The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm

CNBC TV18
Network18

CCI Relaxes Notification Requirements!

Published on Thu, May 02,2013 | 17:47, Updated at Mon, May 20 at 16:16Source : Moneycontrol.com 

By: Pratibha Jain, Shashank Gautam & Simone Reis, Nishith Desai Associates

The Government of India, on March 4, 2011, notified the much debated provisions of the Competition Act, 2002 (“Competition Act”) relating to ‘combinations’ namely Sections 5 and 6 of the Competition Act. Although notified on March 4, 2011, these provisions took effect from June 1, 2011.

As per Section 5 of the Competition Act, a ‘combination’ includes:

1. the acquisition of control, shares or voting rights or assets by a person.
2. the acquisition of control of an enterprise where the acquirer already has direct or indirect control of another engaged in identical business; and
3. a merger or amalgamation between or among enterprises, that cross the financial thresholds set out in Section 5.

Section 6 of the Competition Act makes void any combination which causes or is likely to cause an appreciable adverse effect on competition within India. In furtherance of this determination, Section 6 of the Competition Act requires every acquirer to notify the Competition Commission of India (“CCI”) of a combination and seek its approval prior to effectuating the same in the manner set out therein.

The procedures to be followed pursuant to Section 6 of the Competition Act are the subject matter to regulations issued by the CCI (“Combination Regulation”). The Combination Regulation came into the effect from June 1, 2011 along with the provisions of Section 5 and 6 of the Competition Act.  The provision pertaining to combination was amongst the most controversial feature of the Competition Act. The difficulty in implementing this provision could be gathered from the fact that the provision of Competition Act concerning combination was the last one to be brought into force after a detailed consultation with stake holders in the varied fields including industry associations, legal luminaries and economists, amongst others. The Combination Regulation was subsequently amended on February 23, 2012 to provide clarity and simplification of procedures for notifying combinations. However the said amendment failed to address the concern of industry for relaxation in notification requirement, especially in context with intra group mergers and amalgamations.

CCI in exercise of the powers conferred by Section 64 of the Competition Act, has notified The CCI (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2013 (“Amendment Regulation”)to further simplify the mandatory filing requirements for the combinations meeting thresholds provided under Section 5 of the Act.

 The Amendment Regulation has inserted certain new categories, modified or clarified certain other categories and has also rearranged the categories in Schedule I of the Combination Regulation.

Schedule I to the Combination Regulation provide categories of transactions not likely to have appreciable adverse effect on competition.

A. Category 1 A - Insertion of new category 1A of schedule – gross acquisition of  upto 5% shares each year exempt from notification in certain cases:

Present Position under the Combination Regulations

Position under the Amendment Regulation

There was no such corresponding provision for acquisitions between 25% to 50%, under the Combination Regulation before it was amended by the Amendment Regulation.

Category 1 A: An acquisition of additional shares or voting rights(“Shares”) of an enterprise by the acquirer or its group, not resulting in gross acquisition of more than 5% of the Shares of such enterprise in a financial year, where the acquirer or its group, prior to acquisition, already holds 25% or more shares but does not hold 50% or more of the shares  of the enterprise, either prior to or after such acquisition:

Provided that such acquisition does not result in acquisition of sole or joint control of such enterprise by the acquirer or its group.


Analysis

The newly inserted category 1 A of Schedule I provides that if an enterprise acquires upto 5% additional shares or voting rights in a relevant financial year in another enterprise in which it already holds 25% or more shares and voting rights but does not hold 50% or more of the shares or voting rights either prior to or after such acquisition, then such enterprise will not have to ordinarily file notice under Section 6 (2) of the Competition Act.

The category 1 of Schedule I already provides relaxation in notification requirement for an acquisition of shares or voting rights solely as an investment or in the ordinary course of business in so far as the total shares or voting rights held by the acquirer directly or indirectly, does not entitle the acquirer to hold 25% or more of the total shares or voting rights of the company, not leading to acquisition of control of the enterprise whose shares or voting rights are being acquired.

