking.
    • Where such workmen are not taken over by the new buyer, the old company may continue their service contracts but any redeployment of roles and terms would require consent to be obtained in terms of the ID Act, notices to be given regarding changes in their terms, etc. On the other hand, if the workmen are transferred to the buyer entity, this involves a change of ownership and a new employer for such workers.
    • As judicial norms go, the Supreme Court in India has held that the old employer has to obtain the consent of the affected workers even if there is no change in their terms of service and they are transferred on no less favourable terms. More significantly, the employee transfer would have to be accompanied by an agreement between the transferor (seller) and the transferee (buyer) under which the seniority or period of service may have to be taken over by the buyer so that there is no interruption of employment for purpose of social security benefits.
    • This will also involve transfer of gratuity funds to the buyer entity and transfer of provident fund accounts of the employees to the new entity. If the workers do not wish to move over, and the existing employer does not wish to retain them then the workers have to be “retrenched” as redundant under the ID Act and have to be paid compensation, given notice of termination with reason recorded therein, and all their termination benefits have to be paid under appropriate settlement agreements.
    • There may also be a situation where the transfer of undertaking may involve transfer of workmen on terms less favourable. In this case the workmen who agree to resign from the old employer (seller), and accept to move to the new employer (buyer), would have to be paid retrenchment compensation as provided under the ID Act, and if they have done five years of continuous employment in the seller company, they would have to be paid their gratuity benefits, though the provident fund accounts and balances would have to be transferred to the new employer (buyer).
    • Here a note of caution needs to be sounded for the benefit of the buyer/new employer, as the courts have held that the doctrine of continuing employer mandates that the new employer must take over the service seniority of the employees. Thus, new employers must undertake due diligence to ensure that the appropriate deductions of statutory contributions were made by the old employer and only then take over the accounts. In most cases of mergers (involving sale or transfer of shares), the courts now insist that the buyer would incur the social security obligations as a successor employer.
  • Determination of the status of employees
    • There are a number of statutory and judicially defined criteria that have to be applied to the employment agreements or appointment letters to determine the exact status in each case.
    • Both the ID Act and the S & E Act of the State concerned provide for notices, grounds of termination simplicity where permitted, though in most cases only ‘with cause’ termination are permitted. Then, depending upon the industry and strength of the total numbers employed, there are legal requirements of giving simple notice to the government or applying for prior permission to the government in case of large undertakings in certain industrial establishments.
    • Under the ID Act, the procedure to be followed depends on a case to case fact situation of the industry, whether it is in the service sector or in the manufacturing sector. Where the employees are external resources or “consultants” who were hired for providing services as independent contractors, the procedural requirements and legal conditions for termination are different from those mandated for “workmen”. If these resources have to be terminated as surplus or redundant, their settlement packages, and payment of statutory benefits, if applicable, hinge on the determination of their status.
  • Under Indian law, a company is regarded to be ‘potentially sick’ where accumulated losses at the end of a financial year have dissolved 50 per cent of its net worth during the immediately preceding four financial years.
  • The board of directors of a ‘potentially sick’ company can make a reference to the Board for Industrial and Financial Reconstruction (BIFR) within 60 days from the date of finalisation of the audited accounts for the financial year with reference to which ‘sickness’ can be attained.
  • Foreign investors are permitted to invest in ‘sick’ units, provided that prior approval of the BIFR is obtained. While acquiring assets from a company in the BIFR, it is very important to ensure that no proceedings are pending against any order by the BIFR that could possibly delay title to the assets.
  • Under section 531A of the Companies Act, 1956 (corresponding provision section 329 under the Act is not yet notified), any transaction relating to property of the company concluded within one year prior to the commencement of its winding-up, other than in the ordinary course of business or in good faith for valuable consideration, is invalid.
  • Additionally, transactions with creditors preceding six months prior to the commencement of a winding-up can be challenged as a fraudulent preference.
  • Indian Government has passed the following Laws and Acts against corruption:
    • Indian Penal Code, 1860
    • (IPC), Prevention of Corruption Act, 1988 (POCA),
    • Prevention of Money Laundering Act, 2002 (PMLA)
    • Foreign exchange laws and regulations.
  • India is also a signatory to the United Nations Convention against Corruption and has ratified the same.

Merger Control

What is a merger?

