Merger Control Era Begins!
No prizes for guessing that this weekís edition is devoted entirely to Merger Control. The final guidelines or regulations are out and will come into force on the 1st of June this year. The big question though is - do they pass two critical tests i.e. do they balance India Inc's need for speed with India's need for competition and do they protect competition; not just the competitors? In an interview with CNBC-TV18's Menaka Doshi, Dev Bajpai of Hindustan Unilever, Bharat Vasani of Tata Group, Zia Mody of AZB & Partners and Cyril Shroff of Amarchand Mangaldas, answer both those questions.
The first and most crucial issue with regards to merger control is who has to file?
Quantitative thresholds are the first trigger. A transaction must file with the CCI if it results in the acquisition of a target that has more than Rs 250 crore in net assets or Rs 750 crore of turnover, if the transaction results in an Indian combination with assets of more than Rs 1500 crore or a turnover of more than Rs 4500 crore. The thresholds are higher in the case of a group. Filing is also a must for any worldwide combination with assets of more than $ 750 million or a turnover higher than $ 2.25 billion, but only if it has a minimum presence in India.
In the case of a foreign group combination, the thresholds are higher but with a similar de-minimus condition. But even if you cross the quantitative thresholds, you need not file if the transactions are amongst those listed in Schedule I. They are - If you purchase less than 15% and do not acquire control, creeping acquisition by an entity owning 50% or more is exempt unless it results in a change of control. So is a diversification via an asset purchase unless the asset is a substantial part of the selling enterprise. An amended transaction that has already filed with CCI is exempt, as is the acquisition of stock-in trade, raw materials and the entitled proportion of bonus shares, stock splits, reverse splits and rights. The acquisition of shares as an underwriter, broker or exchange, intra-group transactions and the acquisition of current assets are also exempt.
But if you cross the quantitative thresholds and you are not one of those Schedule I transactions that are exempt, then you have to make a Form I filing. The much lengthier Form II filing is applicable for those transactions that may cause an appreciable adverse effect on competition.
Doshi: The biggest development or the biggest relief, if I may term it that, is that Schedule I transactions that were exempt in the Draft regulations of 2008 but not exempt in the Draft regulations that were released earlier has now been exempted in the final regulations. Mr Vasani that surely is good news because several transactions that had no impact on competition, for instance, the acquisition of a stake of less than 15% or the acquisition of stock-in trade and raw materials- all of those no longer fall in the CCIís net?
Vasani: I must take this opportunity to compliment both the Ministry of Corporate Affairs as well as the Competition Commission of Indiaís Mr. Dhanendra Kumar and his team. Certainly this draft, which has now been placed on the website as the final form of regulations, is far better than what was there in March. But what came in March, we should not use it as a reference point because lot of absurdities had crept in but certainly this is an improvement and many transactions, which would have otherwise required technical filings, would get out of the net.
Doshi: Do you agree?
Shroff: Absolutely. Just again to echo what Bharat says and to add some more to it is, firstly the fact that the regulations are here and the uncertainty is over is a big relief one way or the other. At least it puts an end to- is it coming? Is it coming? There has been a genuine effort to be responsive. There was a huge amount of industry feedback and we can see a lot of it has been taken into account. The biggest piece, of course, is doing away with Schedule I and a lot of other things such as simplification of the form, lowering of the cost but I am sure we are going to deal with it in the later part of the show. So completely agree; it's a great effort.
Doshi: I like the fact that you all are calling it a great effort though we can make the argument that if you start off with what horrors the draft regulations had, then anything is a great effort. But Zia there are several things that still stand out. Is there clarity on whether you have to file if you exceed 15% but you donít have 50% of that entity. The issues regarding when you are purchasing just an asset and if that asset makes up for a substantial part of the sellers business, then again do you have to file, donít you have to file? So even though they have done away with several of the painful aspects of Schedule I, there are still some aspects in this Schedule I that are confusing.
Mody: I think, as Cyril says, given the tremendous consultative process that I have not seen before that the Ministry went through and the Competition Commission went through, I think that they will be engaged and listening. So there is some confusion in the sense that, to my mind, if you are not a group and itís not an intra-group rearrangement, then to the extent that you want to buy between 15% and 26% or perhaps- itís not quite clear- between 15% and 50%, you could have to go through a substantive filing. Now where this will affect people? The concern is its not only listed companies, its also unlisted companies. So this would affect private equity trying to increase their stake. It could affect just an ordinary investor. Query whether it could affect mutual funds; not really examined that in detail. But I think that if the CCI or the Ministry of Corporate Affairs makes it clear that they would apply a control test even to this band, I think we are home.
