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Merger control regime in India in the light of Competition (Amendment) Act, 2023 

“If we allow dominant firms to buy up or block these nascent competitors before they get to scale, we will lose out twice . First by losing potential innovations, and second by losing a potential source of new competition. “

-Jonathan Kanter

 (Assistant Attorney General)

(Department of Justice, U. S. A) 

About the Author:

Anna Mariam Ramacha Thykkadavil is pursuing her 5th semester 3 year LLB at Government Law College, Thiruvananthapuram.She is also an editor of ljrfvoice.com

Competition

is a human behaviour, if healthier can bring huge positive results. If one plays unfair to establish monopoly,  they would decide to suppress the competitors, produce low grade goods or services, buy the markets exclusively and eventually consumers suffer.

According to Wealth of Nations1 by Smith, competition is the striving to maximise wealth by following one’s own individual self interest, wherein he intends only his own gain and is led by an invisible hand to promote an end which was not part of the intention. Competition explains how prices, wages and rents would be set provided all were free to enter any occupation. Competition is said to explain how economic relations would function without State interference. As per Smith, it legitimises distribution of wealth and income that resulted from market exchange. Meanwhile Kenneth Arrow and Gerard Debreu who had received Nobel Prize in economics out forwards General Equilibrium Theory2 by which it says that any socially desirable outcome can be achieved by a competitive market provided the initial distribution of rights and resources is appropriate. 

Brief History of Modern Day Competition Statutes

The concept of Competition Law dates back to 50 B. C as in Lex Julia de Annona enacted during the Roman Republic3. Between 471 to 491 the Emperor of East, Zeno promulgated a Constitution which later led to the pioneer statute in the modern word controlling cartels and monopolies, called Sherman Act, 1890. The development of competition law started with the grant of individual freedom against existing guilds in Europe in the early 18th century4.  The Sherman Act started to be implemented effectively with the 18 Railways case5.

The American Supreme Court had ruled on a trust of 18 railways case which dealt with an issue whether reasonable price fixed by the companies for transport of goods, to be levied from customers, is anti competitive. The Supreme Court declared that all price fixing agreements are void and are not left to the Courts to decide which agreements are reasonable and which are not.

The Sherman Act since excluded the issue of mergers led to enactment of Clayton Act in 19176.

MERGERS

Mergers is the combination of two companies to form one, wherein Acquisitions is one company taken over by the other7. Corporate reorganisations in the form of mergers may be in line with requirements of the dynamic competition and are capable of increasing the competitiveness of the industry. In India, Company Law, 2013 and Competition Act, 2002 deals with mergers and its regulations respectively.

Indian merger control regime has had many flaws after 10 years since the inception of the reviewing power of M&A by CCI went live on 1st June 2011. What level of acquisition is notifiable was in issue at one stage. There was a time when criticisms arose that the Competition Act’s merger control provisions covered any acquisition, even as small as one share (if all criteria were met).the small target exemption in the case of acquisitions was applied to sellers of the target and not the target itself. Now smaller investments are not notifiable8.

There are horizontal and non horizontal mergers. The horizontal merger is between the parties who compete in similar kinds of products. Post merger both the parties may coordinate their behaviour in an anti competitive manner. There is a high probability of anticompetitive effects like elimination of competition between the parties and also, it leads to merging of both their market powers including each of their consumers. A chance of intentional hike in price, reduction in quality or restricting any innovation cannot be avoided. This causes harm to the consumers. The non horizontal mergers include vertical mergers and conglomerate mergers. Vertical mergers are those  between firms that operate at different but complementary levels in the chain of production or distribution of the same final product. It can potentially generate substantial efficiencies. But at times, the vertically merged entity may be able to constrain the ability of rivals to compete by excluding them from a market or by raising their costs, captive distribution networks, price squeezes etc.. Pure Conglomerate mergers are those between firms that produce different but related products. It can also be mergers between firms operating in entirely different markets. These are neither horizontal nor vertical mergers. Conglomerate mergers lead to economies in production, distribution, research, management, selling, or capital costs that might, among other things, enable the merged firm and similarly structured firms to drive less efficient small competitors out of the market9.

