COMBINATIONS
Combination [Section 5] Section 5 of the Act defines 'combination' to mean
acquisition of one or more enterprises by one or more persons or merger or
amalgamation of enterprises, Broadly, combination under the section 5
means acquisition of control, shares, voting rights or assets, acquisition of
control by a person over an enterprise where such person has direct or
indirect Control over another enterprise engaged in competing businesses,
and mergers and amalgamations between or amongst enterprises where the
combining parties exceed the thresholds specified in the Act.
The threshold are specified in the Act in terms of assets or turnover If a
combination causes or is likely to cause an appreciable adverse effect on
competition within the relevant market in India, it is prohibited and can be
scrutinized by the Commission. Thus, Section 5 specifies a threshold below
which a merger, acquisition or acquiring of control is not regarded as a
combination. In short section 5(covers only those combinations which are
above the threshold limits in terms of value of assets and turnover.
Section 5 of the Indian Companies Code (CCI) allows for scrutiny of
combinations exceeding the specified threshold limits in terms of assets or
turnover, which could adversely impact competition within the relevant
market in India. These limits vary depending on whether the combination
involves an enterprise or a group, and whether it has assets or turnover only
in India or globally.
Thus, section 5 of the Act provides for mandatory notification of
combination to the CCI if combining parties exceed the threshold specified in
the Act. In order to estimate whether a particular transaction is
"Combination" and falls under the provisions of Competition Act, 2002, first it
is important to understand the following:
a) The nature of Transaction
b) The values involved in Transaction (Threshold Limits)
(A) NATURE OF TRANSACTION "Combinations under Section 5 of the Act
includes the following three types of transactions:-
1. Acquisition
2. Acquiring of Control by a person over an Enterprise
3. Merger or Amalgamation
1. Acquisition "Acquisition" has been defined under Section 2(a) of the Act.
It Provides that 'acquisition means acquiring or agreeing to acquire directly
or indirectly, of:
(i) shares, voting rights, or assets of an enterprise; or
(ii) control over management; or
(iii) control over the assets of an enterprise.
Thus the definition of 'acquisition' includes all forms of acquisitions whether
direct or indirect.
2. Acquiring of Control by a person over an Enterprise The Act further
covers any acquisition of "Control" by a "Person" over an "Enterprise" where:
(i) such person has direct or indirect control on any other enterprise and,
(ii) the any other enterprise is also in production, distribution or trading of:
(a) similar goods or services; or
(b) identical goods or services; or
(c) substitutable goods or services, as that of the Enterprise whose control is
being acquired. Here a 'person' includes an individual or body corporate as
defined under the Act.
3. Merger or Amalgamation The term merger or Amalgamation has not
been defined specifically a under the Act, though the meanings of the same
may be drawn from Section 2(1B) of the Income tax Act, 1961 to mean the
merger of one or more companies with another company or the merger of
two or more companies to form one company in such a manner that:
• All properties of the amalgamating companies immediately before the
amalgamation become the properties of the amalgamated company;
• All liabilities of the amalgamating companies immediately before the
amalgamation become the liabilities of the amalgamated company;
Shareholders holding not less than three-fourths in value of the shares in the
amalgamating companies (other than shares already held therein
immediately before the amalgamation by or by a nominee for, the
amalgamated company or its subsidiary) become shareholders of the
amalgamated company.
TYPES OF MERGERS : (1) Horizontal Mergers (2) Vertical Mergers (3)
Conglomerate Mergers
(1) Horizontal Mergers The most common types of mergers are Horizontal
Mergers. Horizontal combinations are those that are between rivals and are
most likely to cause appreciable adverse effect on competition. These
mergers have effect on market concentration and use of market powers as
these mergers result in: (a) Reduction in numbers of Market Players (b)
Increase the market share of merged entity.
