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The Firm Special: Interview with CCI Chairman Ashok Chawla

Published on Mon, Jul 06,2015 | 18:22, Updated at Mon, Jul 06 at 22:25Source : CNBC-TV18 |   Watch Video :

The Competition Commission of India (CCI) is amongst the country's youngest regulators with one of the toughest mandates, especially in a country dominated by government enterprises on the one hand and very fragmented regional markets on the other.

On this show CCI's Chairman, Ashok Chawla confronts accusations of delays, aggressive penalties and out of sync timelines. Menaka Doshi of CNBC-TV18 began the interview by first asking him about the proposed amendments to merger control regulations – the fourth set of amendments in 4 years!

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

The proposal that's come in for most flack is the provision to invalidate filings. The CCI says it may invalidate a notice if the commission finds that such notice is not valid or complete. No other specific grounds are provided for, nor does the discussion paper include a hearing opportunity. This has industry concerned about unexplained invalidations consequent delays and hence the failure to meet filing deadlines.

Ashok Chawla
Chairman, CCI

Chawla: The philosophy or the objective behind this is that we very often get filings which are incomplete, which do not give the entire picture. So, the process then is that there is a lot of to and fro between our people in the CCI and the companies or their lawyers who have filed. And very often, the perception on the other side is that this is going on and on and taking long and it is going beyond the 30 days which the regulations stipulate in relation to matters which do not have much appreciable adverse affect prima facie.

So, what we really want is that there should be a little more rigour and discipline in the filings which take place.

Doshi: But, if a filing comes to you incomplete, you still can stop the clock. It has happened in previous filings. What was the need to put this in? And I think concerns are two-fold, one with the exception of saying if the form is incomplete or if it is invalid, we will invalidate it which in itself are not clear enough grounds to explain why this would take place. And B, companies are worried that if a filing is invalidated, by the time they are able to rectify it the satisfaction of the CCI, they may be outside their deadline and hence facing a penalty.

Chawla: Those are probably imaginary fears. Let us see how it works. But the point is, if we stop the clock too often, then we are criticised for stopping the clock too often and writing too many letters. We really want them to come up with material and documents which would suffice in the first instance.

Doshi: Will you consider granting a hearing before you decided to invalidate? Is that something you might work into the clause before you decide to include it into the final merger regs?

Chawla: Yes, of course.

Doshi (narration): The proposed amendments also give CCI more time to offer a prima facie opinion on a combination. The 30 days limit is proposed to be changed to 30 working days and CCI has provisioned 15 extra days to call for information from any other enterprise while inquiring into the combination and another 15 days to seek the opinion of any other regulator - that's a total of 60 days.

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

Chawla: What has inspired this particular regulation is that over a period we found that the average time taken was increasing from about 27 days to 37 days to some people say close to 45 or 50 days. So therefore rather than be non-compliant with the regulations upfront, it is better therefore to ask for little more time which is what this regulation seeks to do and we still do not want to take too much time because we appreciate that this is a process which business and industry needs to go through rapidly and while we have to look at it and we have to approve it, we are there to assist in the process of consolidation.

Doshi (narration): Last year CCI imposed a Rs 3 crore penalty on Tesco for late filing. Tesco applied to Foreign Investment Promotion Board (FIPB) in December 2013 for an approval to acquire 51 percent of Trent Hypermarket. The deal was finalised on March 21, 2014 which is when the joint venture agreement was signed. Tesco filed with CCI ten days later but CCI held that Tesco ought to have filed with the regulator at the time of the FIPB filing, failing which the filing was 73 days late and hence the penalty. The CCI order lead to much confusion regarding filing triggers and whether seeking such government approval in anticipation of a deal was trigger enough. The proposed amendments seek to clarify the situation by providing that besides a deal document a public announcement under Sebi's takeover regulations is the only other trigger.

THE TESCO CASE

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

March 2014
Deal finalised on 21st
CCI filing 10 days later

CCI imposed Rs 3 cr penalty on Tesco for late filing

CCI: FILING TRIGGER

Current Regulation
Execution of any agreement or other document for acquisition

Or… the date of communication to Govt of intention to acquire

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

Chawla: I do not think I should be mentioning all the nitty-gritty before those are put out in the official gazette, but the intention is that we will rely on disclosures or applications made to other regulators and not to central, state governments, which maybe more by way of intention alone.

Doshi (narration): In February last year, Thomas Cook and Sterling Holiday Resorts (India) notified CCI of a composite scheme of arrangement that included the issue of new shares, the purchase of shareholding an open offer and market purchases, except that the market purchase of shares were made two days before the filing with CCI and hence the regulator imposed a Rs 1 crore penalty on Thomas Cook for late filing or gun jumping. The proposed amendments to merger control regulations affirm that a single notice shall be filed for a transaction made up of a series of smaller transactions.