Vasani: But otherwise, I think, even the creeping which is there- the 5% which is permitted under the Takeover Code for the existing promoter- can also come under..(Interrupted)
Shroff: The entire zone between 15% and 50% is suspect for this.
Menaka: For instance, I wanted to bring up the example of several Tata Group companies where the promoters stakes or say Tata Sons stake doesnít exceed 50%. So if you are creeping beyond the promoter stake of 23% or 24% or 25%, will you have to file with the CCI every time you are creeping?
Vasani: Itís a grey area I must say. You can say if you are already in control-you know the definition of group as a third limb- which is that if you are already in control of the enterprise, then you need not file. They have used the definition of group- if you see the explanation very clearly - they said that you refer to the definition of group under Sub-item 8 of Schedule I. They are referring to the group as defined in the Competition Act and so if you are already in control, perhaps, one can argue that you need not file it.
Shroff: That is for intra-group transfer. The other point I would like to make is that even Schedule I- which has to be read with Regulation 4- speaks about ordinarily not fileable. So what is the meaning of Ďordinarilyí? I think there is an element of residual discretion which the CCI has retained and which, I think, market participants will have to continuously review of analyzing whether this is ordinarily a case where I file or I donít file. People generally, the good ones, at least will err on the safer side and go ahead with the filing. So that ambiguity has to be sorted out.
Bajpai: I agree with Cyril. I think the words used in the Regulation 4, although it is clarificatory in nature, but the words used are Ďordinarilyí not filed etc.
Menaka: So what do you do if you are creeping and you have to file? At what point do you have to file and can you then continue with your desire to creep or how does it impact your ability to buy?
Mody: Creeping, by its very nature, means that you are buying from the market. If you cannot buy from the market till you get pre-approval of the buy, then to my mind, how do you creep because you are creeping at a given price. You are creeping in a different market scenario. You are creeping out of a compulsion of the economic need for that time for the person who is creeping. If you have to wait six months or seven months or 30 days or whatever it is, the market has overtaken you, events could have taken you. So I think creeping itself today, subject to clarification by the CCI, could be under threat.
Vasani: But my sense is they have specifically retained the power to give clarifications and directions. This perhaps is an unintended consequence of what has been drafted.
Doshi: I think you all have praised the consultative process. The consultative process had already thrown up this creeping issue which was present in the draft regulation as well and yet, it hasnít been fully resolved. So my question is how many more consultative rounds do you have to go through?
Vasani: You go through teething troubles, I suppose, with any regulator which is at a formative stage. We went through SEBI, we went through another set ups.
Mody: I think the most important thing is that the sense that I think all of us got is that there is a listening mind. So to that extent, if these are concerns and they are going to affect M&A activity- what we have been assured as intermediaries is that is absolutely not the intension. So letís see.
Doshi: So then what is the intention behind introducing this caveat with regards to diversifications via asset purchase except wherein the assets represent a substantial part of the business of the seller- in which case you do have to file -you canít escape a filing?
Bajpai: There is a reference to that in the Schedule I. I think the intent is to not cover those transactions where the assets are in an activity which is other than the mainline business activity.
Doshi: I get what the exemption is for. I donít understand what the caveat to that exemption is which is- even if the asset forms a substantial part of the business of the seller, why should that mean that you do have to file and you cannot avail of the exemption?
Bajpai: Probably the thought would be that the parties might combine.
Shroff: It changes the competitive landscape.
Doshi: Itís like a Competition Commission safeguard against slump sales which have come into the limelight in the last several months.
Vasani: Itís a bit clumsily drafted.
Doshi: Can you read into what the meaning or the purpose of this caveat could be?
Shroff: Itís probably more like an anti-abuse provision.
Doshi: Anti what kind of abuse?
Shroff: Because there could be a transaction which could be cleverly structured to just do an asset transfer bit-by-bit and get over the main restriction which is why I think the caveat that we will still catch you.
Vasani: I sincerely hope that this part is revised properly so that the intent becomes clear.
Doshi: So we need some more clarification on this?
