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Indian Merger Regulations: Tough Times Don’t Last

Published on Mon, Jun 30,2014 | 18:45, Updated at Mon, Jun 30 at 18:45Source : 

By: Avaantika Kakkar, Partner, Khaitan & Co.

Just when one believed that the Indian merger control regime had settled down after some initial turbulence, the waters stand muddied again with two recent orders from the Competition Commission of India (CCI).

The CCI’s order in the TESCO case states that TESCO’s application to the Foreign Investment Promotion Board for acquiring shares of Trent Hypermarket Limited triggered a filing with the CCI as per a strict reading of the Combination Regulations, as opposed to the signing of definitive agreements, which was a later event. TESCO therefore, was penalised for a late filing.

The CCI has read the Combination Regulations in a technical manner, but the question is whether it has surpassed the intention of the legislature. The Competition Act, 2002 (Act) states that it is the agreement or other document that triggers the filing with the CCI. Given the specific reference to “agreement”, was it not reasonable for parties to believe that it would in fact be the agreement that would trigger the filing under the Act and not the more general term “other document”, especially in a situation where parties would sign definitive agreements.

With the TESCO case, it appears that the CCI is comfortable examining a proposed transaction in its early stages with parties would only specifying the “nature”, “purpose” and “type” of the proposed transaction. Parties will sign the final agreements as and when they are ready. The Combination Regulations state that the CCI “shall” make its prima facie opinion on the likely effects of the proposed transaction within thirty days of the filing. In such a situation, one wonders at the administrative pressures faced by the officers of CCI, who would have to keep tabs on the definitive agreements being provided to them. In the few cases where this situation repeats itself, definitive agreements may be provided after the Order approving the proposed transaction has been passed.  

Going forward, parties to M&A in India will have one more permutation to consider while deciding the timelines for applications to government/statutory authorities for fear of triggering Indian merger control sooner than they intend it.

There is of course, one benefit of this Order: where a proposed transaction has to be notified to statutory authorities, it is now possible for parties to approach the CCI at early stages of the transaction without having to wait to sign the definitive agreements.

In another case, the CCI has penalised Thomas Cook (India) Limited, for consummating “market purchases” of shares of Sterling Holidays Resorts (India) Limited without obtaining prior approval of the CCI. Thomas Cook, because had acquired about 9% equity share capital of Sterling through market purchases, which as an independent transaction, would not have required CCI’s approval. The CCI penalised Thomas Cook for “gun-jumping” as it had consummating a part of a composite transaction before securing CCI’s approval. The CCI did not consider the fact that the steps “completed” prior CCI approval of the “composite” transaction were, in fact, exempt under one or more provisions of the law.

In fact, Thomas Cook could have completed the market purchases even if the CCI had rejected its proposal to acquire Sterling because the transaction was exempt, in any case.

It is relevant that the CCI had been approached for its approval of the composite transaction and that the parties had not attempted structuring their way out of the need to approach the CCI.

A view emerging from the industry is that the anti-avoidance provisions of the law i.e., imposition of penalties have been invoked on parties who have voluntarily approached the CCI and made full and bona fide disclosures of their proposed as well as exempted completed transactions is going to have a negative impact on M&A sphere in India.

One particular gripe with respect to market purchases is that these are fairly routine practices in structuring M&A and private equity transactions, usually for commercial reasons. Very often, parties negotiate for extended periods and may eventually agree on signing, and the acquirer may trade in the target’s shares from time to time. When does one know that this action would be perceived to be part of a larger composite combination that ought to have been filed with the CCI?  

To say that Thomas Cook passed resolutions for effecting these market purchases on the same day may be viewed an over-simplification of the commercial aspects of M&A activities.  

The penal provisions for “gun-jumping” should be applied with careful consideration of transactional activity. The CCI must insist on complete compliance with the Act, as it is mandated to do so, but at the same time should balance and allow for legitimate business activity. Market purchases for on-going transactions are also a function of valuations and the way the market looks at a given point in time. As long as the acquirer has not acquired control or the ability to exercise decisive influence on the target, it may be difficult to say with certainty whether the acquirer has indeed “jumped the gun”.

We have seen, within the past month, two instances of the CCI imposing penalties on parties who have applied for its approval. The CCI has also acknowledged the bona fides of parties as a mitigating factor in imposing penalties for provisions that the parties did not know they were breaching. The CCI is a nascent regulator and it may be too early for clarifications on gun-jumping, penalties and other aspects of substance and procedure.

However, penalties on corporations do not just result in financial harm. There is the reputation, which is not the least of consequences for companies and individuals involved in these transactions.

It is not just clarity that stakeholders are seeking. Stakeholders would look askance at a regulator who has previously, even as a fledging regulator, been alive to transactional and market reality. And we are sure that the CCI will not disappoint.


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