Horizontal mergers can have a significant adverse effect on the market
if players act non-coordinated or unilaterally. This means that the number of
players decreases, their powers increase, and they can increase profit
margins or reduce outputs, quality, or variety. Factors that may determine
whether a coordinated or unilateral effect occurs due to a merger include:
(a) High market concentration
(b) Restricted consumer choice
(c) Weak competitive constraints from other market players
(d) Buyer power
(e) Elimination of potential competitive new entrants etc.
(2) Vertical Mergers Vertical combinations are those that are between
enterprises that are at different stages of the production chain and are less
likely to cause appreciable adverse effect on competition. Vertical mergers
occurs when two entities which operate at different but complementary
levels of production chain. Vertical Mergers can further be segregated as (a)
Backward Integration (b) Forward Integration Examples of Vertical Merger (a)
Merger between raw material supplier and manufacturer of Final Product is
an example of Backward integration (b) Merger betet is an exacturer and
retailer is an example of Forward Integration there is a potential for
"Foreclosure of the Market Players".
There can Any adverse effect of Vertical merger can happen in case when be
two types of foreclosures: (a) Input Foreclosure (b) Customer Foreclosure
Input foreclosure may occur when the Merged entity have potential to
likely restrict the product or services in the downstream market for other
market players and thereby increasing cost of production, leading to higher
cost for consumers. Customer foreclosure may occur where the supplier is
likely to integrate with the customer base in the market thereby depriving
the other players in the market to access the customers.
(3) Conglomerate Merger The third type of merger is conglomerate
merger, which generally refers to mergers between entities, which are not
linked. In short conglomerate combinations are those that are between
enterprises not in the same line of business or in the same relevant market
and are least likely to cause appreciable adverse effect on competition.
The types of transaction may further be classified as:
(a) Pure Conglomerate: These are mergers where the merging entities have
no functional link,
(b) Product Extension Merger: These are mergers wherein the product of the
acquiring entity is complementary to that of the acquired entity,
(c) Market Extension Merger: These are mergers where the merging entities
seek to enter into a new market.
Conglomerate mergers though have minimal adverse effect on Relevant
Markets, though they may pose certain threats to competition.Market
extension mergers are similar to horizontal mergers and thereby may have
similar impacts,
Conglomerate mergers may lead to overall industrial Concentration, ie
domination over various portfolios in the market it may also enhance
coordinated mutual forbearance behaviour which may harm consumers Thus
the transactions, as in the nature of Acquisition, Acquiring of Control or
Merger or Amalgamation shall fall under the purview of Competition Act
2002.
REGULATION OF COMBINATIONS. [SECTION 6] :
Regulatory Framework for Combination : The regulatory framework for
combinations is primarily governed by Sections 5 and 6 of the Competition
Act. While Section 5 defines combinations, Section 6 prohibits combinations
that cause or are likely to cause an appreciable adverse effect on
competition (AAEC) within India. Additionally, Section 3(1) prohibits
agreements that cause or are likely to cause an AAEC in India. This means
that even if a combination meets the financial thresholds, it will only be
blocked if it harms competition.
Section 6(2) mandates that any party involved in a combination must notify
the CCI within 30 days of the final approval of the merger or acquisition
agreement. Failure to notify can result in penalties under Section 43A, which
provides for fines of up to 1% of the total turnover or assets of the
combination, whichever is higher.
The CCI assesses combinations based on factors like market share, potential
barriers to new entrants, and consumer impact, as provided in Section 20(4).
Regulation of combinations-
(1) No person or enterprise shall enter into a combination which causes or is
likely to cause an appreciable adverse effect on competition within the
relevant market in India and such a combination shall be void.
(2) Subject to the provisions contained in sub-section (1), any person or
enterprise, who or which proposes to enter into a combination, shall give
notice to the Commission, in the form as may be specified, and the fee which
may be determined, by regulations, disclosing the details of the proposed
combination, within thirty days of-
(a) approval of the proposal relating to merger or amalgamation, referred to
in clause (c) of section 5, by the board of directors of the enterprises
concerned with such merger or amalgamation, as the case may be;
(b) execution of any agreement or other document for acquisition referred to
in clause (a) of section 5 or acquiring of control referred to in clause (b) of
that section. [Sec 6]
The Competition Act is also designed to regulate the operation and activities
of combinations, a term, which contemplates acquisitions, mergers or
amalgamations. The operation of the Competition Act is not confined to
transactions strictly within the boundaries of India but also such transactions
involving entities existing and/or established overseas.