  • The term “merger” finds substantial mention in the Companies Act,2013 (CA13) as well as 1956(CA56), the Income Tax Act, 1961(IT Act) and various regulations of Securities and Exchange Board of India(SEBI), none of them have clearly laid down an exhaustive and absolute definition of merger. However, the framework of merger laid down in these legislations connotes that merger is the blending of two or more companies into one.
  • It is an amalgamation where all properties and liabilities of transferor are merged with the properties and liabilities of the transferee company. In essence, it is a merger of assets and liabilities of two or more companies. The IT Act defines an amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company.
  • All assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company. The shareholders with at least nine-tenths in value of the shares in the amalgamating company (or companies) become shareholders of the amalgamated company. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
    • Equity shares in the transferee company
    • Debentures in the transferee company
    • Cash
    • A mix of the above mode
  • An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the share capital, or all or considerably all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile, and may be effected through agreements between the offer or and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the target’s shares to the entire body of shareholders.
  • Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target.
  • The Competition Commission of India (CCI) is the central authority that ensures the enforcement of Competition Act. The decisions of CCI can be appealed to the Competition Appellate Tribunal and subsequently to the Supreme Court.
  • Sections 5 and 6 of the Competition Act prohibit persons or enterprises from entering into combinations which have or are likely to have an Appreciable Adverse Effect on Competition on competition in the relevant market in India.
  • Section 5 of the Competition Act encompasses three broad categories of combinations within its fold:
    • The acquisition by one or more persons of control, shares, voting rights or assets of one or more enterprises, where the parties, or the group to which the target will belong post-acquisition, meet the specified assets/turnover thresholds.
    • The acquisition by a person of control over an enterprise where the person concerned already has direct and indirect control over another enterprise with which it compete, where the parties, or the group to which the target will belong post-acquisition, meet the specified assets/turnover thresholds.
    • Mergers or amalgamations, where the enterprise remaining, or enterprise created, or the group to which the enterprise will belong after the merger/amalgamation, meets the specified assets/turnover thresholds.
    • According to the act, these combinations are void. Section 20(4) of the act sets out the factors that the CCI will consider when assessing whether a combination has or is likely to have an AAE on competition in India.
    • Transactions which exceed the specified jurisdictional thresholds for assets and turnovers are caught by the legislation. These thresholds are set out in Section 5 of the Competition Act, as amended by the relevant government notifications. Asset and turnover-based thresholds apply to determine whether a transaction is caught by the legislation. These are set out below.
    • Parties test: The parties have combined assets in India of INR 2,000 crores (INR 20 billion) or a combined turnover in India of INR 6,000 crores (INR 60 billion); or The parties have combined worldwide assets of USD 1 billion, including combined assets in India of INR 1000 crores (INR 10 billion) or a combined worldwide turnover in excess of USD 3 billion, including a combined turnover in India of INR 3,000 crores (INR 30 billion). Group test: The group has assets in India of more than INR 8,000 crores (INR 80 billion) or a turn­over in India of INR 24,000 crores (INR 240 billion); or The group has worldwide assets of USD 4 billion, including assets in India of INR 1,000 crores (INR 10 billion), or a worldwide turnover of USD 12 billion, including turnover in India of INR 3,000 crores (INR 30 billion). In this context, ‘group’ means two or more enterprises which are directly or indirectly in a position to:
      • Exercise 50% or more of the voting rights in another enterprise
      • Appoint more than 50% of the board of directors in another enterprise; or
      • Control the management or affairs of another enterpris
  • The government of India, through a Notification dated 4 March 2016, renewed the de minimis target-based filing exemption for five years until March 2021, under which transactions where the target has either Indian assets of less than 3.5 billion rupees or Indian turnover of less than 10 billion rupees are exempted from the CCI notification requirement (target exemption).However, it should be noted that this exemption is only applicable for acquisitions and not for mergers or amalgamations.
  • Other than CCI, there are sectoral regulators like the Reserve Bank of India (for the banking sector), the Department of Telecommunications (for the telecommunications sector), the State Electricity Regulatory Commissions (for the electricity sector), the Securities and Exchange Board of India (SEBI) (for publicly listed companies), and the Insurance Regulatory and Development Authority (for the insurance sector) which can look into mergers/acquisitions in those specific sectors.

