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This post has been authored by Pallavi Khatri, a third-year student of B.A.LL.B (Hons.) at the National Law School of India University, Bangalore.
Introduction
Under Regulation 9(4) of the Combination Regulations, 2011 when a combination is accompanied by transactions which were “interconnected or interdependent on each other”, such transactions must be filed under a single notice and form part of a ‘composite combination’.
The phrase “interconnected or interdependent on each other” has seen inconsistent interpretation by the Competition Commission of India (CCI). Inconsistencies include the use of conjunctive ‘and’ instead of disjunctive ‘or’ in SIIL/MALCO[i] and IMT/Network18,[ii] and the creation of tautological definitions using words such as “interrelated” in SIIL/MALCO,[iii] “inter-conditional” in GSK/Novartis,[iv] and “close nexus” in Thomas Cook/SHRIL.[v] These inconsistencies have caused uncertainty with respect to the impact of the 2016 Amendment to the Combination Regulations wherein the phrase “or interdependent on each other” was omitted.
In this article, it has been argued that, first, notwithstanding the above, CCI has tested transactions using an established pattern with respect to “interdependence”. Second, CCI’s pattern of assessing “interdependence” is at odds with how the Parties to the transaction perceive it. Third, that the deletion "or interdependent on each other" paves the way for an approach where the perception of the Parties as to interconnectedness may be given greater weight in decisions. This may ultimately prevent the CCI from overreaching its powers to bring in otherwise exempted transactions under its scrutiny and impose penalties on failure to notify.
Case Studies
Discarding an exclusive legal positivist application of Regulation 9(4), the CCI, as restated in Thomas Cook/SHRIL,[vi] has taken a case-by-case approach, but involving the same pattern of reasoning. The CCI scrutinizes the transactions presented and then attempts to identify an “ultimate objective” of that series of transactions. This ultimate objective is perceived and framed as a broad, macro-level goal which would impact the business of the Parties in the long term. Demonstrated in IMT/Network18,[vii] where the CCI saw all the transactions as having the ultimate objective of allowing Reliance Industries Ltd (RIL) to acquire control over Network 18 group even though RIL was not directly a party to the transactions.
In Tech Mahindra/C&S,[viii] the consolidation of IT-related businesses of Mahindra into a single entity was identified as the ultimate objective. In each of these cases, the links between the various transactions scrutinized have been made through the use of phrases which are more akin to "interdependent" such as "non-severable" and "sequential". After the identification of ultimate objective, CCI assesses the contribution of each transaction to the achievement of this objective and then determines whether or not an otherwise exempted transaction would need to be notified. The transactions are seen as interdependent because in totality they help achieve that ultimate objective. However, the use of this ultimate objective to determine interdependence has led to questionable conclusions and parties being penalized due to CCI overreach.
Piramal/Sriram involved three transactions. One notifiable transaction involving the acquisition of 20% equity stake in Shriram Capital in April 2014, and two exempted minority stake acquisitions in Shriram Transport Finance Company (STFC) in May 2013, and in Shriram City Union Finance (SCUF) Ltd in June 2014.[ix] Using annual reports of Piramal which referred to described the transactions as ‘strategic’, the CCI identified the ultimate objective as exercising joint control over the financial services business of Sriram and creating a long-term partnership. Despite these three transactions being consummated at different times and being completely different in terms of business entities involved, transaction documents, mode of transfer and rationale, they were held to be interdependent as contributing to this ultimate objective. Subsequently, the CCI imposed a penalty of Rs.5cr for the failure to notify the minority transactions.
Similarly, in Jet/Etihad(C-2013/05/122) the primary transaction was the acquisition of 24% interest by Jet in Etihad.[x] A second transaction, held to be interdependent was the sale of 3 landing slots at London Heathrow Airport (LHR Agreement) by Jet to Etihad which would be leased back to Jet, effectively retaining status quo. The Parties claimed that the LHR Agreement was a transaction in the ordinary course of business and not dependent on the acquisition. The CCI held that the transactions were interdependent despite their different nature because there was an option available to Etihad to terminate or change the date of the LHR Agreement in case the acquisition is not consummated. Further, it was indicated that the ultimate objective was to have wide-ranging commercial cooperation between Jet and Etihad through the acquisition.[xi] The LHR agreement was seen as a contributor to this as the 3 slots in London represented all of Jet’s India-London business and now this route would involve joint business with Etihad. Thus, the contribution to an ultimate objective was used to hold that the transactions were interdependent and impose a Rs.1cr penalty on Etihad.