The Competition Act was passed by both the Houses of Parliament and received the assent of the President on 13th January 2003. It came on the statute book as The Competition Act, 2002. It was later amended in 2007, 2009 and very recently in 2023. The major objectives of the said Act are establishment of Competition Commission, prevention of adverse practices, preserving sustainable competition, protection of Consumers’ interests and ensuring freedom of trade of market players10.

1. Qualification of Combinations and other definitions

By virtue of section 5 of the said Acts, various combinations are defined. Acquisitions of one or more enterprises by one or more persons or merger or amalgamation of enterprises becomes a combination of auch enterprises and persons or enterprises as per various conditions described in the said section. Any merger or amalgamation as conditioned in (i) and (ii) are combinations under Competition Law. (i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation as the case may be, have,-(A) either in India, the assets of the value of more than ₹ 1000 crores or turnover more than ₹ 3000 crores; or (B) in India or outside India, in aggregate, the assets of value more than 500 million USD including at least ₹500 crores in India, or turnover more than 1500 million USD, including at least ₹1500 crores in India; or (ii) the group to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have,- (A) either in India the assets of value of more than ₹4000 crores or turnover more than ₹12,000 crores; or (B) in India or outside India, in aggregate, the assets of the value if more than 2 billion USD, including at least ₹500 crores in India, or turnover more than 6 billion USD, including at least ₹1500 crores in India. Here ‘group’ means 2 or more enterprises, which directly or indirectly are in a position to (i) exercise 25% or more of the voting rights in the other enterprise; or (ii) appoint more than 50% of the members of the Board of Directors in the other enterprise; or (iii) control the management of affairs of the other enterprise;

Value of assets is to be determined from the value of assets mentioned in audited books of account of the enterprise in the financial year preceding the financial year in which the date of proposed merger falls (as reduced by depreciation). Value of assets include brand value, value of goodwill, copyright, patent, permitted use, collective mark, registered proprietor, registered trademark, registered user, homonymous geographical indication, geographical indications, designs or layout design. It also includes similar commercial rights if any referred to in section 3(5), which allows the right of any person to restrain any infringement his intangible rights and right to export goods from India, where export agreement relates exclusively to production supply, distribution or control of goods or provisions of services for such export i.e within the legal framework. 

The Section 6 of the said Act explains the anticompetitive combinations and how they are to be regulated in India. The said section prohibits any person or enterprise from entering into any combination that causes or is likely to cause an appreciable or adverse effect on competition within the relevant market in India. The Act makes such combinations void.

The proposal of merger or amalgamation has to be approved by the Board of Directors of the enterprise concerned. Within 30 days of such approval, or execution of any agreement or other document for acquiring or acquisition of control as mentioned in section 5(a) and (b) the person or enterprise who or which proposes to enter into a combination within the legal framework have to give notice to the Competition Commission of India in the form and with a fee, both as per the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations 2011. The form will be such that it discloses the details of the proposed combination.

The combination comes into effect only from 210 days from the day on which the notice has been given to the Commission or the date from which the Commission passed orders under section 31, whichever is earlier. After the receipt of the notice, the Commission deals with the notice as per sections 29, 30 and 31.

The provisions of this section shall not apply to share subscription or financing facility or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement.  The public financial institution, foreign institutional investor, bank or venture capital fund have to file the details of thr acquisition or control, circumstances for the control and consequences of default arising out of such loan agreement or investment agreement. This filing shall be as per the form specified by the Commission in its regulations. Foreign institutional investors are those persons as per Section 115 AD, Income Tax Act, 1961 (43) of 1961. Venture Capital Fund is provided under Section 10 (23 FB) of Income Tax Act, 1961

By the Amendment of 2023,  section 5 (d) was inserted. Acquisitions of one or more enterprises by one or more persons or merger or amalgamation of enterprises becomes a combination of auch enterprises and persons or enterprises if the value of transaction which is in connection with acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds ₹2000 crores. But the proviso says that the enterprise which is being acquired or taken control of merged or amalgamated should have ‘substantial business operations’ in India as may be specified by regulations.

