[Arham Anwar and Ruby Agrawal are 4th year and 2nd year students of NLU Jodhpur and RGNUL Patiala]
The scheme of arrangements contemplated under the Companies Act, 2013 generally requires the approval of the Competition Commission of India (hereinafter, “CCI”) in relation to asset size and turnover of the enterprise. This essentially underlines high level of dependability the company has on the CCI before taking any decision pertaining to its interests. Section 6(2) of the Competition Act, 2002 (hereinafter, “Act”) provides that any corporation proposing to enter into an arrangement shall give noticeto the CCI, within 30 days of approval of the restructuring proposals.
It is axiomatic that the scheme of the Act has a pre–requisite for an acquisition of control, shares, voting rights or assets which areto be reported to the CCI when an agreement providing for an arrangement is executed between the parties and the parties to the transaction exceed specific financial thresholds as specified under The Competition Act, 2002.
The Companies Act of 2013 also established Optionally Convertible Debentures (OCDs) which are optionally convertible securities as a new financial tool for raising capital in business. Companies have the option to convert their Optionally Convertible Debentures, subject to certain circumstances, into shares of equity at a later time. In contrast to compulsorily convertible debentures, the conversion of OCDs is optional and may be undertaken at the holder’s discretion or in accordance with a mutually agreed-upon arrangement hence providing flexibility to the investors holding such OCDs.
Analyzing the CCI’s stance with respect to acquisition of convertible securities, it has been made clear that the parties to the saidtransaction require clearance from the CCI at the time of acquisition of the said security. However notification to the CCI at the timeof actual conversion of the security is not mandated.
An important caveat here is that, the natural fluctuations in the market and even the control structure of the target entity might vary greatly within the time frame of the acquisition of the convertible security and the date of conversion of the security. This holds true for both securities that can be converted either optionally or compulsorily. However, if there is a juxtaposition with an option to acquire securities rather than the actual acquisition of securities, the prompt for the time of notification to the CCI differs greatly and is distinguished in case of securities which are optionally convertible.
Conundrum in the CCI’s position
There has been a schism between the CCI’s varying stances with respect to acquisition of optionally convertible securities.Firstly, analyzing the Bharti decision,[1] the restructuring proposal contemplated the acquisition of 57% shareholding by Reliance Industries Limited and 17% shareholding by Reliance Industrial Infrastructure Limited in Bharti AXA Life Insurance CompanyLimited, respectively. The remaining 26% shareholding was retained by Bharti AXA. Within the corpus of the transaction, the relevant limb to this analysis was that, AXA had an option to acquire 24% shareholding in Bharti, from Reliance IndustriesLimited at a later date. Here, the CCI denied clearance for the optional and potential acquisition of shares. Since the optionalacquisition cannot be considered a part of the present arrangement, the CCI was of the opinion that potential acquisition of securities would be assessed for approval at the time of actual acquisition of said securities.
However, there was a substantial shift in the CCI’s position regarding acquisition of optionally convertible securities which could be extrapolated from the CCI’s order in the assessment of the arrangement proposal of Independent Media Trust[2] for the acquisition of zero coupon optionally convertible debentures. The proposed transaction stipulated that the holders of such optionally convertible debentures had the prerogative to convert the said debentures into equity shares at any time within 10 years ofsubscription. Here, the CCI shifted from its own precedent and cleared the proposed arrangement, rather than assessing the debentures at the actual time of conversion. This hiatus is unaccounted for, and the dissonance in the reception of securities thatare convertible at the holder’s prerogative must be treated.
A number of issues arise from such shift in the stance. First, the very fact that the holder has the option to convert such debentures into equity shares even when the actual conversion is distant in future provides the possibility of exercising control over management decisions (or, to draw from the phrase used in relation to hostile takeovers under Delaware law, the “omnipresent specter”). Such control is acquired with the acquisition of OCDs and does not defer until the actual conversion takes place thus pushing the boundaries of how control is defined under the Act, and if rigidly followed, can even have unanticipated repercussions. Second, it draws attention to the inconsistencies between the definitions of control and share acquisition under the competition and takeover laws, which are governed by CCI and SEBI, respectively. Such discrepancy can be easily noted in the role of acquisition of voting rights under both laws, variation in the timing regarding with when the triggers operate under the two statutes. Some of the above issues will make arrangement of significant takeover transactions more difficult and may make both sets of rules applicable simultaneously.
