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CCI's Fix For The Tesco & Thomas Cook Problems!

Published on Fri, May 08,2015 | 23:23, Updated at Mon, May 11 at 21:02Source : CNBC-TV18 |   Watch Video :

3 years, 3 reviews - and the CCI's combination regulations are now set for a 4th revision! This time to fix the ??Tesco problem, the Thomas Cook problem, invalidate notices and buy itself more time. To tell you what all that means, CNBC-TV18's Menaka Doshi is joined by Avaantika Kakkar of Khaitan and Nisha Uberoi of Amarchand...

Doshi: I am going to get right down to the first proposed change and this has to do with what triggers a filing. The triggers that are already listed in the regulations include board approval for the merger, execution of any agreement pertaining to the transaction, any other document or any communication to the government in the absence of any other document, that has now been replaced to say that in the case of an acquisition being done under the takeover regulations of Sebi, then the public announcement is the trigger. I suppose this is a welcome simplification because there has been confusion earlier on and I believe the Tesco case was all about this?

CCI: FILING TRIGGER

Current Regulation
Execution of any agreement or other document for acquisition
Where such document has not been executed, the date of communication to Govt of intention to acquire

Proposed Revision
Where a public announcement has been made under Takeover Regs, such public announcement shall be deemed other document

Kakkar: That is correct. The Tesco case involved a filing with the FIPB and in that the commission found had triggered a notification requirement because it suggested that this was a binding document that reflected a decision to purchase….

THE TESCO CASE

December 2013
Tesco applied for FIPB approval to acquire 51% in Trent

March 2014
CCI filing done 10 days after JV signed

CCI imposed Rs 3 cr penalty on Tesco for late filing

Doshi: Whereas Tesco in fact only notified the CCI later on when they signed the joint venture.

Kakkar: Yes, when they signed the binding agreement. The commission found that the FIPB application was in fact the trigger, but some of us felt that it was always the binding agreement.

Uberoi: What they have done really is they have limited Tesco. So, now in the case of an acquisition, you will file on the basis of a binding agreement, or if it involves a listed company and a takeover you will file when the public announcement is made. If you go to any other statutory authority, you do not need to go to the CCI that is not your trigger.        

CCI: FAILURE TO FILE

Current Regulation
CCI shall direct parties to combination to file notice in Form II

Proposed Revision
Form II not mandatory, filing as directed by CCI

Doshi: Let’s get to change number two. This had to do or is regarding the failure to file notice. The current regulations say that when parties to a combination fail to file notice the commission can initiate an inquiry and direct the parties to file notice in Form II, that is the long format form. The proposed revision now says that a mandatory Form II filing is not required.

Uberoi: It is a very welcome move because it just goes to show that they are not out to penalise industry. As it is when you don’t file a form, you will have to undergo penalty proceedings. In addition to that if you are made to file a Form II, particularly in a case where you are acquiring a minority stake and you have inadvertently not filed the form then it is an extremely cumbersome process. So, this is a very welcome move.

CCI: SINGLE NOTICE

Current Regulation
For a transaction made up of a series of smaller transactions, single notice may be filed

Proposed Revision
For a transaction made up of a series of smaller transactions, single notice shall be filed

Doshi: The third proposed change does away with the ambiguity surrounding the obligation to file a single notice for the transaction that is made up of a series of smaller transactions. The current regulations say, in such a transaction a single notice may be filed. The CCI now proposes to change that to shall. This in a sense confirms their treatment of Thomas Cook.

THE THOMAS COOK CASE

Multi-stage acquisition of Sterling Holidays
Feb 10-12: Market purchase of Sterling Holidays shares
Feb 14: CCI filing

CCI imposed Rs 1 cr penalty on Thomas Cook for late filing

Uberoi: That is absolutely right. What they are doing is they are taking away the discretion from parties and the rule of thumb that they came out with in Thomas Cook is if a series of transactions is done simultaneously, it is approved by the same board resolution, it involves essentially the same parties they will treat it as a composite. So, if a part of those series is not notifiable, parties no longer have the flexibility not to notify it. The problem though with this particular amendment is that if we were to file on the first step and we don’t have enough information, it would be an invalid notice, it could be a premature filing because the amendment regulations also come up with the new amendment which says that in case a notice is not complete or not valid they can return it. We could have such a situation here, alternatively we could have a situation where parties inadvertently consummate one step treating as not notifiable and then you have penalty proceedings. So, the rule of thumb now very likely will be a lot more pre-merger consultations with the commission before a transaction which involves a series of interconnected and interdependent steps.

Kakkr: My take is a little bit different on this. You can’t confuse gun-jumping with the need to notify transactions. So, I believe that the Thomas Cook case was possibly a gun-jumping situation. I am not necessarily agreeing with what the commission held, but they used this provision to explain and reason their decision in Thomas Cook. Whereas my understanding always was that this provision was meant as a convenience or perhaps an anti-avoidance. I wonder if it is worth the commission’s time to be spending on determining whether the parties filed on time or whether they filed at all. I think it is more of a form over substance issue, I am not sure this really worth the effort.

