CCI And A Decade Of Merger ControlBloombergQuintOpinion
On June 1, 2021, the Indian merger control regime completed a decade since the merger control provisions of the Competition Act, 2002, were enforced.
A decade is not sufficient to judge the performance of a regulatory regime, but it is a good time to consider whether its implementation has lived up to the legislative expectations, i.e., to prevent practices having adverse effects on competition, promote and sustain competition in markets, protect the interests of consumers, and ensure freedom of trade for participants in markets, in India. The Competition Commission of India has laid a solid foundation for the Indian merger control regime for the coming decade.
In the last 10 years, the CCI processed many merger filings (close to 830) and has developed a broadly consistent jurisprudence.
No transaction has been blocked by the CCI so far.
The CCI found no competition concerns in most of the transactions notified to it.
In cases where it found competition concerns, the CCI showed willingness to clear the transaction subject to certain remedies that would mitigate such concerns.
This piece examines the evolving personality of the CCI and the form and shape of things to come – best studied through the stance of the regulator on remedies in complex merger cases, the quirk on minority acquisitions that doesn’t go away, merger enforcement and rising wave of protectionism.
CCI’s Stance On Remedies
What type of remedies would the CCI impose in complex mergers with anticompetitive consequences?
In the beginning, the CCI preferred the clean-cut divestment or structural remedy, for instance PVR/DT. However, over time, the Commission has been less emphatic about its preferred structural remedies, accounting for the peculiarities of each case and has been convinced that behavioral remedies may adequately address competition concerns.
In Schneider / LT (2018, switchgears) the CCI accepted white labeling of certain products as an adequate resolution, in Hyundai and Kia / Ola (2019, auto and ride-hailing app) the CCI accepted a commitment that the collaboration between Hyundai and Ola would not be on an exclusive basis and the algorithm/program of Ola would not discriminate for/against drivers based on the brand of passenger vehicles. In Tata/GMR (2019, airport) the CCI accepted voluntary commitments from parties including restrictions on appointment of key managerial personnel and the conduct of directors.
In the horizontal mergers involving Nippon Kabushiki, Mitsui O.S.K. Lines, and Kawasaki (2017, shipping) and Northern T.K. Venture/Fortis Healthcare (2018, hospitals), the Commission accepted the parties’ commitment to introduce a rule of information control towards addressing concerns around potentially collusive information exchange.
In the Jio/Den (2018, DTH and broadband) and Jio/Hathway (2018, DTH and broadband) mergers, Jio (acquirer) undertook to bear the cost of any technical realignment of the customers’ equipment to alleviate the CCI’s concerns around bundled services that the merged entities would offer.
Out of approximately 830 approved cases, the Commission required remedies only in about 40 cases (less than 5%), in the prima facie stage (Phase I) or, after a detailed investigation (Phase II).
Out of these, 13 cases (less than 2%) involved either divestments or behavioral commitments or a combination of both, though in only 8 (less than 1%) of these cases the CCI conducted in-depth Phase II investigation involving public consultation.
In the remaining 5 (less than 1%) problematic cases, the transacting parties offered voluntary divestments / commitments during the Phase I review.
This is possibly because the CCI has so far not been confronted with a fact situation that required blocking a transaction and remedies proposed by the Commission or, by the parties themselves, allowed competitiveness to prevail.
An Indian Merger Control Quirk That Won’t Go Away
The single most dominant quirk at the Commission is the requirement to notify minority acquisitions.
This has left private equity, financial and fund investors with at least a 30- working day hurdle to closure, while the CCI reviews the applications.
An interesting development was the recent voluntary remedies offered by Chryscapital (a private equity investor) in relation to its investment in Intas Pharmaceuticals. The remedies include:
resignation of its nominee director in Mankind Pharma (a portfolio company of Chryscapital);
undertaking not to nominate a director in Mankind Pharma so long as Chryscapital has a nominee director on Intas;
the nominee director on Intas’ Board should not have been associated with Mankind Pharma in the previous 1 year;
Chryscapital undertaking not to exercise its affirmative right in Mankind Pharma with respect to changes to capital structure, M&A, amendment to charter documents; and
non-public information received by Chryscapital from its portfolio companies competing with Intas will be strictly used for the purpose of evaluating the respective investment in such portfolio company.
The Commission has been under heat with multiple investors complaining about the scrutiny of the acquisition of non-controlling minority shares. It hasn’t helped that such investments form a key portion of the merger enforcement activity in India. We see increasing instances of the Commission’s media scanning exercise resulting in notices to various financial investors about past acquisitions and their failure to notify these.