Another problem is that The Combination Regulations, 2011 require parties to submit a single merger notification that covers all of the transaction components in a multi-step transaction that are planned by the parties to achieve the transaction’s final goal. Notably, the existence and specifics of the option must be disclosed to the CCI if the purchase of an option is being considered in conjunction with a standard notifiable transaction. A notifiable composite transaction (which consists of numerous steps making up the complete transaction) is often certified in its entirety by the CCI under the provisions of the Act and its related regulations. When a composite transaction has components that are deemed to be inseparably linked to the main transaction, the CCI’s approval is normally not delayed. The Independent Media Trust decision’s guiding concept in this regard harmonizes the interconnection rules’ business realities with them. The purchase of an optional instrument may be evaluated and approved along with any linked notifiable steps under the framework of the Independent Media Trust decision. Under the stance supported by the Bharti judgement, it would not be permissible to apply this strategy since, under the Bharti decision design, the CCI is required to disregard a notified step (including alternatives) and cause it to be assessed at a later time.
Divergent Reconciliation
The CCI has been employing an approach which can be best described as a ‘pendulum approach’ in its stance regarding theacquisition of convertible securities and their assessment. In the arrangement process of Reliance Jio Infocomm Limited,[3] theCCI assessed and approved the potential acquisition of such securities, thus diluting its original position. However, a significantaddition was made in order to harmonize its approach when the CCI provided for a time frame to exercise the option ofconversion.
The CCI’s attempt at harmonization subsequently failed as it rejected the arrangement proposition of Axis Bank to acquire shares in Max Life, at a later date. However, in 2021, the CCI had assessed and granted approval to an optional acquisition ofsecurities within five years from the primary acquisition in the scheme of arrangement between Sumitomo Mitsui FinancialGroup and Fullerton India Credit Company Limited. Subsequently, in the Ola cases the CCI only approved the primary transaction and posited that the notice regarding potential acquisition of securities at a later date would only be assessed at thestipulated date.
Conclusion
The CCI has not maintained a consistent stance regarding acquisition of optionally convertible securities, as can be extrapolatedfrom its various assessments. While the stance in the most recent assessments swing towards the original position laid down in the Bharti decision, a clear reconciliation is sacrosanct. The issue primarily arises because optionally convertible securitiescreate a legal right, but only at a prospective date, which has the potential to impact the findings of the CCI’s assessments,as the assessment is not in real time, but a contemplation of future market scenarios. Hence the acquisition of optionally convertible securities may be permitted or prohibited by the CCI depending on the particulars of each situation. The CCI assesses transactions individually and takes into account elements including market concentration, entry hurdles, and the potential for anti-competitive coordination among rivals. The CCI may step in to remedy the issues if it is determined that the acquisition of optionally convertible securities will considerably lessen competition, for example by establishing a dominant market position or preventing entry by new rivals. This intervention can entail putting restrictions on the deal or, in severe circumstances, blocking the acquisition altogether.
There have been multiple occasions where the CCI has authorized a transaction leg that is conditional upon the occurrence of a future contingency, despite the fact that the CCI typically avoids approving transaction steps that are not fully crystallized. It might be argued that approval of a transaction does not necessarily depend on a transaction step being final. Therefore, the CCI’s willingness to allow ZOCDs (Zero Coupon Optionally Convertible Debentures) serves as evidence that a transaction step does not need to be approved with 100% confidence. Using an analogy, there is probably no reason why an option should not be treated equally to optionally convertible instruments as long as it is adequately specified in terms of its duration, scope, and operation.
The stated inconsistency in the stance not only creates ambiguity but also decreases predictability of the merger clearance process by treating options and optionally convertible securities differently. The CCI must bring uniformity to its assessments. A steptowards the realization of uniformity was the inclusion of the time frame paradigm, as was laid down in the assessment of the Reliance Jio Infocomm Limited arrangement. A return to the original position of the Bharti case would bring uniformity in CCI’s assessments and would also ensure that the assessments are not tainted due to market fluctuations and other contingencies, thusreconciling the double – layered conundrum.
The Competition Act has seen a number of changes since it was first passed, including inclusion of provisions for mergers and acquisitions in 2007 and tougher penalties for anti-competitive action in 2009. Another amendment bill that seeks to improve enforcement practices and impose stiffer penalties for disregarding CCI rulings is approved by both Houses of Parliament in 2023. Hence a firm stance could be taken by CCI in the 2023 amendment bill as if passed; this Bill could significantly impact the operations of large corporations in India and create a more equitable playing field for all businesses.
– Arham Anwar and Ruby Agrawal
[1] 2011 SCC Online CCI 95
[2] 2012 SCC Online CCI 76
[3] 2017 SCC Online CCI 117