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

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

Chawla: The final position, not just of the CCI but various merger authorities around the world is that if the transactions are in a way related then those should be put altogether and not broken up and fragmented with a view to giving a smaller picture of what is totally or fully intended. I think that is the objective.

Doshi: When can we expect that these new amended merger regulations will be notified?

Chawla: Very soon. We have done our process and they must have been sent to the gazette for notification. So I would expect that any day those could be…

Doshi: Within this week itself you are saying?

Chawla: That I am not sure, but very soon.

Doshi (narration): In the last year, Thomas Cook, Etihad, Deepak Fertilisers and Zuari Agro are among those, Competition Commission of India (CCI) found guilty of jumping the gun. Industry labels CCI as aggressive.

GUNJUMPING!
                                                        PENALTY
THOMAS COOK                                 Rs 1 cr
ETIHAD                                             Rs 1 cr
DEEPAK FERTILISERS                     Rs 2 cr
ZUARI AGRO                                    Rs 3 cr


Ashok Gupta
Group General Counsel, Aditya Birla Group

We have incorporated all international concepts, but in each case, you need to examine it differently, it is gun jumping or not gun jumping, because you may have multiple agreements, standalone agreements, it will have implication on the other and therefore sometime you are slapped with a kind of notice. And you have done very conscious move, whatever you have done, thought through completely, what the law is, what are the anticipated questions, stayed clear of any competitive behaviour.

Chawla: It is a matter of interpretation, but all that we are trying to say is that if you are going through a process of combination or merger and acquisition (M&A), all we are saying is, please file in time, that is all. And maybe it will have no appreciable adverse effect on the market, so we will decide it very fast. But, if it comes to us later than it should have then there could be problems and that is what the whole thing about gun jumping is.

Doshi (narration): The mega Sun-Ranbaxy deal prompted CCI to impose its first ever structural remedy. CCI passed a conditional order directing the combination to sell seven brands. The process took 10 months, whereas the deal got US Federal Trade commission clearance in 8.5 months.

CCI  vs FTC

Sun-Ranbaxy
CCI approval: 10 months
FTC approval: 8.5 months

Uday Baldota
CFO, Sun Pharma

Once we, let us say if there is a product divestment, I divest the products, I sign the agreements, I give those agreements to the FTC, based on which FTC gives us an approval. And the way it works is, once I close my deal, in five days, I need to divest those products. That is the way it works. Again, our understanding because we do not have experience, but our understanding in the European jurisdiction is different. It is that you close the deal and then you are given time to do the structural remedy. So, divestment happens post close.

The way the thing works with the CCI was sort of a combination of both. So, what was done is that the remedies were identified, we were given a conditional approval. Once the conditional approval was granted, then we were expected to divest the products and then only we got the final approval. So, it was sort of the both the US practice as well as the European practice. The only, I would say, bit of a disappointment on our part was that we took the more conservative approach of the US as well as the Europe.

Chawla: Our law is more formal and more structured and driven in a certain manner. But, what they do in the US and in Europe, the system is far more collaborative or consulted. And maybe, at the end of the day, that helps the companies. But, the way our act is structured, we have to follow a certain process, after giving opportunities to the parties concerned on what the decision could be. So, I do not think it is possible for us, given the architecture to adopt the kind of approach which is informal up to a point in the US and in European Union (EU) and then gets formalised at a very late stage.

But we do have this option which we have exercised in the other case you mentioned, one case where we have imposed structural remedies, we recently had a second case. But, we do have this option which we have chosen to exercise in that case is that whether to give the approval up front and then say please complete this process or to say please complete the process of this structural remedy or divestment and then the matter stands approved. So, in the other case, where we felt that it would take much longer for the divestment to take place, we approved the deal subject to the divestment taking place in a certain period of time.

In the Sun-Ranbaxy case where it was mentioned to us and the parties themselves agreed that these are molecules and so on which are going to be divested, this is not going to take very long, complete in maybe two or three months. So, we said alright, you please complete that process, and then come back and of course, there are also public health and policy concerns and that kind of thing. So, that kind of leeway is available within structural, how to sequence it, whether to have structural or behavioural remedies, that option is available or not have any remedy, that option is available. But the process cannot be part formal and part informal. It has to be formal with the legal architecture that we have.

Doshi (narration):  prescribes strict timelines in case of an acquisition led open offer. But a deal cannot close until CCI approval is in. That can sometimes mean a delayed open offer and interest payments as GSPC found out in the Gujarat gas case.