This section was put forward since there were many transactions that took place in digital and infrastructural modes whose deal value was much higher than 2000 crores through their assets and turnover value did not exceed the threshold to be reviewed by the CCI. CCI’s inability to vet the WhatsApp acquisition by Facebook in the U.S is an example. The amendment has incorporated a transaction (deal) value threshold as ₹2000 crores in section 5 (d). Value of transaction includes every direct or indirect valuable consideration, or which is deferred for any acquisition, merger or amalgamation. Thus, the amendment aims to place the global acquisitions of enterprises, which have domestic operations in India, under CCI’s merger review. But the problem is  that the deal value threshold has been set low. Also, the term ‘substantial business operations in India’ is not explained or defined in the statute but is expected to be specified in the regulations. This ambiguity of criteria to consider on an activity to qualify for the same can be an issue in future. Thus when the purview of notifying CCI for a proposal of combination has been made widened, the number of applications for approval before the CCI is going to hike. The ‘green channel’ mode can help hasten the process efficiently. 

The definition of ‘control’ has been revisited to specifically prescribe it as the ability to exercise ‘material influence’ over the management or affairs or strategic commercial decisions by the same categories as said before. In UltraTech Cement Limited case11, CCI defined material influence as the lowest 

level of control. Thus ‘control’ in terms of ‘material influence’, is a method to narrow down the definition itself12. The Ministry of Corporate Affairs had earlier commented that under the Competition Act, “in case of notifiability as well as substantive assessment of combinations, acquisitions of negative control may be vital13

The definition of ‘group’ has also been revised so that it brings into purview the fact that even a single enterprise in the group of two or more enterprises, if able to directly or indirectly have voting rights, control of management and appointment powers over another,  be called a group.  

‘Turnover’ which was not previously defined has been specifically given in the explanation (e) to section 5, where it means the ‘turnover certified by the statutory auditor’. Turnover in India is determined by excluding intra group sales, indirect taxes, trade discounts  and all amounts generated through assets or business from the customers outside India. These turnovers certified by statutory auditor are on the basis of the last available audited accounts of the company in the financial year immediately preceding the financial year in which the notice, of the proposed combination, to the Commission.

Also, the value of assets has also given a chance to those whose financial statement has not yet become due to be filed before the Registrar under Companies Act, 2013. In these cases, the statutory auditor’s report is made based on the last available audited accounts of the company in the financial year preceding the financial year in which the notice is filed before CCI. 

2. Regulation of Combinations

  1. Notifying CCI 

Section 6 of Competition Act, 2002 clearly prescribes that no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India. Else, such combinations shall be void according to the Act.  Therefore, it is mandated that any proposed combination be notified to the CCI in the form and with fee as prescribed. It has to disclose the details of the same. After the approval of the proposal by the Board of Directors of the concerned enterprises or after the execution of any agreement or ‘other document’ for the acquisition or acquiring control as mentioned in section 5. The time limit was 30 days of the two.

But the 2023 amendment has taken away the fixed period of 30 days time limit and kept it as either after approval or execution but before consummation of the combination. The amendment has explained the ‘other document’ said in the section which was not previously done. It can be any document which may be a conveyance deed or a decision to acquire control, shares, voting rights or assets (even if there is absence of consent of the enterprise being acquired), public announcements made as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.

  1. Exemptions

Some parties are exempted from the requirement to comply with notifying and such procedures. The Act already exempts acquisitions by public financial institutions, foreign portfolio investors , bank and venture capital funds from the requirement of seeking CCI’s prior approval if acquisition is based on any covenant or loan agreement or investment agreement. But they have to notify CCI within 7 days from the date of acquisition, file in the form including details of control, circumstances for exercise of such control, and consequences of default arising out of such loan or investment agreement.