Doshi: Okay. The final one in Schedule I which I wanted to point it out is- thankfully any acquisition via bonus, stock splits, reverse splits, rights- has now been exempted unless you ask for more than the entitled proportion that is due to you in that process. Again, is that fine? Is that fair? Is that going to throw up issues?
Vasani: No; it says unless it leads to change in control. Rights issue- I can give you an example that you subscribe to your own entitlement but if some other party does not take up, then there may be an increase in the percentage of your holding because somebody doesnít take up; you take up your own entitlement- then where do you lead to.
Shroff: And also the renunciation as well. The combination of the take up of the unsubscribed portion as well as renunciation- so if that results in change of control- I think that if control is there as a safeguard, we should be okay.
Mody: But to Menakaís point- it does say that rights are exempt to the extent of your entitled subscription.
Vasani: But they are talking of a situation where I am entitled to 200 shares and I take up 200 shares but if somebody else does not take it up.
Mody: But suppose you are entitled to 200 shares and you take up 201 shares, then what happens?
Doshi: Then you have to file.
Mody: Which again ought not to be the case unless 201 is taking you over the control line.
Doshi: My question then is- if you were to assume that all of these guidelines are based on the control aspect -which was a test that we have been asking for a long time and that already is embedded- though there is no transaction test and Schedule I now is out of the purview of filing. Does that mean that we have reduced the universe of deals that will in fact have to file with CCI, thereby reducing the worries of a pile up and delays and all of that?
Shroff: If I can go back to a point I just made 2 minutes ago on Ďordinarilyí. Probably that word Ďordinarilyí will then get into this situation where they feel you have actually used the exempt mechanism. You are trying to achieve or inadvertently land up achieving control through just a manner in which some of these processes work. They would use Ďordinarilyí to say - this was fileable, come to us we are not exempting you.
Mody: But, I think, the test should be that in the Schedule I, they should not limit it only to the fact that you can take up your entitlement. Even if you take up more than your entitlement, as long as there is no change of control, it should not be a malignant transaction. I think that the industry was very keen to have the concept of control running through the combinations. I think the CCI has not felt appropriate at this stage to only have control transactions.
Shroff: By analogy, even the Takeover Code as well as the rights issue- which is ordinarily exempt from an open offer- but if as a result of renunciation, there is going to be change of control, there are open offer requirements unless you follow certain conditions of disclosures and only a promoter can do it.
Doshi: The only thing I am confused about is that in several places a change in control is a minimum requirement. So arenít their enough control tests in these regulations or did we need an underlying control test?
Mody: In certain specific areas, they mention Ďunless there is change of controlí but if for a Completion Law oversight what you are looking at is a change of concentration, change of market power with change of behavioral thinking- which can only come if you control. You cannot sit as a passive investor and change the behavior of the landscape. And therefore in order to have a light touch and my own personal view is that in the beginning, itís very important to have that light touch. So industry does not get nervous, delayed and therefore if you say that everything is fine unless you are changing the landscape through control- that would have been most salubrious.
Doshi: But they havenít done that?
Mody: Itís not so specifically but in fairness to them, in certain areas where there could be concerns, they have mentioned Ďunless change of controlí. But itís not an overarching concept.
Shroff: Which it should have been and may evolve by jurisprudence.
Vasani: But one more aspect over this control issue where I get a little concerned is about the carved out in Item II of Schedule I- joint control to sole control when you are holding even more than 50%. Take any example- insurance companies because of the FDI restrictions of 26% for a foreign partner, most of the JVs are structured as a 74-26% JV. Now if one of the partners wants to exit and you have, in the shareholders agreement, right of first refusal to a surviving partner. If the CCI does not give an approval, then you are stuck -either to a foreign partner or to an Indian partner. Now Indian partner obviously will be the buying partner because foreign partner cannot go beyond 26% in an insurance situation. But take any joint ventures for that matter. If you are in a joint control and from joint control to sole control, I donít think it changes the competitive landscape in the market place. So why should CCI be concerned with that and it would have an serious problem on transaction documentation point of view because if I write in my shareholderís agreement a clause that in the event of you selling out, I have a right to first refusal but if I canít buy because CCI does not permit me to buy, what should be the sequitur.
Shroff: There is a counter argument to that which, in fairness, we should discuss. When there is a movement from joint to sole control, the very nature of the behavior of an organization can change because if itís joint control, one partner, so to speak, controls behavior of the other.