SEBI & CCI TIMELINES

Takeover Code: Interest payable for delay in open offer
CCI: Deal closure only after approval

GSPC pair Rs 2 crore as 10% interest for delay of payment.

Cyril Shroff
Managing Partner, Cyril Amarchand Mangaldas

Other regulations have timelines. For instance, the takeover code. There is a very fixed timeline and if you exceed that including CCI delays and interest meter starts running. And that is what happened in the Gujarat gas case as well. There is no provision under Union Law where those clocks stop. They continue to run. That is one of the main reasons why you are allowed to go ahead with the deal and do the divestment later.

Chawla: I think we have tried to synchronise as much as we could. Maybe there is one little area in which there could be some divergence, but the general perception is that we will wait and see what needs to be done. Because basically the ball is in the court of  because it is under their regulations, for us it is under the law. So, let us see how it plays out, but I do not think there is much cost for concern. And the objective will be, the end objective will be to try and synchronise as much as we can in terms of open offer and merger cases.

Doshi (narration): When it comes to anti-competitive behaviour, several CCI orders have included headline grabbing penalty amounts. NSE got a bill of Rs 55 crore. DLF got slapped with a Rs 630 crore fine. 14 auto companies have to cough up Rs 2,540 crore and last year, 11 cement companies were fined Rs 6,300 crore. Though the amounts are within the penalty limits provided for in the competition act, their shock value suggests CCI is warning India Inc.

XXXL PENALTIES!

NSE: Rs 55 cr
DLF: Rs 630 cr
14 Auto companies: Rs 2540 cr
11 Cement companies: Rs 6300 cr

Chawla: There are what you mention these are some of the headline penalties, but there are much smaller penalties. There are cases which get closed and perhaps they do not attract that much attention. And it is also true. Let me be honest, in the initial years, it is important to do some kind of messaging. That is not at the cost of over punishing or needlessly punishing the corporates. Having said that, if one were to look at the spectrum of cases in which penalties have been imposed by the commission. I would say that we have generally been at the midpoint of about five percent and it has gone as low as two percent. In some cases as high as 10 percent. But there the amounts were not very large. So, amount involved which would have sort of become amounts of penalties because the turn over etc was small.

So, it is not as we are either two trigger happy or we are very shy to use the gun as and when required. And we have also been trying to in each case, indicate what are the aggravating factors or the mitigating factors because there has been this huge debate out there that we should put our penalty guidelines. People should know what are the kind of penalties which could visit them in specific cases. We have taken the position that our orders will speak for themselves for a few years and then maybe guidelines will come out. And in any case, guidelines are not all that easy in the area of competition, because the whole thing depends on behaviour on how it is done, when it is done, under what circumstances. So, too much of mathematics is also neither the right thing, nor is it very good in the long run.

Doshi:  You are appealing currently against the relevant penalty turnover concept that was introduced in the explosive case on appeal in that sense? Where do you expect this to go? Do you expect the CCI to continue being able to levy fairly headline grabbing penalties from here on?

Chawla: Our appeal is on the fact that the law doesn't provide for anything called relevant turnover. It just says turnover. So we are interpreting the intention of the legislature which is the total turnover. It is possible that the corporate may have number of divisions and maybe it may seem illogical that the penalties on the entire turnover, but either the act has to be amended or the Supreme Court has to very clearly rule on the subject that when the legislature meant turnover, the intention was relevant turnover. Till that time we are not in a position to accept it and our understanding is that turnover is turnover as indicated in the books of account of the company.

Doshi: There is some conversation and some indication that maybe the CCI at this point in time is keen to revise some of its thresholds to include more deals specifically when it comes to merger control as well as also extend some of the timelines so that it has a little bit more time to be able to provide the orders or the clearance in. Is there any truth to this?

Chawla: Timelines, we discussed that there have been some minor change in merger regulations and nothing beyond that. The act is very clear and we cannot go beyond the act and we have no views on that at this point in time.

On the merger threshold, it's not something which we determine. Those are determined by the parliament and then the government issues notifications from time to time. What may have triggered off some kind of speculation, if I may call it that, is that the notification for target enterprise exemption of a level of Rs 250 crore or Rs 750 crore in terms of assets and turnover respectively came about in March 2011 and that was five years, so the limit will expire in March 2016, but that's not something which we do, or we have the authority to do. The government will do that and there has been no consultation with the government at this point in time.

Doshi: They haven't asked you if you would like to revise the thresholds?

Chawla: Not as yet.

Doshi: If they do, would you say that you would like to revise the thresholds?

Chawla: I cannot say what view the commission will take but broadly speaking my view is that it doesn't serve the cause of the end purpose if the net is cast needlessly wide.

 
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