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This post has been authored by Khushi Maheshwari, a B.A. LL.B (Hons.) candidate at the National Law School of India University, Bangalore.
Introduction
Every economy aims to grow and tries to operate in the most efficient manner for all its actors. The need for competition law arises because markets, which form the backbone of any economy, can suffer from distortions due to various players resorting to anti- competitive activities. This adversely impacts economic efficiency, healthy and fair competition in the market. Combinations form an integral part of any economy and are necessary for healthy competition. According to Section 5 of the Competition Act, 2002, (the Act) a combination is an umbrella term for anything that involves a change in control (acquisition of control, shares, voting rights or assets, merger, amalgamation for example).[i] However, not all combinations are healthy and make the market more efficient. If a combination leads to more profitability due to market power concentration and increased prices, the net effect on welfare can be negative.[ii]
Due to the above reasons, it becomes necessary to regulate certain combinations. The Act envisages appreciable adverse effect on competition in the relevant market in India as the criterion for regulation of combinations. The Competition Commission of India (CCI) realizing the importance of combinations as well as a need to control the same, has introduced various amendments to accelerate the process of approval for the same. For instance, in July 2015 an amendment was introduced, providing that every combination under review by the Commission shall be published on the CCI website to ensure greater transparency.[iii]
The focus of this post is on a recent amendment, i.e., the Green Channel approval route (the Green Channel) that has been introduced following the recommendations of a high- level government panel constituted last September to review the Competition Act, 2002. The panel has, via a gazette notification dated 13 August 2019, amended certain key features of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2011 (Combination Regulations).[iv] CCI has also introduced Guidance notes on 27 March 2020 to issue further clarifications with respect to the amendment.[v] This post argues that while the guidance notes clarify most of the grey areas in the amendment, the burden of filing on parties, has, in fact, increased. This might dis-incentivize the parties from opting for this route.
The Green Channel route
The Green Channel has been introduced to amend the merger control regime keeping in mind the Ease of Doing Business in India. By amending Regulation 5A of the Combination Regulations, it allows the parties to obtain an on-the-spot approval from the CCI. They no longer have to wait for the 30 working-day period and have to file only one form (Form I). This amendment makes India the only competition jurisdiction in the world where a proposed merger transaction (namely, combinations falling under Schedule III of the Act) can receive approval on the same day of its filing, subject to fulfilment of certain conditions.
Combinations will get approval, subject to the condition that, there are no ‘overlap’ transactions (i.e., horizontal, vertical, and complementary) based on the parties’ self- assessment. The parties also have to provide full disclosure with respect to the same, according to Form I. After the issuance of the Guidance notes, the term ‘overlap’ includes: (i) direct or indirect shareholding of more than 10%; (ii) a right which is unavailable to an ordinary shareholder (some commercial advantage for example), and (iii) a right to appoint a director or an observer in another undertaking.
The Burden of Filing – Has it Actually Reduced?
The introduction of a threshold percentage of 10% in the Guidance notes is a welcome change. But for a specified percentage as a threshold, even an investment of one share would come under the ambit of an overlapping business and documents in respect of the same would have to be provided. However, due to the increase in the ambit of the word ‘overlap’, undertaking overlapping mapping to file the requisite documents has become burdensome. One may argue that the competition concern here outweighs the convenience of the parties with respect to the burden of filing. However, competition scrutinization arises only in cases where there is a concern with respect to control which is not the case here. This is because, the right to appoint an observer or director arises only in cases where there is a minority shareholding. It is argued that in such cases, there cannot be any real concerns related to control. The definition of ‘control’ in the Competition Act, 2002 applies for the specific purpose of combination and includes controlling the affairs and management of the company. The mere right of appointment of observer does not include control over managing the affairs of the company and so competition concerns do not arise.[vi] Situations where there is a mere right to appoint an observer or director without having any control are very common and will increase the burden of compliance. For example, investors will have to track their portfolio companies, in related business lines, even where they only wield observer rights. This becomes crucial in situations of downstream investments, where the investment might not require the approval of the investor or might be uncontrolled.
The Guidance notes also mention additional information that has to be provided, which includes: (i) details of all orders passed by the CCI in the same industry or sector; (ii) complete details of all rights arising out of the combination including but not limited to veto rights, commercial advantage; (iii) not just actual but also “potential” overlaps and (iv) comprehensive details about the sector in which the combination is sought for the last five years. While the burden for providing market information for 3 years has been eased by introducing a threshold percentage of 10%, overall, the burden of filing seems to have substantially increased for the parties. Further, if the CCI, after giving the parties an opportunity of being heard, is of the opinion that the transaction failed to qualify for the Green Channel, the deemed approval shall be void ab initio and proceedings under section 43A and 44 of the Act may be initiated for ‘gun jumping.’ Given this increased burden due to the aforementioned reasons and the severe penal consequences associated with the Green Channel, the ordinary route for approval may seem more lucrative and be resorted to.
Some Grey Areas in the Green Channel
The Guidance Notes provide clarity with respect to the word “complementary” which had been left undefined in the initial amendment. Citing the Canada Merger Enforcement Guidelines, CCI has said that complementary products are those which are related because they are combined and used together, do not compete with each other, and are not vertically related. An example given by the CCI is that of printers and ink cartridges. This definition, it is argued, is too wide and might prove to be problematic in certain sectors, like, automobile, where steering components could be seen as complementary to gear and seat products.
In addition to the above, the parties have to also supply information about their management-liaison, who knows the business well and will be engaging with the CCI.[vii] However, it is not clear as to how much flexibility will be allowed to the parties, in case of unavailability of the said liaison owing to valid and justified reasons.
Conclusion
Overall, the amendment is expected to go a long way in reducing the timelines associated with approvals for merger. However, the same cannot be said for the technicalities associated with the filing procedure. There are still a few grey areas in the Green Channel which need to be looked at from a practical perspective. This would help in ensuring the working of this approval route with the efficiency it intended to.
End-Notes
[i] The Competition Act, 2002, No. 12, Acts of Parliament, 2002, § 5. [ii] Maurice E. Stucke, Is Competition Always Good? 1(1) Journal of Antitrust Enforcement, 162 (2013). [iii] Press Information Bureau, Press release,3-7-2015, available at https://pib.gov.in/newsite/PrintRelease.aspx?relid=122964. [iv] The Competition Commission of India (Procedure in Regard to the Transaction of Business relating to Combinations) Amendment Regulations, 2019, https://www.cci.gov.in/sites/default/files/notification/210553.pdf. [v] The Competition Commission of India, Press release, 27-3-2020, available at https://www.cci.gov.in/sites/default/files/press_release/PR492019-20.pdf . [vi] Securities and Exchange Board of India, Discussion Paper on Brightline Tests for Acquisition of Control under SEBI Takeover Regulations, https://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf. [vii] Press Information Bureau, Press release, 28-3-2020, available at https://pib.gov.in/Pressreleaseshare.aspx?PRID=1608766.