The Competition Act, 2002, provides for regulation of combinations.
Combination includes acquisition of shares, control, voting rights or assets,
mergers and amalgamations. Only those combinations where the total value
of the assets or the turnover of the combining parties exceeds the threshold
limits prescribed are regulated by the Act.
Determination of value of assets- The value of assets in a merger is
determined by calculating the book value of assets in the audited books of
account of the enterprise in the financial year preceding the merger date,
reduced by any depreciation. This includes brand value, goodwill value,
copyright value, patent, permitted use, collective mark, registered
proprietor, registered trade mark, registered user, homonymous
geographical indication, geographical indications, design or layout design,
and similar commercial rights.
Exceptions - Except for share subscriptions or financing facilities,
acquisitions by public financial institutions, foreign institutional investors,
banks, or venture capital funds made pursuant to a loan agreement or
investment agreement fall outside the combination provisions of the
Competition Act, 2002. However, these institutions must notify the
Competition Commission of the details of the acquisition within seven days
from the date of acquisition.
Compulsory Notice to the Commission- Companies wishing to enter into
a combination must give notice in Form I to the Competition Commission of
India within thirty days of board approval or execution of any agreement or
document for acquisition. Optional notice is available for parties engaged in
production, supply, distribution, storage, sale, or trade of similar or identical
or substitutable goods or services, and their combined market share is more
than 15% in the relevant market. Parties engaged at different stages or
levels of the production chain in different markets may give notice in Form II
to the Competition Commission of India, along with a prescribed fee of Rs.40
lakhs.
PROCEDURE FOR INVESTIGATION OF COMBINATION [Section 29 and
30]
The Commission examines a combination that exceeds monetary threshold
limits and files a mandatory notice, forming a prima facie opinion. If the
Commission suspects the combination has negatively affected competition in
India, it issues a show cause notice to the parties, requiring them to respond
within 30 days, following the combination regulations and section 29(1) of
the Act.
The Commission can request a report from the Director General after
receiving parties' responses to a combination, which must be submitted
within the Commission's direction. If the Commission believes the
combination has an adverse effect on competition, it must publish the details
within seven working days of receiving the response or the Director
General's report, which must be made within ten working days.
The Commission may invite any person or member of the public, affected or
likely to be affected to file his written objections. This shall be done within
fifteen working days from the date of the publication of the details. [Section
29(3)].
The Commission may call for additional or other information from the parties
to the combination. This shall be done within fifteen working days after the
expiry of the aforesaid period of fifteen working days. [Section 29(4).
The additional or other information shall be furnished by the parties within
fifteen days from the expiry of period mentioned in para 4. [Section 29(5)].
After receipt of the information the Commission shall proceed to deal with
the case within a period of forty-five working days from the expiry of the
period mentioned in para 5. [Section 29(6)].
Order of Commission on Certain Combinations [Section 31]
Section 31(1) provides that where the Commission is of the opinion that any
combination does not, or is not likely to, have an appreciable adverse effect
on competition, it shall, by order; approve that combination including the
combination in respect of which a notice has been given under Section 6(2).
Section 31(2) provides that where the Commission is of the opinion that the
combination has, or is likely to have, an appreciable adverse effet on
competition it shall direct that the combination shall not take effect.
Section 31(3) provides that where the Commission is of the opinion that the
combination has, or is likely to have, an appreciable adverse effect on
competition but such adverse effect can be eliminated by suitable
modification to such combination, it may propose appropriate modification to
the combination, to the parties to such combination.
Section 31(4) provides that the parties, who accept the modification
proposed by the Commission under Section 31(3), shall carry out such
modification within the period specified by the Commission.
