CCI needs to consider liberalising M&A norms

India, in line with the best global practices, is looking at recasting its mergers and acquisitions regulations to bring them in line with over 100 countries worldwide.

There is no doubt that all businesses strive hard to acquire monopolistic positions, which has a strong possibility of affecting both, the consumers and the markets they operate in, negatively. It is with this precise reason that Competition Commission of India (CCI) regulations are framed to encourage expansions and growth of businesses, but at the same time restrict the creation of anti-competitive scenarios.

The Law
Sections 5 and 6 of the Competition Act, 2002 (the Act), relating to combinations, have been notified and will come into effect from June 1, 2011. As per the said sections, any combinations meeting the threshold limits must be pre-notified to CCI for approval, prior to consummation of the transaction. Schedule 1 to the regulation lists down combinations for which Form I needs to be filed with CCI.

For the residual combinations not covered under Schedule 1, parties to the combinations are required to file the requisite information in Form II. Particulars under Form II require detailed and analytical information as compared to Form I and rightly so, as Schedule 1 transactions are not expected to impact competition significantly.

Schedule 1 transactions mainly include acquisitions up to 15%, fresh acquisitions wherein the target is already under the control of the acquirer, intra-group acquisitions, acquisition of stock in trade, raw materials, stores and spares, acquisition of shares pursuant to bonus or stock-split, etc.  Along with the requisite form, filing fees (Rs10 lakh - Rs40 lakh) is required to be paid.  As per the regulations, CCI clearance is expected to take up to a maximum of 180 days.

The overall framework has been designed in line with international standards; however, there are a few concerns and issues that merit consideration.

Section 5(a) of the Act covers all types of combinations, wherein either the control, shares, voting rights or assets are being acquired. Whereas Section 5(b) of the Act covers only those combinations wherein the target is an enterprise which is in related line of business and control is being acquired. Therefore, Section 5(b) of the Act, is clearly a sub set of Section 5(a) of the Act and therefore not required.

Alternatively, if the objective of CCI is to cover only combinations in related line of businesses, then section 5(b) is sufficient and section 5(a) is not required.

The thresholds currently provided in terms of turnover and assets (which have been generously revised upwards) for the combined entity seems to be of a reasonable size. 

However, the issue arises because the above limits are applicable to the combined entity.  In a scenario wherein the acquirer is already of the specified size, any acquisition, however small it may be, will require CCI approval.

The only exemption currently provided is in the scenario wherein the target has assets of not more than Rs250 crore or turnover of not more than Rs750 crore. To make this more industry friendly and practical, exemption should also cover cases wherein the acquisition cost is below a certain threshold say Rs500 crore.

Further, the exemption should also provide that acquisitions upto a certain percent (15% under current SEBI Takeover Code, which is proposed to be increased to 25%) be exempt from the provisions of the Act / regulations.

Otherwise, this may create hilarious situations. Under the current draft it may be possible to argue that acquiring even a single share of large corporations like Reliance Industries, Infosys or ONGC would require prior CCI approval, which is definitely not intended!!

The Flaw
The foremost critical exemption required is for mergers and acquisitions amongst the group. Typically, due to a host of historical and other reasons, Indian companies have been doing businesses through multiple entities. These structures require modifications on an on-going basis; either due to regulatory reasons or commercial efficiencies. In scenarios where the companies are undertaking internal restructuring; for preparing for an IPO or inviting a private equity investor or simplifying the holding structure for reducing costs or making the structure more tax efficient or unlocking value for stakeholders ; they should not be subjected to the vagaries of the CCI regulations. Internal group reorganisations, in whatever format (acquisitions, merger, demerger, reorganisations, capital reductions etc), should be specifically exempted; otherwise CCI will be the single largest hurdle for the growth of these upcoming businesses.

The draft regulations have proposed an exemption on the following lines:
“the Central Government, in public interest, hereby exempts the ‘Group’ exercising less than fifty per cent of voting rights in other enterprise from the provisions of Section 5 of the said Act for a period of five years.”

The issue arises as to how to interpret the above exemption.  Does it mean
that any transaction amongst the ‘Group’ is exempt for 5 years or the definition of ‘Group’ in the explanation (b) to Section 5 of the Act, which currently covers companies above 26% holding for the purpose of computing the assets and turnover of the group, is extended to above 50%.  The latter seems to be a better interpretation, but it would be necessary to clarify.

Lastly, for certain specified transactions, it would be meaningful to have a provision similar to clause 24(f) of the listing agreement of BSE & NSE, wherein companies are required to obtain prior approval of the stock exchanges.

The transaction is deemed to be approved if the stock exchange does not communicate anything to the contrary within 30 days. A similar provision should be enacted for at least Schedule I transactions, because it would be a pity to provide huge amount of data to the regulator for transactions such as transfer of business from a subsidiary to a parent, or receipt of shares on account of bonus or stock-split or intra-group mergers and acquisitions. 

Fortunately, the regulators in the instant case have adopted a cohesive approach in inviting suggestions from various industry factions. We hope that the suggestions on minimum threshold amount for acquisitions and exempting intra-group transactions would be enacted in the final guidelines.

The writers are with KPMG.