The CCI’s position (at least the portion of it that is clear) is that special rights (such as those impacting business and operations of the target, or the appointment of nominee director/s) amount to the acquisition of material influence over the target and this is a notifiable event even if the investor acquires less than 25% shares in a company.
The confusing additional exemption threshold for shares less than 10% being solely an investment is subject to the stricter standard that any special rights in favour of the acquirer would take the exemption away.
For a company actively engaged in business that is horizontally linked or vertically connected with that of the target, the CCI’s requirement is that such an acquisition is notifiable whether the acquirer takes special or negative veto rights, or not. The investing arms of companies do not therefore, enjoy the ‘special rights’ standard and it is likely that they would have to seek the Commission’s approval for their acquisitions.
Increasing Merger Enforcement But Decreasing Gun-Jumping Penalties
Merger enforcement is on a high with the Commission pursuing gun jumping inquiries into multiple transactions (many of them, minority acquisitions). However, the penalties for a failure to notify have seen a decreasing trend.
The Commission has dealt with close to 40 gun jumping cases so far. Gun jumping refers to instances where parties implement a transaction without notifying it or take certain premature actions.
While the penalty for gun jumping could go up to 1% of the higher of the total turnover or the value of the total assets of the combination, in practice, the CCI has imposed nominal penalties ranging from Rs 0.1 - 50 million.
The violations that have attracted these penalties included the following acts and omissions pending CCI approval:
(a) extending corporate guarantee to a bank in connection with its loan to the target;
(b) requiring transfer of IP rights in favour of the proposed acquirer;
(c) advance payment of the whole or part of the consideration;
(d) holding acquired shares in an escrow account;
(e) advancement of loan to the target company; and
(f) contractual overreach of standstill obligations.
The Commission has so far ignored submissions for reasonable rules of derogation that would allow some acts such as the payment of advance consideration to distressed targets, or the acquisition of shares in public companies pending CCI approval (with the condition that voting rights are not exercisable till such time as the final approval is received).
With the 30-calendar day timeline for submitting the merger filing being suspended, the CCI’s recent enforcement focus has also included incomplete and/or incorrect information provided in merger filings.
Recently, the CCI penalised a large cement company for omitting to provide correct and complete information in respect of its shareholders/ status of control, and a pension fund for failing to disclose material facts about arguably a connected transaction.
The penalty imposed in these cases was Rs 50 lakh, much higher than recent penalties for a failure to notify transactions.
Will The CCI Be Swept Up By The Rising Wave Of Protectionism And Nationalism Across The World?
So far, the Commission has maintained a broadminded stance with respect to the idea of Indian ‘champions’.
We do not believe that the “national” card has been played successfully before the Commission in all these years. It has not been the Commission’s concern where the investment is coming from into India or which country the acquirer is based in because India has a robust foreign investment law addressing these issues.
For instance, the Fosun’s (Shanghai Fosun Pharmaceutical (Group) Co) (a Chinese pharmaceutical company) acquisition of Gland Pharma (Gland Pharma Ltd.) received CCI approval but the then Foreign Investment Promotion Board did not allow an acquisition of 100% of the target by Fosun (who settled with acquiring only 74% of Gland under the automatic route).
Would the Commission continue to maintain an agnostic stance in the face of growing protectionism internationally? Or, would it set a precedence for informal reciprocity for companies from jurisdictions that remain invested in India, or in sync with the Indian polity of the time?
It is ambitious to deny possibilities.
It will become increasingly difficult for the Commission to ignore the waves of sentiment that respond to and anticipate economic activity at present especially given the limited number of members at the CCI (for the past 3 years, only 4 persons have been appointed as members including the Chairperson at the CCI whereas the statute provides for the appointment of 7 members including the Chairperson).
Perhaps, a sign of firm commitment to fair markets would be a full and robust membership at the Commission.
The Commission has recently undertaken insightful market studies into e-commerce, telecom, pharmaceutical and common ownership issues with a focus on private equity. Some of these studies may even set the basis for a more informed merger review and various investigations into companies operating in these sectors.
The To-Do List
Here are the asks:
a less strenuous approach in assessing financial investor driven/minority acquisitions of non-controlling stake,
a reasonable law of derogation from the strict suspensory regime for mergers,
clearer FAQs on the Commission’s website; clarificatory notes to Form II (possibly, a revised, more up-to-date Form II); and,
a more formal, informal guidance system where the facts and the guidance are published (similar to the Securities and Exchange Board of India’s informal guidance).
Avaantika Kakkar is a Partner and the Head of the Competition Practice at Cyril Amarchand Mangaldas.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.