This nature of “ultimate objective” as perceived by the CCI has proven to be different than what is perceived by the Parties to the transaction. The Parties’ perception, as seen through their arguments, is closer to the actual phrasing in 9(4) i.e. “ultimate intended effect of a business transaction” which signifies a narrower, more immediate intended result of a set of transactions. Seen through this lens, the LHR Agreement is an ordinary transaction which was consummated for the limited purpose of restructuring business at one specific airport and not for a larger long-term goal. In Piramal/Sriram, the two minority transactions were consummated without any links to the majority acquisition and merely made Piramal an ordinary shareholder in STFC and SCUF.
Conclusion
It can be seen that the CCI's tracing of interdependence between transactions to a broadly framed ultimate objective has led to the scrutiny of exempted transactions which constituted the ordinary business of the Parties. The consequence of this is greater uncertainty with respect to the notification as excluding even an entirely unreferenced transaction would lead to the imposition of a penalty upon the parties. Further problems arise when two independent entities invest in a common target as this might be seen as an investment with the ultimate objective of increasing the business/growth of the target party. Based on this, these two transactions may be seen as interdependent and requiring a single notice thereby, increasing transaction and negotiation costs and delays.
The removal of the word "interdependent" in the 2016 amendment, thus, would have the consequence of preventing the abovementioned CCI overreach and watering down of the exemptions. This is because the CCI would have to stick to a narrower standard of interconnectedness in the transactions which has been held to exist when transactions are consummated together with actual links in the documents, a commonality of the part of business involved, and the commercial feasibility of isolation of two transactions. This would allow for a shift in focus wherein the Parties' perception of interconnection, shown through the links in the transaction documents, their collective filing, sequential nature and their attempted short-term results, would be given greater weight than the CCI's perception of the transactions' links to a larger ultimate objective.
Post-2016 orders have largely restricted themselves to declaring interconnectedness between transactions without highlighting the impact of the Amendment. However, there is evidence of change in orders like Claymore Investments/IndiaIdeas,[xii] Visa/IndiaIdeas,[xiii] and Springfield Investments/IndiaIdeas[xiv] wherein despite having the same target and transaction documents, the CCI allowed for separate filings by multiple investors. Thus, the 2016 Amendment may reduce CCI’s scrutiny into exempt transactions and, through the narrow interpretation of Reg.9(4) may reduce the uncertainty associated with notification of transactions.
End-Notes
[i] Combination Registration No. C-2012/03/45, Order under Section 31(1) of the Competition Act, 2002, (2012), ¶11. [ii] Combination Registration No. C-2012/03/47, Order under Section 31(1) of the Competition Act, 2002, (2012), ¶17. [iii] Combination Registration No. C-2012/03/45, Order under Section 31(1) of the Competition Act, 2002, (2012), ¶11. [iv] Combination Registration No. C-2014/07/188, Order under Section 31(1) of the Competition Act, 2002, (2014), ¶7. [v] Thomas Cook (India) Ltd. v. Competition Commission of India, Appeal No. 48 of 2014, (2015), ¶20 (COMPAT). [vi] Combination Registration No. C-2014/02/153, Order under Section 43A of the Competition Act 2002, (2014), ¶8. [vii] Combination Registration No. C-2012/03/47, Order under Section 31(1) of the Competition Act, 2002, (2012), ¶17 [viii] Combination Registration No. C-2012/03/48, Order under Section 31(1) of the Competition Act, 2002, (2012), ¶12. [ix] Combination Registration No. C-2015/02/249, Order u/s 43A of the Competition Act, 2002 (“Act”) in the notice given by Piramal Enterprises Limited, (2016), ¶7(d). [x] Combination Registration No. C-2013/05/122, Order under Section 43A of the Competition Act, 2002, (2013). [xi] Combination Registration No. C-2013/05/122, Order under Section 43A of the Competition Act, 2002, (2013), ¶6.6. [xii] Combination Registration No. C-2018/12/623, Order under Section 31(1) of the Competition Act, 2002, (2019). [xiii] Combination Registration No. C-2018/12/620, Order under Section 31(1) of the Competition Act, 2002, (2019). [xiv] Combination Registration No. C-2018/12/621, Order under Section 31(1) of the Competition Act, 2002, (2019).