While the amendment continues such exemptions, it now includes any acquisition by a Category 1 alternative investment fund. Significantly, by the amendment, the exempted entities are not required to notify the CCI within 7 days of acquisition as the notifying time limit has been omitted from the Act by amendment. Category 1 alternative investment fund is defined in SEBI (Alternative Investment Funds) Regulations,2012. Foreign Portfolio Investor is duly dealt in Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019. 

  1.  Investigation of combinations

After the receipt of the notice, the CCI has to deal with the notice as per sections 29, 30, 31 which deals with inquiry and investigation upon the proposed combination. The amendment inserted 29-A (Statement of objections and proposal of modification) which is also to be considered by CCI.

The Commission after receiving the notice inquires whether a combination has caused or is likely to cause appreciable adverse effect on competition (hereafter AAEC) in India. The Central Government revises the value of assets or the value of turnover or transaction thresholds of qualification to be a combination. This revision is to be held every 2 years after the commencement of the Act. This is done in consultation with the CCI. This will be done based on wholesale price index or fluctuations in the exchange rate of rupee ot foreign currencies or other relevant factors14. The ingredients for the determination of causing AAEC is specifically mentioned in section 20(4) including the degree of countervailing powers, nature and extent of vertical integration in the market, whether the benefits of the combinations outweigh the adverse impact of the combination, etc.. 

If the CCI is of prima facie opinion that a combination is likely to have caused AAEC within the relevant market in India, it issues a show cause notice to the parties of combination. They have to respond within 15 days of receipt of notice as to why such investigation shouldn’t be conducted15. The CCI may call for a report from the Director General and the report will be submitted by the Director General within the time CCI may direct16. Within 7 days of the receipt of the parties’ response or report from the Director General, whichever is later, CCI directs the parties to publish details of the combination. These details are to be made available to the public as well as the persons affected or likely to be affected by such a combination17. Such persons can file written objections before the CCI. But this has to be done within 10 days of the said publication. After 7 days from the expiry of the said 10 days, CCI can call for additional information from the parties of the proposed combination, as it may deem fit. 

CCI issues statement of objection to the parties identifying such appreciable adverse effect on competition and directs the parties to explain why its proposed combination should be allowed to take effect. The duration prescribed is within 25 days if receipt of the statement of objection18. If the parties consider AAEC can be eliminated by some modifications to the proposed combination, they can offer such modifications to CCI in the manner specified by regulations. 

If CCI doesn’t accept the modifications, it has to communicate to the parties as to why those modifications are not sufficient to eliminate the AAEC. This is to be made within 7 days of the receipt of the offer of modifications. Within 12 days of the CCI’s communication, parties can furnish revised modifications for the same purpose. Revised proposal is evaluated within 12 days of proposal19.

If appropriate, CCI may suo moto propose modifications before forming a prima facie opinion of AAEC20.

If the Commission finds that the Combination notified does not fulfil the criteria or informations, declarations provided are materially incorrect or incomplete, the approval shall be void ab initio. An opportunity of being heard will be given to the parties of the combination and then CCI will pass such an order as it may deem fit.

  1. When the combinations to come to effect

Upon filing the notice, CCI does not form  a prima facie opinion of AAEC21,acknowledged by the Commission, the proposed combination is deemed to be approved by CCI and no further approval is required22.

A combination is allowed to come into effect only after 210 days of giving notice to CCI or the date since an order has been passed, whichever is earlier. Amendment has  reduced the time limit to 150 days23. If no order is passed or direction issued by CCI within a period of 150 days of notice given to it, the combination shall be deemed to have been approved by the CCI24. 

  1. Open Offers

Open offers means an open offer made under  Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Section 6-A deals with how open offers or an acquisition of shares or securities convertible to securities from various sellers through a series of transactions on a  regulated stock exchange would come into effect. If the notice of such acquisitions are filed as per the statute, or the acquirer does not have any ownership or beneficial rights or interests in shares or convertible securities , except  if specified by regulations, till CCI approves the acquisition, their implementation shall not be prevented by section 6 (2-A) or 43-A.

