MCA’s Notification for Enhanced Exemptions Under the Merger Control Regime

[Guest
post by 
Varun Thakur, BA.LL.B fourth year student at National Law
University, Jodhpur
.]
In a notification
dated 27 March, 2017, the Central Government, exercising its powers under the
Competition Act, 2002 (‘the Act’), has issued a notification containing certain
clarifications for easing compliance under the merger control regime. These
interpretations are aimed at ensuring the ‘ease of doing business in India’ and,
to a certain extent, do achieve this objective. The purpose of this post is to
analyze these clarifications and examine to what extent such a notification will
benefit the M&A landscape in the country.
De
Minimis Exemption
The small target exemption, or as popularly
called the ‘de minimis’ exemption,
was introduced in 2011 to ensure that a combination involving a small target
(i.e., less than Rs. 350 crore in assets and Rs. 1000 crore in turnover) is
exempted from notification to the Competition Commission of India (‘CCI’). The
rationale herein was to essentially exempt transactions involving very small
targets and large acquirers which otherwise get notified due to the size of the
acquirer.
However, strangely, this small target
exemption was only applicable to transactions structured as ‘acquisitions’ but
were not applicable to ‘mergers’ or ‘amalgamations’. This artificial
distinction seemed absurd as the potential anti-competitive effect of an
acquisition and a merger is necessarily the same. This is evidenced by the fact
that the amounts provided under the ‘asset’ and ‘turnover’ threshold are same
for transactions structured as an acquisition or a merger. Furthermore, this
was more problematic for transactions structured as ‘reverse triangular
mergers’ which are quite a popular structure for taxation purposes. The
question then was, how these transactions would be interpreted, especially in
light of the ‘small target’ exemption? The CCI’s practice so far has been to
accept the structure that the parties to the combination submit.[1]  As a result, in different combination
notifications, parties submitted their transactions either under section 5(a)
as ‘acquisitions’ or under section 5(c) as ‘mergers’ or ‘amalgamations’. The CCI
has not taken upon itself to clarify the exact structure of such reverse
triangular mergers, and there always existed an ambiguity in this regard.
Now, according to the notification dated
27 March, 2017, such ‘small target exemption’ is now applicable not just to
acquisitions, but also to mergers and amalgamations
. The assets and
turnover thresholds remain same at Rs. 350 crore and Rs. 1000 crore respectively
of the target entity. This exemption now will remain in force for a period of
five more years until 2022. This is a welcome move since there existed an
artificial distinction without any rationale, and now this would enable mergers
to take benefit of this exemption.
Relevant
Assets or Turnover
Prior to this notification, where only a
part of the business or division of assets of an enterprise was being acquired
or merged, the computation of assets and thresholds was of the total assets or
turnover of both the acquirer and target enterprise. Thus, while Company A
acquires a part of the business of Company B, the complete turnover or assets
of both A and B were considered for computation, including the business or
division of the target not being acquired. Thus, a multiproduct company selling
a small business through a slump sale will have to include the assets or
turnover of the entire company.
However, as per the notification, in such a
situation, the revised method now would be to include only the value of the
asset or turnover of such portion of an enterprise or division or business as
is being acquired or taken control of
. Thus, the essential test now is that
of the ‘relevant assets and turnover’. This will thus ease notification
requirement where the transaction is in the form of a demerger or slump sale.
This would exempt those transactions which possibly involve acquiring a small
part or portion of another business. This is likely to ensure that many such
transactions are exempted from notification benefitting parties and also
reducing the workload of the CCI which is already overburdened.
Misses
While the government can be lauded for removing
much needed ambiguities that were present in the Act, certain major ambiguities
continue to exist. One of the main issues present in the framework of the Act is
with respect to the correct method of computation of penalties for violations under
anti-competitive agreements and abuse of dominance. In accordance with section
27(b) of the Act, the penalty for such violations is a maximum of ten percent
of the average of the turnover for the past three financial years. Thus, as per
the provisions of law, penalty is to be computed according to the ‘average
turnover’ of the enterprise in question. Arguably, such an interpretation can often
be extremely harsh for enterprises which manufacture multiple products or has
multiple divisions of business. Since the penalty is based on ‘average
turnover’, the penalty would also be computed from those businesses which
possibly have no nexus with the products/business which face scrutiny.
Accordingly, the quantum of penalties consequently increase and this operates
harshly for defaulting enterprises.
While the CCI has been given broad powers
under section 27 of the Act, so far it has not corrected the existing anomaly.
The COMPAT however in the Excel Crop
order[2] corrected this CCI
interpretation and held that the correct method in such situations is to
penalize an enterprise based on the ‘relevant turnover’. Such relevant turnover
includes computation of penalty of the segment or division of business which is
scrutinized and found guilty for any anti-competitive activity, and does not
include parts of the business having no nexus. This was similarly followed by
the COMPAT in the LPG Cylinder Case,[3] Autoparts Case,[4] National Insurance Case,[5] amongst others. However,
this still goes against the literal words of the statute, and the
interpretation taken by COMPAT thus is more of a harmonious interpretation to
address a possible anomaly. Resultantly, the correct interpretation of the
penalty is still an open debate.
The CCI ,disagreeing with the COMPAT order
in Excel Corp, had filed a review
petition in the Supreme Court challenging such an interpretation of average
turnover to be the relevant turnover. Interestingly, the COMPAT itself has not
followed its practice of using the relevant turnover test as evidenced by a
later order in DLF v. CCI.[6]
While we still await the Supreme Court’s
ruling Excel Crop Care, it would have
been a relief to see a notification clarifying this issue. This is especially
so when the CCI has proceeded to prescribe a relevant asset and turnover test
for the purposes of a combination notification. A logical extension would have
been to also make reference to relevant turnover when interpreting average
turnover.
Varun Thakur



[1] Johnson/Tyco, Combination Registration No. C-2016/02/376; Computer
Sciences Corporation/Hewlett Packard Enterprises Limited, Combination
Registration No. C-2016/06/411; Konecranes Plc. /Terex Corporation, Combination
Registration No. C-2015/09/307, etc.
[2] Appeal No. 79 of 2012
[3] Appeal No. 47 of 2015
[4] Appeal No. 60 of 2014
[5] Appeal No. 96 of 2015
[6] Appeal No. 20 of 2011

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • IMPROMPTU
    If not mistaken,for the purposes of income-tax- more specifically for the purpose of qualifying for tax exemption on 'transfer' (sec 47 of the IT Act),the terms 'merger' and 'amalgamation' have been specially explained. As such,prima facie, the tax effect or consequence of the subject Notification by MCA, only for its limited purpose(s), nonetheless necessitates , and requires, a fresh look at and anxious consideration by company law and tax experts, alike.
    Any eminent thoughts to share !

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