Doshi: So you are saying that itís fair.
Shroff: Itís not completely illogical. I can see another point of view as well; I donít think its slam-dunk.
Doshi: Okay, fair.
Vasani: The practical difficulties would be in the FDI restricted sectors where partners want to exit and they would have a difficulty in getting someone else. I am not so much worried about a normal Indian JV situation.
Shroff: It is certainly a hassle. But there is some logic in joint to sole as well.
Doshi: We are missing an overarching sort of change in control requirement as Zia pointed out. I know in previous discussions you have spoken of a transaction test. Do you still feel that we are missing or that the regulations are worse off due to the lack of a transaction test despite the fact that we have the target exemptions? We now have a change in Schedule I and the fact that they donít need to file and of course we have got all the other thresholds?
Vasani: In a manner of speaking, they have introduced a size of the transaction test by bringing 15% criteria that if you are below 15%, if you are buying a company, which is below 15% (interrupted by anchor)
Doshi: Thatís a control test, isnít it?
Vasani: Itís a size of the transaction test also in a manner of speaking. But for assets, I would have still preferred- like they have done in Japan that if you are buying assets of less than 1 billion Japanese Yen, you donít need to come to us even if you are meeting the parties test i.e. the acquirer and the target test. I would have been happier if that pointed out the same size of the transaction test for the asset buyer.
Mody: If you see the March 4 notification, which has come out, which says that you have assets of less than Rs 250 cr and turnover of less than whatever as a target- then you are exempt. I think that is the key notification on which they can do a lot of good. Today there is not clarity as to Ė so if there is that minimum target size, you are out. (interrupted by anchor)
Doshi: Rs 250 crore, which is the minimum target.
Mody: But the concern is - one that Rs 250 crore, in todayís world, is a very low threshold and if they have increased everything by 50%, why not this? Because they have taken these figures from the old draft regulations; they have not increased this. The second is that there is no clarity as to whether if either you have assets or do you have turnover. If they say you need to have assets and turnover, you are defeating that whole exemplary notification- so the jury will be out because than how many will have both. Some could have an asset of Rs 1 crore just to exaggerate and a turnover of Rs 1000- so when you buy an asset of Rs 1 crore, I am just sort of exaggerating that.
Vasani: Zia, the 4th March notification categorically also talks of Ďorí; it doesnít say Ďandí.
Mody: No, but the thinking within the regulator, I think, is that it is not necessarily Ďorí; it could be Ďandí.
Vasani: But also another important point that there they have missed out is that the assets or turnover in India is critical. (Interrupted by anchor)
Doshi: That was something which we were expecting along with the final draft regulation (interrupted by guest)
Doshi: I have a question and this is to try and give our audience a bit of an illustration. Hypothetically if letís say a hedge fund or a private equity fund was to buy 1% in Reliance. Now most Nifty stocks we checked, in fact, exceed these minimum threshold requirements, right? Would then - and I am using Reliance only for exampleÖ
Mody: But if you under 15%, you are out.
Doshi: So the whole worry that several routine investment transactions would get impacted by this- that at least is clear.
Mody: All old Schedule I which they said required approval- they have now, by and large, translated in saying that you need not Ďordinarilyí file with certain caveats, not all but by and large. So the 1% stock of Reliance would be exempt.
Shroff: But just to be devilís advocate for a second, if that 1%- because itís going to be pile of money going with a set of rights- which could be viewed as control you would still, the ordinarily word wouldÖ. (Interrupted by anchor)
Doshi: Now, we still donít have any clarity on whether that control is positive control or negative control?
Mody: Rightly so.
Doshi: Why do you say that?
Mody: Itís almost impossible to get to a black and white written definition.
Doshi: So is the CCI going to determine what they consider control? Is that determination going to be along the lines of any other regulator determining what they consider control or what the court or jurisprudence says?
Mody: I think jurisprudence will set it out.
Shroff: I think the Shubkam judgment of the Supreme Court will probably be the final determinant for everybody.
Vasani: But still the judgment is awaited.
Bajpai: It will be on the basis of the agreement between the parties as to what you have agreed to in the SHA.
Doshi: To wrap up which transaction comes into the net and doesnít- the question I would like to ask all four of you is that do you feel that there will still be a large number of unnecessary filings? Could that just be a beginnerís case and over a period of time, in a year or two, things will normalize based on how the CCI is dealing with some of these prior cases or is it going to be chaos?