  1. Penalties and Appeal

Chapter VI of the Competition Act, 2002 deals with penalties to be given for contravention of orders of Commission, compensation regarding contravention of orders of CCI, penalties for failure to comply with directions of Commission and Director General, penalty for non furnishing of information on combination, penalty for making false statement or omission to furnish material information, penalty for contraventions in relation to furnishing of information. Besides those related to combinations, penalties with respect to settlements and commitments are also given in the said Chapter.  The non furnishing of information on combination to CCI can attract a penalty which may extend to 1% of total turnover or assets whichever is higher. By the amendment, the value of transaction is also to be calculated to find whichever is higher25. 2023 Amendment increased the maximum limit of penalties for furnishing false information or omission to furnish material information from ₹1 crores to ₹ 5 crores26.

Also , the appeal by a person who is required to pay any amount in terms of the CCI orders, shall be entertained at the National Company Law Appellate Tribunal (NCLAT) only if the person deposits 25% of that amount. The deposit has to be made in the manner specified or directed by the NCLAT27.

  1. Rules and Regulations

The absolute implementation of the amendments is possible only when the rules and regulations are set by the CCI. The Act itself says that those rules and regulations, in existence, shall continue till new rules and regulations are made under the Competition (Amendment) Act, 2023.

The statute also says that any order passed, or fee imposed on combination consummated or resolution passed or direction given, instrument executed, in pursuance of any rules and regulations made before the amendment shall continue in force as if those were in pursuance of the amended Act28.

Interventions in Other Countries

Globally, the most concerning matter in issue is the so-called ‘killer acquisitions’- acquisitions of nascent targets that do not trigger existing thresholds- especially in the life sciences and technology sectors29. U. S. A, U. K, China and Australia are on the run to make a quality merger control method.

The DOJ and FTC launched a merger review and other guidelines to modernise antitrust enforcement. 

China has revised Anti Monopoly Law (AML) to trigger the filing of transactions involving mega corporations. The thresholds are set as, whenever at least one party has turnover greater than RMB 100 Billion  or the target has a market capitalization or valuation greater than RMB 800 Million and if the target generated more than ⅓ of its global turnover in China in the preceding financial year30.

The UK has also planned to make a new test to give its Competition authority more jurisdiction where at least one of the merging businesses has surpassed the threshold of turnover, or supply of goods or services31. After the German Federal Cartel Office (FCO) conducted enquiries,  Germany plans to lower the transaction threshold for notifying the merger to the concerned authority in those markets32.

Inclusion of transaction value threshold is an admirable adoption from the policies by Austrian Federal Competition Authority and German Federal Cartel Office (FCO). The merger is subject to merger control provisions of the company to be acquired and has substantial domestic operations  in those countries. This is determined by the measurement of domestic activity, geographical allocation of the domestic activity, market orientation, significance of domestic activity33. The definition of ‘substantial business operation in India’  for the use in section 5(d) can refer to the above said countries’ definitions of terminologies.

Conclusion

Another important issue lies in the rules and regulations that have to be formulated to provide guidelines and implementation procedures for a complete enforcement of all the amendments. Though the previous rules and regulations are in force now, the uncertainty till the final draft is out is an inevitable after effect of the amendment. The stakeholders await for the yardstick to be adopted by the CCI to define every ambiguous term set in the Amendment Act ‘like substantial business operations’. If the net cast is too wide, it can result in flooding of additional transactions to be notified to the CCI34.

The current trend of the merger control process can be put together as a blend of government mission to improve ease of business, inflation influenced  filing thresholds and penalties, and reduction of the number of appeals by demanding compensation deposits.

Though many interventions are positive, loopholes through killer acquisitions are not fully met since the qualification of combination majorly depends on the total output value of merger and not one of them. Let’s hope that the deal value threshold erases killer acquisitions and brings all acquisitions above the table. The elimination of threshold evasion using killer acquisitions is yet to be eliminated fully. In this aspect merger control interventions of other countries like China can be a helpful model. The need for a global coordination on all aspects of merger control like substantive assessment and remedies planning and how it can play out in each jurisdiction will be an expected outcome in future.