The notification requirement for the Combination is based on the value of asset and the turnover threshold provided under Section 5 of the Competition Act. This new category 1 A relaxes such asset and turnover threshold and an enterprise holding 25% or more shares but 50%or less shares will not be required to notify the combination if the ‘gross acquisition’ of shares in a relevant financial year does not result in gross acquisition of more than 5% of the Shares of such enterprise.

CCI has not provided any definition of the term ‘gross acquisition’. The term gross acquisition is defined in Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011(“SASTR”). SASTR provides for a 5% window for every financial year for the shareholders holding shares between 25% and 75%. The calculation for this 5% window under SASTR must be on gross basis regardless of any intermittent fall in shareholding or voting rights and in the case of issuance of new shares in any given financial year, the difference between the pre-allotment and the post allotment percentage voting rights shall be regarded as the quantum of additional acquisition.

Category 1 A, also provides that the exemption under category 1A will not be available if the acquisition result in acquisition of sole or joint control of such enterprise by the acquirer or its group. The definition of ‘control’  is pivotal to the provision of Section 5 and 6 of the Act and the Combinations Regulation. Control is defined under the Competition Act to include controlling the affairs or management by—(a) one or more enterprises, either jointly or singly, over another enterprise or group; (b) one or more groups, either jointly or singly, over another group or enterprise. The definition of ‘control’ under the Competition Act is ambiguous and circuitously defined to include controlling the affairs or management of one or more enterprises or ‘group’, either jointly or singly and the definition of ‘group’ in turn defines the ‘group’ to include two or more enterprise which directly or indirectly are in position to ‘control’ the management or affairs of the other enterprise.

CCI in SPE/Grandway/Atlas combination has made following observation with respect to joint control -
“Joint control over an enterprise implies control over the strategic commercial operation of the enterprise by two or more persons. In such a case, each of the persons in joint control would have the right to veto/block the strategic commercial decision(s) of the enterprise which could result in a dead lock situation. Joint control over an enterprise may arise as a result of shareholding or through contractual arrangements between the shareholders. However, careful scrutiny is required to differentiate mere investor protection rights from those rights which result in a situation of joint control. The assessment of joint control over an enterprise would depend on the facts and circumstances of each case with due consideration of relevant factors such as statutory and contractual rights of the shareholders.”

Further in Alok Industries/AlokImpex,[1] CCI held that common directors on the board of amalgamating companies constituted the majority of directors on the Board of AlokImpex and accordingly Alok Industries and AlokImpex were under common control and under the same management.  

B. Category 9 – Merger or amalgamation involving a holding company and its subsidiary and other intra-group companies

Present Position under the Combination Regulations

Proposed Position under the Amendment Regulation

Category 8 A - A merger or amalgamation involving a holding company and its subsidiary wholly owned by enterprises belonging to the same group and/or mergers or amalgamations involving subsidiaries wholly owned by enterprises belonging to the same group.

Category9:A merger or amalgamation of two enterprises where one of the enterprises has more than 50% shares or voting rights of the other enterprise, and/or merger or amalgamation of enterprises in which more than 50% shares or voting rights in each of such enterprises are held by enterprise(s) within the same group:

Provided that the transaction does not result in transfer from joint control to sole control.”

Analysis

This amendment brings significant relaxation in the notification requirement under section 6 (2) of the Competition Act for intragroup mergers and any acquisition made by a holding company in its subsidiary company. The Amendment Act relaxes the mandatory notification requirement in the following two conditions:

(a) Mergers or amalgamations involving two enterprises where one of the enterprises has more than fifty per cent (50%) shares or voting rights of the other enterprise.

(b) Merger and amalgamation of enterprises where more than 50% shares or voting rights in each of such enterprises are held by enterprise(s) within the same group.

Earlier the Combinations Regulations provided that the relaxation was available in the cases of a merger and amalgamation involving holding company and ‘wholly owned’ subsidiary company and/or subsidiaries ‘wholly owned’ by enterprise belonging to the same group. Only condition to this new relaxation provided under category 9 is that such merger or amalgamation should not result in transfer from joint control to sole control.