Uberoi: The problem might be if we are doing intra-group reorganisation because we have got an investor coming in and if I have to go in at the stage of the intra-group reorganization, then at that stage we won't have enough information for a complete competition assessment. So, we go in for the filing and it only means that he time taken for review is going to be that much longer because the commission is also going to want to review all the documentation which I enter into with the investor because they are going to look at things like non-compete, they are going to look at standstill obligations. So, the time for review will actually get longer in practice.

CCI: NOTICE INVALIDATION

Current Regulation
The notice filed shall not be valid and complete unless it is in conformity with these regulations.

Proposed Revision
CCI may invalidate a notice if it is not valid or complete

Doshi: Speaking of the fourth proposed change and Nisha has already mentioned this, it has to do with notice scrutiny. The CCI has proposed an addition that says, it may invalidate a notice if the commission finds that such a notice is not valid or complete. I couldn’t understand that at all. What does it mean that if it is not valid we will invalidate it? What are the grounds for invalidation here at all?

Uberoi: There are no grounds, it is purely discretionary. If they think when you submit a notice that it does not have adequate details or it is not complete….

Doshi: But that has taken care of the word complete. So, if it is not complete based on the formats that they have provided then I understand that it would be treated as invalid.

Uberoi: Then they will return the notice.

Doshi: But saying it is not valid, I couldn’t understand the use of those words.

Kakkar: I am not going to pretend that I understand it either. Therefore, the exercise of discretion and how far will we go with that and whether the commission really needed to do this? Is this really necessary? When they receive what they believe defective or incomplete notices, they have the power to not even start the clock. The commission can come back to you and say that there were defects in the notice or that it was incomplete and please fill it in. At that time, the clock stops.

Uberoi: If it is not complete, to give you a very absurd example, you need an authorised signatory to verify the notice, you have to provide all of that person’s contact details. So, say I don’t provide your email address, it is a not complete notice. If they can invalidate this notice and there is no timeframe prescribed for this, it means that you as the CCI will return the notice to me, I might not be able to file it within 30 days from my trigger, I will then be exposed to a penalty proceedings because when I actually do re-file the notice, I will not meet the timeline. I will get no time credit for the period when you have actually reviewed the notice to decide this and I don’t get a right of hearing.

Doshi: By not providing any basis for an invalidation in these amendments or proposed amendments themselves, they are literally leaving you a sea, right? You could be invalidated for pretty much anything, not just incompleteness.

Kakkar: Absolutely. The point is I do not believe that the commission intends in anyway to be unreasonable about it. It is poorly phrased and anything that gives such wide discretion, I am not sure it is a great thing particularly because of the consequences it will have on a transaction.

CCI: MORE TIME

Current Regulation
CCI shall form prima facie opinion within 30 days of filing

Proposed Revision
CCI shall form prima facie opinion within 30 working days of filing

CCI: MORE TIME

Current Regulation
CCI may call for information from any other enterprise

Proposed Revision
Time taken for obtaining information shall not exceed 15 working days and shall be excluded from 30 working day limit

CCI: MORE TIME

Current Regulation
CCI may seek opinion of any other Regulator or Statutory Authority

Proposed Revision
Time taken for obtaining opinion shall not exceed 15 working days and shall be excluded from 30 working day limit

Doshi: While they are not giving you more time they are buying themselves more time and that is the fifth proposed change. Essentially, this gives the CCI more time to offer prima facie opinion on the combination, so 30 working days instead of 30 days. It also gives the CCI 15 extra days if it wants to call for information from any other enterprise while inquiring into the combination and it gives the CCI another 15 days to seek the opinion of any other regulator or statutory authority. So that is 30 working days, plus 15 working days, plus 15 working days, so prima facie opinion is now 60 working days, right?

Kakkar: Yes.

Doshi: That changes your entire deal timeline, doesn’t it?

Kakkar: In the beginning when you read it, it seems like the heavens have fallen but let us hold on for a minute here. We have 30 days to make a filing from the time that we trigger the merger control notification, that no one can take away except the legislature because that is creature of the statute. So, let’s let that be. Now about the commission, the commission promised that it would make its prima facie order in 30 days. However, in reality and I tend to appreciate where the commission is coming from, that is very little time to make your assessment. They have to keep stopping the clock by asking questions, sometimes perhaps even to buy time. I am not sure I can blame the commission for that, they have to write a reasoned order. They have to approve the combination, they have to say that this doesn’t result in appreciable adverse effects or that it does and that has to be something they have to think about. So I don’t mind the 30 working days.

Doshi: They can still stop the clock.

Uberoi: Yes.

Doshi: What is the comparable anywhere else in the world for a prima facie opinion?

Uberoi: The Singapore Competition Commission takes 45 working days. There is one very big positive for industry out of this. In a complex Form I filing, instead of taking a transaction automatically to phase II where you have further 180 day review the commission has, they can now choose to exercise this option where they go out and they consult third parties for a 15 working day period which is defined and they can go and consult other sectoral regulators, again a very big positive which shows that they want to consult other sectoral regulators for technical issues. So, in such an instance, industry will actually benefit because they could clear this in that time period.

Kakkar: However, the other side of that is that they have eaten into their ultimate limit which is 210 days.

 
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