Bajpai: I personally feel there would be lot of filings and more so because the Regulation 4 is a little ambiguous. It uses words like Ďnormallyí, Ďordinarilyí. So people would want to be cautious about it. So my personal view is that there would be lot of filings.
Vasani: I donít think it would lead to chaos now. It would have lead to chaos if they had gone by 1st March. This is a much smaller category they would be dealing with.
Shroff: I think the chaos part is largely addressed but in terms of huge pile of notification landing up- that, I think, we still have an issue over there and that will evolve only after we see how the CCI is going to react to a lot of initial applications that come in.
Doshi: I am looking at some data. We did 373 domestic deals in India last year- a little over 100 in terms of inbound. I am not counting outbound in this because they would not need to file. So we are talking in the region of about 500 transactions in a year?
Mody: More so because those would be the ones that would be squarely within the CCI ambit but you still have all the Form I where the filing has to happen. Gift, inheritance, private equities.
Doshi: But they have to cross the threshold; the thresholds are pretty substantial, right? If it is a gift of assets of more than Rs1,500 crore or turnover of more than Rs 4,500 crore- thatís a pretty substantial gift to be giving somebody; its not going to be a routine occurrence?
Shroff: That is one data point but thatís not the only data point for analyzing what is a denominator of transactions.
Doshi: I know itís difficult to put a number out there but I am just trying to say that would all of these 500 deals require filing?
Mody: I donít think all 500 would have crossed your threshold anyway.
Shroff: My guess is probably about third.
Vasani: I think we should give the credit where they deserve. They almost doubled the assets and turnover by 4th March notification. So my sense is that it would lead to significantly lesser filing because both the parties here should have satisfied the assets and turnover test. Then only you need to file. So I think out of 500, maybe, just about 75-100 may require filing.
Doshi: I am going to run through the next two points really quickly. The first one being when to file and that is either when you have a binding document or you have a Board of Directorsí approval and I think there were some grey areas in the draft Ė but that seems to have been cleared up now. Is there any more concern with regards to confusion as to when in the life of that transaction you have to file?
Bajpai: I think it is pretty clear now that you need to file only once you have the Board of Directorsí approval.
Doshi: Or a binding document and they have even been spelt it out in case of a hostile takeover saying what is the kind of document you need in the case of hostile takeoverÖ
Bajpai: Board of directors is for mergers and acquisitions. For acquisitions, it will be the binding document for transactions on or after 1st June 2011
Mody: There is one squiggle which, perhaps, again there could be a notification which could ease concerns- if you go to a regulator like an FIPB approval indicating your intention, then that will also be considered to be a notifiable trigger.
Shroff: The logic being that you are out there now in the public domain. Firstly why FIPB should considered public domain- I have no idea- but if you take that as a starting point that you have now gone out of your organization and made a public filing somewhere expressing your intention to acquire, that is also treated as a trigger.
Doshi: In a transaction, do you go to FIPB after you get board approval or after you have a binding document?
Shroff: I think largely once you have signed something but there are also cases where there is some ambiguity on whether this is going to require an approval or not. There are at least some cases we all have handled over the years that even before signing something definitive, you may go to the FIPB to get a sense.
Mody: I would think that unless you have you a definitive agreement, whether you go to the FIPB or not, should not be the sequitur because if you have not decided whether to go ahead and you want some input from the government authorities- a yes or a no- and after that you will actually put your mind space to it, then it should be that definitive document which should start the control.
Shroff: This is one of those things where lawyers will find a way to work around; so I am not too worried.
Vasani: But, by and large, I would say that the way Regulation 5 (8) is worded, I think it is fairly clear that now you need to go to them at board stage and that is only when you signed a definitive agreement.
Doshi: And they have cleared up the June 1st confusion- transactions that were in the works. So when to file is reasonably clear. The process, to me again, from a lay personís point of view- at least Form I seems to be far simpler, far shorter and the fees have been reduced. So would you consider this to be a dramatic improvement with regards to the process even though they have done a way with pre-merger consultations which they had in fact introduced in the draft regulations?
Bajpai: You are right. I think they Form I is fairly streamlined. Form II- there are still issues, there is information asked for which may not be strictly necessary to share and very detailed. So to that extent Forms are okay. The fee is rationalized.