Through the first Notification, the Central Government has increased thresholds, both assets and turnover, for any transaction to qualify as a combination under Section 5 of the Competition Act, 2002 (Act)by 100%. Consequently, the following shall be the revised thresholds under the Act to trigger the filing requirement for any transaction before the Competition Commission of India (CCI):

Threshold for proposed combination (acquirer + target) Threshold for group post acquisition
In India In or outside India In India In or outside India
Assets Assets Assets Assets
Jointly worth more than INR 3,000 Crores (INR 30 billion) Jointly worth more than USD 1500 million (including assets worth at least INR 1500 Crores (INR 15 billion) in India) Jointly worth more than INR 12,000 Crores (INR 120 billion) Jointly worth more than USD 6 billion (including assets worth at least INR1500 Crores (INR 15 billion) in India)
Turnover Turnover Turnover Turnover
Jointly worth more than INR 9,000 Crores (INR 90 billion) Jointly worth more than USD 4.50 billion (including at least INR4,500 Crores (INR 45 billion) in India) Jointly worth more than INR 36,000 Crores (INR 360 billion) Jointly worth more than USD 18 billion (including at least INR 4500 Crores (INR 45 billion) in India)

Trigger

  • It is mandatory to notify the CCI of the combination in the event that the jurisdictional thresholds are met and exemptions are unavailable. The Competition Act prescribes that notifying parties must file a notification with the CCI within 30 calendar days of:
    • Public financial institution (PFI)
    • Foreign institutional investor (FII)
    • Bank or venture capital fund (VCF)
      • Execution of any agreement or other document for acquisition under Section 5(a) or acquisition of control under Section 5(b).
      • The Combination Regulations clarify that the term ‘other document’ means any binding document, by whatever name, that conveys an agreement or decision to acquire control, shares, voting rights or assets.
      • The CCI has up to 210 days from the date of notification to approve or prohibit a notified combination. It should be noted that the 30-working- day periods for the parties to submit amendments to proposed modifications, and for them to accept the CCI’s original modifications in case the modifications are not accepted, are excluded from this 210-day time period.
      • Additionally, the CCI follows a practice of excluding any time extensions sought by parties for responding to the CCI’s additional requests for information, from the 210-day time period (although the Competition Act and Regulations are silent on this aspect).
      • There are no provisions to speed up the review timetable and parties who wish to gain early clearance should comply with all information requests expeditiously. In practice, CCI clearance can take anywhere between 60 and 90 days even for no-issues transactions. Transactions with substantial overlaps can take significantly
      • In the event the CCI believes the transaction will cause or is likely to cause an AAEC (Appreciable adverse effect on competition) in India, the transaction will be treated as void, and all actions taken in pursuit of the void transaction shall also be v In such a case, the CCI has the power to unwind the transaction, though this has not happened to date. The CCI also has the power to reduce the scope of ancillary restrictions such as non-compete provisions and can also order divestiture of assets. There is no express restriction on the types of remedies that the CCI can accept in order to address AAEC concerns

      Time of Filing Notification

      • A combination must be notified to the CCI within 30 days of either:
      • Execution of any binding agreement for acquisition
      • Passing of the board resolution approving the combination (in the case of a merger/amalgamation).

      Final approval of the proposal of merger or amalgamation under Section 5(c) of the Competition Act by the board of directors of the enterprises concerned; or

