Regulations governing M&A

NITIN SAVARA | Updated on June 16, 2011 Published on June 05, 2011


Mr Nitin Savara

The revised Combination Regulations seek to regulate big ticket M&A deals which could potentially have appreciable adverse effect on competition in India, entered into post-June 1.

On May 11, 2011, the revised set of Combination Regulations for the Competition Act was introduced. Combination Regulations seek to address various concerns raised by industry forums on the draft regulations released earlier, and provide some level of clarity on transactions, which would fall within or outside their purview. The US and the European nations are mature markets and anti-trust laws in those nations have been in existence for a long time now. In China, anti-monopoly law was enacted only in May 2007. In fact, in 2009, China rejected Coca Cola's $2.3-billion bid to acquire China Huiyuan Juice Group Ltd, under this anti-monopoly law.

In so far as India is concerned, while Competition Act was introduced in 2002, it has been done so in a phased manner. The key operative provisions (Section 5 and 6) relating to acquisitions and mergers are now proposed to be made effective from June 1, 2011.

It would be important to consider that in recent times, India Inc has been a part of many large deals, both domestic and global, of which a few have triggered debates regarding impact on Indian markets. To illustrate, the Indian pharma sector has seen some significant deals, which triggered discussions regarding the potential impact of increased foreign investment on the pharma industry, and appropriate measures to regulate such takeovers.

In this backdrop, the revised Combination Regulations (which are substantially in line with international anti-trust regulations) are a step in the right direction at the right time and seek to regulate big ticket M&A transactions entered post June 1, 2011, which could potentially have appreciable adverse effect on competition in India.

The earlier draft proposed a look-back provision of one year from the date Regulations were to come into force, and also did not provide clarity on applicability of these Regulations to ongoing transactions (initiated before June 1 and continuing post June 1). It has now been clarified that the Combination Regulations would apply only to mergers for which final approval by board of directors is given on or after June 1; or acquisitions (of shares or control), where binding documents are executed on or after June 1.

Appreciable adverse effect

Competition Regulations have been introduced with an intention to regulate transactions with ‘appreciable adverse effect' or AAE., the intention is to scrutinise only those eligible transactions which may have a significant impact in India, and hence threshold limits based on assets and turnover have been duly prescribed.

Though the threshold limits are substantively in line with international standards, the ‘size of transaction test' does not find a place in the Combination Regulations. When the draft regulations were released in March ,there was a concern even acquisition of one share could trigger prior filings and approval from the CCI in some cases, even though there was no AAE.

Combination Regulations now provide a list of transactions, which would ordinarily not require any prior CCI approval. Minority investments (with no acquisition of control) up to 15 per cent in companies are covered under this relaxation. Similarly, acquisition by an existing majority shareholder (greater than or equal to 50 per cent) would also ordinarily fall outside the purview of CCI approval.

Interestingly, there is no provision, which deals with situations falling within 15 per cent- 50 per cent range, and even insignificant stake acquisition by a shareholder with existing shareholding of 15 per cent-50 per cent could potentially require pre-acquisition approval under Competition Law, even though Securities Laws permit such creeping acquisitions, subject to prescribed conditions. The Combination Regulations should be in sync with the Takeover Code.

While there is an exemption separately notified for a ‘Group', which exercises less than 50 per cent of voting rights in other enterprise, there is some ambiguity around the actual implementation of this exemption.There are no clear guidelines on the aspect of new joint ventures in the current Combination Regulations.

The Combination Regulations need to be “tightened” in terms of key definitions, which would effectively trigger these regulations.

(The author is a Partner at BMR Advisors.)

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Published on June 05, 2011
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