Doshi: It was Rs 10-40 lakhs; now it has come down to Rs 50,000 to Rs 10 lakh
Bajpai: Rs 50,000 for Form I and Rs10 lakh for Form II.
Doshi: And the bulk of the filings will be Form I; only those that are likely to have an appreciable adverse impact on competition will be Form II .So that is a smaller number.
Mody: Only one caveat that I think all of us were discussing before the show is that if you have a shorter Form I and the CCI is going to take a prima facie view within 30 days, the sequitur of not taking that prima facie view in 30 days is not spelt out. Let us say I file a Form and there is no appreciable adverse effect, the CCI doesnít write back to me. So then what happens? There is no deeming approval which would have been appropriate and great for Form I after that period of time. So that there is certainty, because as it stands today, until the 210 days are over and the deeming approval and then the Act comes in, there could be exposure to the transaction.
Vasani: Absolutely; this is one aspect where you say that this if within 30 days you donít hear anything from CCI, you can go ahead.
Doshi: That is missing.
Shroff: This is a case where on the 31st day you havenít heard, there is silence. So Zia makes a valid point that what happens in that case. I think you need to go a step further. Even if you get a letter on the 30th day saying we are prima facie satisfied about this, it is prima facie. So am I entitled to believe that this is conclusive and there is no more risk of going into a phase to investigation; so I think there is a grey area there as well? And it can be a fairly significant point if somebody is going to reopen it up on the 31st day. What should have been done is after the 30 day initial investigation is over, I should be able to literally close the file, there should have been finality; prima facie he is not good enough.
Vasani: I have a point on the confidentiality issue.
Doshi: Why donít you make the point because the last theme which we wanted to talk about is finally timelines and what is it going to mean for deal timeline?
Vasani: Firstly Section 57 puts an absolute obligation of confidentiality on the Commission that they would maintain. In the new Reg 30 which has come out, they say you need to justify why you want to keep it confidential. The applicant will have to make out a case that this thing needs to be kept confidential. The worry- which is more of a cultural issue in India- I donít know with powerful media houses like yours, I think you can pierce any wall of secrecy and the biggest concern the corproates have is that all the M&A transactions which have lot of sensitivity, we hope donít get debated and discussed in media and then there have an impact over the Commission. The worry which we have is when we file with the CCI, will it go into public domain.
Doshi: Everything leaks in this country, so why are we worried only about the CCI?
Vasani: Just a few weeks example, the Parliamentary Committee report which, under the Constitution, is supposed to be utmost confidentialÖ.(Interrupted by anchor)
Doshi: That is what I am saying, every thing leaks, so let us not make this out to be a CCI issue.
Mody: The concern that I have is that if you go into Form II filing, you are supposed to file with them Ďreport, survey studies or any other document taken into accountí. So Ďany other document taken into account for the purpose of assessing the impactí- so is that your due diligence report, is it internal discussions of the board. So that Form is a bit expansive. If that can be reduced to what actually globally Commissions require to assess combinations, then with that as long as objective stuff is going over to the Commission.. (Interrupted)
Shroff: But that I think international practice includes even emails, merchant banker presentations- everything is covered. So I donít think we have too much of a argument over there.
Doshi: Can I make an argument here in favor of the CCI here? Is it possible to actually spell out or draw up a laundry list of documents that one may need for a transaction as each transaction is different in nature. And once you draw that laundry list, is it possible that companies will say you have asked only for that, so I am not going to give you the rest of the documents which may in fact be important and have a bearing?
Mody: So there will be a happy balance. If a company is basically willing to take the call that I donít have to give this and it is not going to affect the assessment of competitive market behavior by the CCI, it should have the right not to give it and take the consequences.
Doshi: The consequences are a delay in the timeline.
Mody: Consequences are that you will have to give all the material information- so bad. But if you are obliged as a matter of law to submit everything- whether you think it is there or not- then firstly there is too much data coming into the Commission and secondly leakage concerns and thirdly possibly not relevant. So let the participant run the risk of getting hung by the CCI but donít force him to submit everything per force.
Shroff: This is anecdotal. I think our Form I is the simplest in the world and our Form II is most complex in the world in terms of the amount of the details that it requires. However things like confidentiality are about the same; whether you say it or not, they are expected to be confidential. I think the point that Bharat makes that it is the inherent nature of a transaction.
