How Useful Is The CCI’s Green Channel For M&A Deals?
Since its inception, the Competition Commission of India has cleared 666 mergers and acquisitions. Some of these have been approved with modifications but no deals have been blocked by the regulator so far.
The average time taken by the CCI to approve M&A deals has improved—from 29 days in 2016-17 to 23 days in 2018-19. And with the recent introduction of the Green Channel—an automatic system of approval for deals—there would be significant reduction in time and costs, it has said.
At CCI’s 10 years of enforcement event, while the experts lauded the regulator’s intent, they also said that the Green Channel regulations require further clarity. The CCI should also take a more liberal view towards M&A deals that involve minority investments, industry experts said.
CCI Green Channel: How Useful?
M&A deals above a certain threshold require CCI’s approval to ensure there is no adverse effect on competition. For parties with no horizontal, vertical or complementary overlaps, the regulator has introduced a Green Channel for speedy approval.
Horizontal overlap refers to situations where parties to a deal are competitors in the same market and in vertical overlap, the parties are involved in different stages of the supply chain for a product or service. But the Green Channel regulations don’t define complementary overlap.
There is some guidance on complementary goods and services globally but we will need clarity from the CCI on this—do we want to define it very widely and allow only certain deals to go through the Green Channel or should we adopt a narrower definition to make this route more meaningful, Pallavi Shroff, managing partner at Shardul Amarchand Mangaldas Co., said.
By way of guidance, the European Commission has stated that complementary overlaps—referred to as conglomerate mergers—take place between parties that are active in closely related markets. For instance, mergers involving suppliers of complementary products or products that belong to the same product range.
In the last few years, the European Commission has examined several deals for conglomerate effects—Dentsply International’s acquisition of Sirona Dental Systems. Dentsply designs, develops and manufactures a broad range of consumable dental products and medical devices, and Sirona is a global manufacturer of dental equipment.
Similarly, Microsoft’s acquisition of LinkedIn too was examined for conglomerate effects. In both these cases, the commission approved the transactions with certain modifications.
Lack of scope of complementary overlaps in not the only concern with the Green Channel. The rigour that the parties have to apply to assess whether a particular transaction qualifies for this route can become onerous too.
CCI’s regulations say the assessment of market overlap between parties needs to be done for all plausible alternative market definitions. The overlap needs to be assessed between the parties to the deal, their group entities and all other entities where the parties directly or indirectly hold shares in or have control over.
If the regulator’s approach to the Green Channel is similar to Form II assessments—where the CCI carries out a detailed investigation for anti-competitive effects—it would make the new route easier to use, Nisha Uberoi, partner at Trilegal said.
Typically, in Form II cases, where you have direct and indirect shareholding, if the acquisition is less than 5 percent with no board seat and rights, you don’t have to make disclosures. If the CCI adopts the same approach under the Green Channel, it’ll be so much better.Nisha Uberoi, Partner, Trilegal
On whether assessment in the Green Channel should be done vis-a-vis the acquirer and the target, going by CCI’s decisional practice, if it’s an acquisition, then you’ll look at only the acquirer group but if it’s a merger or joint venture, you’ll look at both, she pointed out. “As long as they stick to these standards, the Green Channel route will be vastly facilitative.”
The expectation is that the Green Channel be allowed for block deals—they happen on the exchanges, they are negotiated but not via agreements and the idea is to lock-in the price. And that cannot legitimately happen if parties have to notify the CCI and wait for an approval, Avaantika Kakkar, partner at Cyril Amarchand Mangaldas, said.
Block deals may or may not meet the Green Channel criteria. But since block deals happen with listed companies, theoretically, it is possible to unscramble the egg.Avaantika Kakkar, Partner, Cyril Amarchand
Minority Investments: CCI’s Approach
Not all transactions need CCI’s approval. Minority investments or acquisitions of less than 25 percent shares don’t need the regulator’s approval as long as they are made “solely as an investment” or in the acquirer’s “ordinary course of business”, with a categorical caveat that such a transaction should not result in the acquisition of “control”.
But some recent filings made by transacting parties and their approval by the regulator is making this exemption less meaningful. That’s emanating from what qualifies as “solely as an investment”. The regulations define it to mean acquisition of less than 10 percent shareholding, where the acquirer does not have:
- Rights that can’t be exercised by ordinary shareholders.
- Right or intention to nominate a director.
- Intention to participate in affairs or management of the target.
For instance, in January this year, Claymore Investments Mauritius—a wholly owned subsidiary of Temasek—notified a 0.12 percent acquisition in IndiaIdeas. Claymore was an existing shareholder with a 8.75 percent stake in IndiaIdeas but in the second round of investment, it didn’t get an additional rights.
Similarly, in the Copper Technology-ANI Technologies transaction, acquisition of 9.57 percent stake along with the right to appoint a director was notified to the CCI.
The Copper Technology deal didn’t qualify for the minority investment exemption because it came with a board seat, Uberoi said.
But I don’t get the Claymore filing—the 0.12 percent investment neither had a board seat nor a right which wasn’t with an ordinary shareholder. That, to me, was a non-notifiable transaction and should not constitute a precedent.Nisha Uberoi, Partner, Trilegal
Control has been wielded with far lesser than 25 percent by Corporate India but it’s also worrying when you say that one board seat would necessarily give you decisive control, Independent Counsel Somasekhar Sundaresan said.
That said, the regulator should shun the push from market that some numerical threshold—X board seat is okay or Y percent stake is okay—should be put in place, he said.
According to Sanjay Nayar, chief executive officer at private equity firm KKR India, the CCI needs to view these rights with lesser suspicion. The bulk of savings coming to India through private equity and venture capital will be minority investments—investors would want a board seat, negative covenants and information rights, he said. Foreign investors need to protect the money they’re investing and need enough mitigants to ensure they know what’s going on in the company they’ve invested in, he added.
The minority investment exemption criteria may become even more difficult to meet if the recent recommendation of the Competition Law Review Committee are accepted by the regulator.
Acquisition of control makes a transaction notifiable to the CCI. So far, the competition regulator has used the ‘decisive influence’ test to determine control. Only in two deals—UltraTech-Jaypee and Agrium-PotashCorp— the CCI had applied the ‘material influence’ standard. The Competition Law Review Committee has now advocated this lower material influence threshold as a standard.
In the eight years of its decisional practice, the CCI has almost consistently used the standard of ‘decisive influence’ and there is no particular reason or situation in which it has needed to move to a lower standard of ‘material influence’, Samir Gandhi, partner at AZB added. On the contrary a change in the standard of control would create further uncertainty for filing parties and increase the number of technical filings to the CCI, he added.