Bringing ease of business into the Indian markets can attract more employment and standard of living of the people. Competition is a significant factor which cannot be neglected so that quality products and services are in the market.  In this regard, the Competition Amendment Act 2023 can set an example for the future, to make revolutionary steps so that CCI’ motto ‘fair competition for greater good’ literally comes into effect absolutely.

Footnotes 35

  1. Smith: Wealth of Nations (W. pickering, 1995) ↩︎
  2. Eric C. Maskin, ‘The Economics of Kenneth J. Arrow: A Selective Review’, Annual Review of Economics, Volume 11, 2019 Maskin pp.1-26 ↩︎
  3. Lex Julia de Annona (D.48,12) ↩︎
  4. MARK FURSE: COMPETITION LAW OF EC AND UK, (Oxford University Press, 2004) ↩︎
  5. United States v. Union Pacific R. Co., 226 U.S. 61 (1912) ↩︎
  6. The Clayton Act, 1917 ↩︎
  7. Poddar, N. (2019) ‘A Study on Mergers and Acquisition in India and Its Impact on Operating Efficiency of Indian Acquiring Company’.Theoretical Economics Letters, 9, 1040-1052. doi: 4236/tel.2019.94067 ↩︎
  8. Dhanendra Kumar, Arshad (Paku) Khan, ’10 Years of CCI Merger Control: Beckoning India’s Opportunities’ ↩︎
  9. ABIR ROY, JAYANT KUMAR, ‘COMPETITION LAW IN INDIA’, Chapter 5. Merger and Competition Law, pp. 123-127 ↩︎
  10. Dr. S. C TRIPATHY, ‘ COMPETITION LAW ↩︎
  11. Ultra tech Cement Limited v. Competition Commission of India, Competiton Appellate Tribunal, 2017) 3112 Appeal No. 126/12 ↩︎
  12. Rukshad Davar, Sinjini Majumdar, Anshul Issac ‘ M & A Impact Due to Changes in India’s Competition Law’, Majumdar and Partners, pp.2 ↩︎
  13. 52nd Report of Standing Committee on Finance (2022-2023) ↩︎
  14. The Competition Act, Section 20, Act 12 of 2002 ↩︎
  15. The Competition Act, Section 29 (1), Act 12 of 2002 ↩︎
  16. The Competition Act, Section 29(1-A), Act 12 of 2002 ↩︎
  17. The Competition Act, Section 29(2), Act 12 of 2002 ↩︎
  18. The Competition Act, Section 29-A (1), 2002 Act 12 of 2002 ↩︎
  19. The Competition Act, Section 29-A (2,3), Act 12 of 2002 ↩︎
  20. The Competition Act, Section 29 (7), Proviso to 29-A(3) Act 12 of 2002 ↩︎
  21. The Competition Act, Section 31(1), Act 12 of 2002 ↩︎
  22. The Competition Act, Section 6 (5), Act 12 of 2002 ↩︎
  23. The Competition Act, Section 2-A, Act No.12 of 2002 ↩︎
  24. The Competition Act, Section 31(6), Act No.12 of 2002 ↩︎
  25. The Competition Act, Section 43-A, Act No.12 of 2002 ↩︎
  26. The Competition Act, Section 44, Act No.12 of 2002 ↩︎
  27. Second Proviso to Section 53-B (5), Competition (Amendment) Act, 2023 ↩︎
  28. Section 6(8) of Competition Act, 2002 ↩︎
  29. Freshfields Bruckhaus Deringer, ‘Global Antitrust in 2023: Is Merger Control Fit for Purpose- Evolution or Revolution?’ RuiMin,17 February 2023, page 2 ↩︎
  30. Freshfield. ibid ↩︎
  31. Freshfield. ibid ↩︎
  32. Freshfield. ibid ↩︎
  33. Argus Partners, ‘Changes to the Merger Control Regime in India- Competition Law Update’, April 7,2023. ↩︎
  34. Shardul Amarchand Mangaldas, ‘Competition (Amendment) Bill- New Challenges and Opportunities’ pp.5 ↩︎
  35. ↩︎
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