Section 31(5) provides that if the parties to the combination, which have
accepted the modification under Section 31(4), fail to carry out the
modification within the period specified by the Commission, such
combination shall be deemed to have an appreciable adverse effect on
competition and the Commission shall deal with such combination i
accordance with the provisions of this Act.
Section 31(6) provides that if the parties to the combination do not accept
the modification proposed by the Commission under section 31 (3), such
parties may, within thirty working days of the modification proposed by the
Commission, submit amendment to the modification proposed by the
Commission under the sub-section.
Section 31(7) provides that if the Commission agrees with the amendment
by the parties under section 31(6), it shall, by order, approve the
combination.
Section 31(8) provides that if the Commission does not accept the
amendment submitted under section 31(6) then the parties shall be allowed
a further period of thirty working days within which such parties shall accept
the modification proposed by the commission us (3)
Section 31(9) provides that if the parties fail to accept the modification
proposed by the Commission within thirty working days referred to in section
31 (6) or within a further period of thirty working days referred to in section
31(8), the combination shall be deemed to have an appreciable adverse
effect on competition and be dealt with in accordance with the provisions of
this Act.
Section 31(10) provides that where the Commission has directed under
section 31(2) that the combination shall not take effect or the combination is
deemed to have an appreciable adverse effect on competition under section
31(9), then, without prejudice to any penalty which may be imposed or any
prosecution which may be initiated under this Act, the Commission may
order that the following shall not be given effect to: (a) the acquisition
referred to in section 5(a) or (b) the acquiring af control referred to in section
5(b); or (c) the merger or amalgamation referred to in Section 5(c).
Penalty for making false statement or omission to furnish material
information
In terms of the provisions of Section 44 of the Act, if a party to a combination
(a) makes a false statement of any material particular, knowing it to be false;
or (b) omits to state any material particular knowing it to be material, such
party shall be liable to a penalty between Rs. 50 lacs Commission. Rs. 1
crore, as may be determined by the commission
Remedies The Competition Commission of India has the power to propose
and accept modifications to combinations to prevent adverse effects. It may
appoint agencies to oversee these modifications or remedies. Remedies can
be structural or behavioral, with behavioral remedies being preferred but
challenging to implement and monitor. Structural remedies require
combining enterprises to make structural adjustments, such as asset sales,
divestment, or strengthening competitors through intellectual property rights
licensing.
Appeals The Central Government has notified to hear and dispose of
appeals against any direction issued or decision made or order passed by the
Commission under specified sections of the Act, such as orders relating to
notification of combination, inquiry by the Commission and penalties. An
appeal has to be filed within 60 days of receipt of the order/
direction/decision of the Commission.
Time Limit for Commission's Order [Section 6(2A)] Section 6(2A)
provides that combination shall come into effect after two hundred and ten
(210) days have been passed from the day on which the notice has been
given to the commission or commission has Passed the order under Section
31, whichever is earlier.
EXCEPTIONS [SECTION 6(4) AND SECTION 6(5)] : Section 6(4) and 6(5)
of the Competition Act allows exemption from giving notice to the
Commission in cases of share subscription, financing facility, or acquisition
by public financial institutions, foreign institutional investors, banks, or
venture capital funds under a loan agreement or investment agreement.
Institutions must file details of the acquisition, control details, circumstances
for exercising control, and consequences of default within 7 days of the
acquisition date.
This exemption aims to facilitate raising funds by enterprises in their
normal business. The procedures for implementing section 6 are subject to
regulations issued by the Competition Commission (CCI). The Combination
Regulation, which came into effect on June 1, 2011, was controversial due to
its last implementation after consultation with stakeholders. The Regulation
was amended in 2012 to provide clarity and simplification of procedures for
notifying combinations, but failed to address industry concerns for relaxation
in notification requirements, especially in intra-group mergers and
amalgamations. The Commission has since amended the Combination
Regulations in 2013 and 2015 to simplify filing requirements and increase
certainty in the application of the Act and Regulations.