Vasani: In a lighter vein, they are located in Hindustan Times House- the media house building.
Doshi: I have a question. If they have a modification that they want to be made to your deal or they want to strike down your deal- this is all to be done within 210 days- thatís statutory limit that they have. They have to convey, not the actual modification, they have to convey want they want modified or they have to convey that this deal canít go through or that this deal can go through all within 210 days and they said that they will endeavor to do within 180 days. I have two different views on this. The previous panel that we spoke to said that 210 days is comparable to international standards. The IBA in its submission in its working group paper to the CCI has said 210 days is excessive. How do we compare on 210 days?
Shroff: I think it is the outer limit. If I am not mistaken, the CCI Chairman yesterday said we are going to try and endeavor to complete it within an overall 180 days which includes the first 30, so an extra 150; it should be okay.
Mody: I think that given that it is a new regulator, it will probably take a little more time. If I was the regulator, I would demonstrate my enthusiasm for my regulations in two ways. Where there are really non-malignant filings, I would act super quick to demonstrate to the industry you were wrong, see we can do it, we have done it and we will continue to do it. So sense of relief immediately. For the longer ones, I suspect that given that it is just new, it will take longer, the clock will stop in the beginning, it is growing pains. I think industry will have to deal with it but as long as it is collaborative. See the type of market information, type of competitive market information- my worry is only where do you get all this so soon in the beginning. So it will develop. I think the bigger ticket items which are really Form II justifiably require scrutiny and may take a little longer in the beginning.
Vasani: The point I would like to make here is Form II transactions that would require publication in leading newspapers and economic papers Ė if my past experience is anything to go by- would happened in the MRTP regime- there are busy buddies in this countries, PIL is the order of the day. If it gets into a judicial system and somebody files an appeal to the Competition Appellate Tribunal- here they have tried to limit the right to appeal by saying those who were a party to proceedings before the CCI can file an appeal. Statutorily, under Section 53B anybody can. If it gets into that mode, Appellate tribunal has no time limit and they have said they will endeavor to dispose off in180 days. Thereafter there is an appeal to Supreme Court. You know very well that where the things go.
Doshi: This feeds into Ziaís point on competitiveness.
Vasani: Unfortunately the past experience does suggest that these kind of mechanism have been used to fight surrogate corporate wars and if business rivals try to scuttle your M&A transaction by getting into that system, then you had it.
Doshi: How real a problem is it?
Shroff: It is a serious problem. But it will depend on how culturally the CCI reacts. They are at a fork where they can take a decision and go down and come up as a very credible independent regulator or they can allow themselves to succumb to all this sort of stuff.
Doshi: What can they do if somebody files a case in the Appellate Tribunal and then decides to take it to Supreme Court?
Vasani: The Supreme Court has admitted that 95% of the PILs are private interest litigations, they are vested interest litigations. Statistically. I can tell you one thing that this legislation is certainly a fertile ground for litigation.
Doshi: So despite all the improvements, the core concern continues to be the timeline and its impact on deal timelines and completion of deals and there is no way of doing away with that till we actually start going through all of this.
Vasani: The problem is that any solution that you find through regulation will be a sub-optimal solution. They should have amended the Act once. There are several genetic defects in the Act. And that cannot be cured by sub-ordinate legislations like regulations or notifications because for example the definition of group- they have increased from 26-50%- any NGO will file that is going against the statute. (Interrupted by anchor).
Doshi: They have done that for thresholds as well, right? The thresholds have also been increased.
Vasani: That is permitted under Section 6. But what is not permitted is increasing the size of the group from 26-50. Similarly, they donít have a power to exempt. So what they have tried to do is that these are the transactions which are not likely to have an appreciable adverse effect on competition and they have exempted10 categories of transaction in Schedule I. But this is all subject to litigation because the problem is unless you cure those deficiencies in the legislation and let me again emphasize that the Act is materially flawed. Unless you remove those flaws, any of the solutions that you find in this kind of regulation will be always sub-optimal.
Doshi: I am going to ask for wind up comments. We need to close the show. I think there were two opening thoughts that we started the show with. One- does it match India Incís need for speed versus Indiaís need for competition and does it also protect competition, not just protecting competitor? So both from the point of view of corporate India and the point of view of the general public- how do you think this stacks up given the fact that merger control is here to stay, most important jurisdictions have it and there will be teething troubles like in the case with any new regulator that comes into being.
