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.