[Jubair Bhati is a corporate lawyer and Mayank Sen a 5th year B.B.A., LL.B. (Hons.) student at School of Law, Raffles University, Neemrana (Rajasthan)]
The Competition Commission of India (“CCI”) has recently notified amendments to its ‘Procedure in regard to the transaction of business relating to combinations Regulations, 2011’ (the “Combination Regulations”). The amendments to the Combination Regulations have been notified to ease the approval process for mergers and acquisitions (“M&A”) in India.
Through the recent amendments, the CCI has notified a “green channel” mechanism for certain kinds of M&A transactions.[1] The parties are simply required to file a notification under the green channel mechanism in a prescribed format. The concerned M&A transactions will be deemed automatically approved upon the CCI’s acknowledgment of the receipt of such notification. However, the newly notified green channel route is found have several roadblocks, which certainly have the potential to reduce the flow of M&A transactions through this route. The significant roadblocks are discussed below.
The Roadblocks
Overlaps
The major roadblock to the green channel comes through stipulations under Schedule III of the Combination Regulations. They provide that the green channel will not be available to such parties that have vertical, horizontal or complementary overlaps. The parties are also under the obligation to consider ‘all plausible relevant market definitions’ to determine these overlaps. Further, they are required to consider these overlaps from the perspective of their own operations, group entities’ operations, direct or indirect shareholding, and direct or indirect control of transacting parties.
These qualifying criteria for the green channel route raise certain concerns. While a small group of companies may find it easy to meet the qualifying criteria, it may pose a significant problem for global financial investors and private equity funds that have diverse investments. Even a minuscule investment of 1% in an overlapping business will make these investors ineligible to adopt the green channel route. It would also be a burdensome task for these entities to identify their minor shareholdings in any overlapping business of companies.
Ambiguous Terms
Along with horizontal and vertical overlaps, Schedule III also closes the green channel route for an M&A transaction if the transacting parties are engaged in any complementary businesses. The use of the term ‘complementary’ seems vague and ambiguous. The Combination Regulations provide no guidance on how to interpret the term ‘complementary’. In the absence of such guidance, the parties are posed with a risk of “gun jumping”, i.e., parties may go ahead with a reportable transaction without the approval of the CCI, and at a later stage CCI finds both businesses complementary to each other. For example, if a party, who owns fuel stations that also provides the facility of a cafeteria at each of its fuel stations, wants to acquire a small portion of shares in a company that runs cafes, will that qualify as ‘complementary business’? The recent amendments provide no clarity and guidance to answer this question.
In another requirement to adopt the green channel, the parties are under an obligation to take into consideration ‘all plausible alternative market definitions’. The word ‘alternative’ seems to be deliberately used, but Combination Regulations provide no guidance or clarity as to the meaning of this word. At present, the Competition Act defines a ‘relevant market’ in relation to the relevant product market and the relevant geographic market.[2] Even the ‘appreciable adverse effect’ of any transaction is assessed against these two criteria. Further, the relevant geographic market is limited to jurisdictions within India only.[3] In such circumstances, the use of the word ‘alternative’ does not seem to expand the horizons of the relevant market beyond the Indian jurisdiction. However, in case a large foreign company acquires a stake in its Indian competitor, it can use the green channel route if the foreign company has no overlaps within the Indian jurisdiction. This would certainly frustrate the purpose of competition law as the entry of a large foreign company will certainly impact the competition in the relevant market. Thus, more clarity is needed for the use of the term ‘alternative’ to enable parties to assess their green channel eligibility.
Onerous Penalty
The amendments to the Combination Regulations further provide that if the CCI, after acknowledging the notification, finds that the parties do not qualify for the Green channel route, then the transaction would be considered void ab initio. It means parties will be required to file a new notification to prove the eligibility under the green channel route. In case the parties are found to have consummated the transaction, then such parties will be considered guilty of gun-jumping. This will eventually attract the penalty of five million rupees under the Competition Act.[4] Thus, under conditions where there is ambiguity as to the interpretation of terms and chances of a heavy penalty being imposed, the acquirers may be reluctant to adopt the green channel route.
Conclusion
The CCI has introduced the green channel route for the ease of doing business and to facilitate M&A transactions in India. This seems to be a significant step taken to increase the inflow of investments into India. However, as described above, certain roadblocks exist to this green channel route. The major roadblocks are the onerous and burdensome eligibility criteria to qualify for the green channel route and the onerous penalties for inadvertent error in filings for this route.
To facilitate the use of the green channel route, the CCI should introduce a certain percentage threshold for disclosure of any overlaps. For example, the parties could be barred from adopting the green channel route if they have investments beyond a 10% threshold in any horizontal or vertical overlaps. Such a small percentage of overlap cannot be considered to be capable of causing an appreciable adverse effect on the market competition in any relevant market.
Nevertheless, informal consultations with the CCI may provide clarification on ambiguous terms over a period of time. The competition watchdog must come up with further amendments to provide clarity and remove the roadblocks to the green channel. Overall, in the present economic conditions, the green channel route seems to be a welcome step to attract investments in the country.
– Jubair Bhati & Mayank Sen
[1] Schedule III, The Combination Regulations.
[2] Section 2(r) of the Competition Act, 2002.
[3] See Shri Vinod Kumar Gupta, Chartered Accountant v. WhatsApp Inc. [Case No. 99/2016], decided on 1 June 2017.
[4] Section 44 of the Competition Act, 2002.