The definition of the term ‘group’  under the Competition Act is a three prong test, namely (i) voting right test (ii) appointment of director test and/or (iii) control of management test. As discussed above the definition of ‘control’ and ‘group’ under the Competition Act circuitously refer to each other and this has laid to the ambiguity in the definition of both ‘control’ and ‘group’.
The Amendment Regulation omits category 8 A. The provision of category 8 A is included as new category 9 of Schedule I.

C. Substitution of category (8) under Schedule I: – Acquisition of control, share or voting right within the same group.

Present Position under the Combination Regulations

Proposed Position under the Amendment Regulation

Category 8: An acquisition of control or shares or voting rights or assets by one person or enterprise of another person or enterprise within the same group.

Category 8:An acquisition of shares or voting rights or assets, by one person or enterprise, of another person or enterprise within the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part of the same group.

Analysis

The amendment to category 8 to Schedule I is clarificatory in nature. It provides that in the cases of intra-group acquisitions, relaxation would not apply where the acquired enterprise is jointly controlled by enterprises that do not belong to the same group. Considering the ambiguity in the definition of ‘control’ and ‘group’, determining joint control will be difficult task.

It is also important to note the distinction between category 8 and category 9. This distinction was subject matter of discussion in CCI’s order in TCL/Wyoming . In this case combination notification was jointly filed by Tata Chemicals Limited (TCL) and Wyoming 1 (Mauritius) Private Limited (Wyoming). The parties to the proposed combination made a submission that proposed transaction has taken place pursuant to an acquisition of assets of Wyoming by TCL, the same would fall under the exemption provided under category 8 of the Combination Regulation. CCI held that the proposed combination falls within Section 5 (c) of the Act as it is pursuant to a scheme of amalgamation and not by way of acquisition. Therefore, the question of application of category 8 of the Combination regulation would not arise.

Prior to the Amendment Regulation this distinction was very important. Exemption in the case of intra-group merger and amalgamation was only available in the combination involving a holding company and its subsidiary ‘wholly owned’ by enterprise belonging to the same group and/or merger or amalgamation involving subsidiaries ‘wholly owned’ by enterprises belonging to the group. The exemption under category 8 was available for acquisition of control or shares or voting rights or asset within the same group. As can be seen category 8 envisaged a much lower threshold of exemption for intra-group acquisition as compared to intra-group merger and amalgamation where the exemption was only available for reorganization involving wholly owned subsidiary. The amended category 9 seeks to address this distinction between two modes of intra-group reorganization by reducing the threshold of exemption involving ‘wholly owned’ enterprise to that that to 50% or more. 

D. Substitution of category (5) under schedule I: – Acquisition of Current Asset

Present Position under the Combination Regulations

Proposed Position under the Amendment Regulation

Category5:An acquisition of stock –in-trade, raw materials, stores and spares in the ordinary course of business.

 

Category9: An acquisition of current assets in the ordinary course of business; Explanation: ‘Current Assets’ shall have the same meaning as attributed to them in schedule VI of the Companies Act, 1956.

Category5:An acquisition of stock-in-trade, raw materials, stores and spares, trade receivables and other similar current assets in the ordinary course of business.

Analysis

The amended provision merely consolidates provision of category (5) and category (9). The amended category 5 has two changes firstly a new term ‘trade receivable’ is included in the list of current assets acquired in the ordinary course of business. Secondly, the explanation of category 9 that defined the current asset as the current asset defined in Schedule VI of the Companies Act, 1956 is not included amended category 5.

Conclusion

The Amendment Regulation is the second amendment to the Combination Regulation since the time the Combination Regulation was notified in June 2011. This amply exhibits that the CCI is quick on its feet to learn from the experiences. The CCI has also addressed the demands of industry to further simplify and relax notification requirements to ease the pressure of regulatory filings and compliances in such combination cases that may not cause appreciable adverse effect on competition within India. Amendment regulation is definitely a step in the right direction. We also hope that the Parliament will soon pass the Competition (Amendment) Bill, 2012  to bring further clarity in the enforcement of the Competition Act.

 
Twitter


 
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.