Bajpai: Let me say that these regulations are better and clearer than the earlier version. But there are many issues in these regulations still, many anomalies that exist. So to answer your question on speed and on competitiveness- I think it does not fully address the issues.
Doshi: From real life operational point of view how much more tougher is the life going to get starting 1st June for you?
Vasani: I have a larger philosophical concern. I find, forget about India, whether merger control regime really benefits consumers? PWC study suggests that the transaction cost goes up by almost 20% in the routine transaction and if it's a multi-jurisdictional merger review, itís 42% of the transaction cost. So ultimately it's borne by the consumers. Is it an opportune time- when India is going through so much of inflation and so many economic problems- to bring in this regime at this stage; itís a larger issue.
Doshi: Every acquisition you have made in the Tata Group, which is offshore, you have had to deal with competition authorities across the world. Now you have one more to deal with, which is in India.
Vasani: But western model transplanting into Indian situation when our conditions are different; one-size-fits-all approach. Internationally people are debating the cost benefit analysis. For example there was an interesting study in US way back in 1997 that they spent $1 billion- The Federal Trade Commission- spent $1 billion to scrutinize transactions which did not have any competitions concerns. The transactions ought to have been automatically cleared, they spent $1 billion.
Doshi: But how do you compare that with the gains of having being able to catch a transaction that in fact (interrupted by guest)
Vasani: That analysis needs to be done.
Doshi: That in fact it was an anti-competitive transaction and you were able to block it or modify it?
Vasani: I have a larger concern- is it an opportunity time, but now we have crossed that stage.
Doshi: I think so, it's here to stay, and all jurisdictions have it. (Interrupted by guests)
Vasani: Sections 3 and 4 are perfectly fine. Whether 5 and 6 which deal with merger control- do they really benefit the consumers? It's a lager question to be debated.
Doshi: Mr. Vasani has gone into the philosophical issue. So you give me the operative point of view. How difficult the life going to get for the Tata Group or for large conglomerates of that nature, simply because they have more filing to do.
Mody: As I said earlier, I think transaction that which deserve scrutiny and are going to end up before the Commission- the deal time will get longer especially in the beginning. That said, I agree with Cyril, Combination Regulations are here to stay, I am very much hoping and that is my wish list that the light touch of the regulator is visibly seen in the beginning so that all the ghosts don't come back to haunt India Inc.
Doshi: Last word to you Mr. Shroff?
Shroff: I think I have looked at it in a short-term and a medium to long term perspective. I think in the short term there will be two things. There will be a big learning curve as well especially because some of these ambiguities will have to work themselves out and a jurisprudence will evolve. So in the short term, life of conglomerates is going to get more complex. This is a new regulatory kid on the block so to speak. So I think people will have to understand this. Thatís about a 12 month process where I would put in the short term. By the end of that, things will settle. There probably will be some of these ambiguities that we talked about on the show that will get worked out. Then I think the market will come to accept that as part of a M&A transaction, this is one more thing which you have to deal with. Every country in the world or every developed or developing economy as well is having to deal with this and itís not necessarily a bad thing because competition is finally good for the consumer. I think the comment which Zia Mody just made about in terms of overlapping with some of the other regulation- there is an issue which maybe another show can deal with. Overlapping with public M&A regulations like the SEBI Takeover code- which is itself now under review- there are some issues there itself which will have to be dealt.
Doshi: Can anybody give me just one quick illustration of where do you see the two in fact clash?
Mody: The concern that I have, as far as the syncing goes is that there are two main concerns - one is if the CCI takes inordinately long time to clear, then the interest clock starts ticking from a SEBI perspective. So how does the acquirer deal with that? The second thing is that if the acquirer has gone to public with an offer and the CCI says you canít buy the whole enterprise, you can buy only half of it and wants a modification, so to speak, to the transaction- which the acquirer is willing to accept- but then is he stuck with having given the full blown offer to the public shareholder. How does he vary it, at what price is the new offer so to speak? So I think that, that sync is important and the regulators need to talk to each other because otherwise what are you doing? You are forcing somebody to go away from a transaction. Query - whether that will also stop the public offer from going ahead.
Shroff: You change the goal posts in the middle.
Doshi: This maybe the end of this show but its only the beginning of merger control and as we live through this new regulatory architecture, I am sure its going to warrant several more discussions.