      • However, by way of exception, a post facto notification must be filed within seven days from the date of the acquisition for share subscriptions, financing facilities or any acquisition made under an investment agreement or a covenant in a loan agreement by any of the following:
  • Form of Filing
  • The Combination Regulations prescribe three forms for filing a merger notification. Notifications are usually filed in Form I (i.e., short form). However, the parties can file a merger notification in Form II (i.e., long form). The Combination Regulations recommend that Form II notifications be filed for transactions where the parties to the combination are:
    • Competitors with a combined market share in the same market of more than 15%; or
    • Active in vertically linked markets, where the combined or individual market share in any of these markets is greater than 25%.
  • Form II requires extremely detailed information – far more than that required by the (long form) Form CO under the EU Merger Regulation or a second request pursuant to the US Hart Scott Rodino Act. This information includes detailed descriptions of products, services and the market as a whole, including:
    • The relative strengths and weaknesses of competitors;
    • Estimates of a minimum viable scale required to attain cost savings;
    • The costs of entry; and
    • The impact of research and development
  • No pre-notification procedure exists. It is possible to conduct pre-notification consultations with the CCI on procedural and substantive issues. Consultations are oral, informal and non-binding. The merger control regime has a standstill requirement and no part of a transaction can be implemented until approval has been obtained.
  • Fees
  • At present, the filing fee for notice filed in Form I is Rs 15,00,000
    • In Form II is Rs 50, 00,000 (See Regulation 11 of the Combination Regulations).
    • No fee is payable for filing the notice in Form III.
  • The formation of a joint venture (JV) is not specifically covered by Section 5 of the Competition Act. Section 5 covers the acquisition of an “enterprise” and mergers and amalgamations of “enterprises”. The term “enterprise” is defined under the Competition Act.
    • It effectively refers to a “going concern” that is already conducting or has previously conducted business. A purely “Greenfield” JV (that is, a new project with no previous work) is unlikely to be considered as an enterprise, and will therefore not fall within the scope of Section 5.
  • However, setting up a “Brownfield” JV (where parents are contributing existing assets or businesses, or conferring control over these assets/businesses to the JV) where the jurisdictional thresholds are met, is notifiable as it relates to the acquisition of an enterprise under the Competition Act.
  • There is presently very little guidance from the CCI of India in relation to the treatment of JVs or the criteria it applies in determining if a transaction is Greenfield or Brownfield.

Substantive Test for Clearance

In order to determine whether a combination will have or be likely to have an AAEC, the CCI may consider all or any of the following factors stated in section 20(4) of the Competition Act:

  • actual and potential level of competition through imports in the market;
  • extent of barriers to entry in the market;
  • level of combination in the market
  • degree of countervailing power in the market
  • likelihood that the combination would result in the parties to the combination being able to significantly and sustainablily increase prices or profit margins

Remedies and ancillary restraints

  • extent of effective competition likely to sustain in a market
  • extent to which substitutes are available or are likely to be available in the market
  • market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination
  • likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market
  • nature and extent of vertical integration in the market
  • possibility of a failing business
  • nature and extent of innovation
  • relative advantage, by way of the contribution to the economic development, by any combination having or likely to have an AAEC
  • whether the benefits of the combination outweigh the adverse impact of the combination, if any.

 

The exchange control regulations primarily govern foreign ownership of assets in India. These regulations list certain sectors:

  • Where prior approval of the government is required before an investment can be made by a non-resident (e.g., investments in the defence sector)
  • With restrictions on the investment limits that a non-resident can make (e.g., foreign direct investment in infrastructure companies is permitted only up to 26% without having to obtain the government’s prior approval)
  • Which have conditions that must be fulfilled before making foreign investment (e.g., investment in a non-banking financial company is subject to certain minimal capitalisation norms); and
  • In which foreign investment is completely prohibited.

Foreign to Foreign Transactions 

  • As per the jurisprudence developed so far from CCI orders, as long as the prescribed thresholds mentioned above are met, and the “de minimis” exemption as well as the possible exclusions mentioned in Schedule I of the Combination Regulations are not applicable, the transaction needs to be notified to CCI for its approval before consummation irrespective of the fact that the transaction is taking place entirely outside India.
  • Until the end of March 2014, the Regulations provided an exemption for transactions between parties outside India provided there was insignificant local nexus and effects on markets in India. The CCI interpreted the exemption narrowly, rendering it virtually redundant. To remove uncertainty in this regard, the CCI withdrew the exemption, so that foreign-to-foreign transactions satisfying the standard assets and turnover thresholds under the Competition Act, and not covered by any of the other exemptions, will have to be notified even if there is no local nexus and effects on markets in India. However, the absence of a local nexus and effects may expedite the review and clearance process by the CCI.
  • In this context, it is important to mention that the CCI, by an amendment to Schedule I of the Combination Regulations, has deleted one category which originally provided for exclusion of combinations taking place entirely outside India with insignificant local nexus and effect on markets in India.
  • It is also pertinent to mention that the CCI does not differentiate between combinations taking place in India or outside India in case of any violation of the provisions of the Act, particularly in the matter of adhering to the prescribed timelines.
  • There are currently no other special rules under the Competition Act governing merger control review for foreign investment or specific sectors such as telecoms, pharmaceuticals, the media, oil and natural gas. In addition, there are non-competition regulatory approvals, which may be required, depending on the sector in which the investment is being made.