VIVEKANANDA SCHOOL OF LAW AND LEGAL STUDIES

Competition Law and Consumer Protection Laws (CRL113)

(RTDA)

TOPIC:
REGULATION OF COMBINATIONS UNDER COMPETITION ACT, 2002

Submitted to: Submitted by:

Dr. Priya Bhatnagar Sahar Irfan
01417747024
LLM – Corporate Law

[Type here]
ABSTRACT

Merger and acquisitions have played a very significant role in phenomenal growth of corporate
sector after opening up of Indian economy. Though it is one of the fundamental mechanism for
corporate restructuring and business synergies but the process regulating mergers and
acquisitions is not free from regulatory bottlenecks. There are several judicial, quasi-judicial and
regulatory bodies involved in sanctioning a scheme of merger. The introduction of a competition
watchdog i.e. Competition Commission of India caused apprehension in the industry that
the inclusion of another regulator would further complicate and delay the merger process.
However, the Competition Act, of 2002 and the regulations framed thereunder have a very
systematic and fair approach to dealing with merger cases. This article discusses the statutory
framework of M&A approval under the competition law in terms of section 5 and 6 of the
Competition Act, 2002, and regulations framed thereunder. In terms of the scheme of the
Competition Act, of 2002, transactions below a threshold are exempted from the purview of
the Competition Commission of India. This paper discusses the approach of the Competition
Commission of India in dealing with merger and acquisition transactions. In this backdrop, this
paper also discusses whether the laws related to Combinations regulated by the Competition
Commission of India align with the objectives of the Competition Act, of 2002.

[Type here]
INTRODUCTION

The concept of combinations has been common in developed countries. This concept was not
popular in India until the policies were introduced by liberalization, privatization, and
globalization. Such policies also resulted in the entry of multinational companies (MNCs) into
the Indian markets. Pertinently, the Indian Companies now had to compete with the MNCs to
survive in the market. Furthermore, these MNCs opted for acquiring companies in the Indian
market through mergers and acquisitions, instead of building their business from scratch.
Therefore, in light of increasing such combinations between the companies, India has enacted the
Competition Act 2002.

The Competition Act 2002 binds the parties to the combination and requires mandatory
notification to the CCI. The aforesaid act provides for high thresholds regarding assets and
turnover.

The Competition Act, 2002 (as amended), [the Act], follows the philosophy of modern
competition laws and aims at fostering competition and protecting Indian markets against anti-
competitive practices. The Act prohibits anti-competitive agreements, and abuse of dominant
positions and regulates combinations (mergers and acquisitions) to ensure no adverse effect on
competition in India. The provisions of the Act relating to the regulation of combinations have
been enforced with effect from 1st June 2011.

The Competition Act, of 2002 used the term ‘Combinations,’ which encompasses mergers,
acquisitions of shares and assets, and taking control of a business. The fundamental justification
for a combination or merger is that the combined entity’s value is projected to be larger than the
sum of the independent values of the merging commodities.

Limiting or eliminating competition is feasible by choosing the proper manner and amount of
acquisition. The goal of any competition regulation is to guarantee that individuals or businesses
gaining autonomy via mergers and acquisitions do not undermine the competitive system.

[Type here]
It is critical to limit monopolization to encourage competition. However, the Competition Act,
2002 aims to move the focus from monopolies to practices that harm competition both within
and outside India.

MEANING OF COMBINATIONS

According to Section 5 of the Competition Act, 2002 a combination is an “acquisition of one or

more enterprises by one or more persons or merger or amalgamation of enterprises shall be a
combination of such enterprises and persons or enterprises”.

In simple words, a combination can be defined as a merger, acquisition, or amalgamation

between two or more enterprises or businesses. The aforesaid act puts up a responsibility on the
government to control such mergers, acquisitions, and amalgamations by the MNCs, as MNCs
with their huge power and resources tend to dominate the Indian small-scale industries.
Therefore, the provisions of the Competition Act, of 2002 ensure that there is fair competition in
the market.

Broadly, combination under the Act means the 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 when the combining parties exceed the
thresholds set in the Act. The thresholds are specified in the Act in terms of assets or turnover in
India and abroad.

Entering a combination that causes or is likely to cause an appreciable adverse effect on

competition within the relevant market in India is prohibited and such combination shall be void.

The Act defines ‘Combinations’ under Section 5 which covers mergers, amalgamations, and
acquisitions. However, only certain mergers, amalgamations, and acquisitions that meet the act’s
threshold limit would qualify as a “combination.”

Section 5 jurisdictional thresholds entail a two-step analysis: the target’s global turnover or
assets; and the aggregate global and Indian turnover or assets for either the parties or the post-
completion group (i.e. the acquirer group comprising the target).
[Type here]
A ‘group’ is defined as two or more enterprises that, directly or indirectly, have:

 the ability to exercise 26% or more of the voting rights in the other enterprise; or

 the power to appoint more than half of the members of the other enterprise’s board of
directors; or

 the ability to control the affairs of the other enterprise.

Control, as used in the definition of group, refers to the control of one or more enterprises, either
jointly or separately, over another enterprise; or one or more groups, together or singularly, over
another group or company.

The asset and turnover threshold limitations are to be changed every two years based on the
Wholesale Price Index or variations in the exchange rate of the rupee or foreign currencies.

If the jurisdictional thresholds are reached, Section 5 of the Competition Act provides for three
types of transactions that must be reported to and cleared by the CCI before completion:

 Section 5(a): any transaction involving acquiring control, shares, voting rights, or assets.2

 Section 5(b): a person gaining control of an enterprise when that person already has direct
or indirect control of another enterprise engaged in the production, distribution, or trading
of similar or identical or substitutable goods or the provision of an equal or identical or
substitutable service.3

 Section 5(c): a merger or amalgamation.4

It is worth noting that India has one of the highest threshold limits globally compared to other
countries.

This is done to stimulate mergers, which also benefit the economy. According to worldwide
experience, 85% of mergers are allowed without a full investigation and 10% after an inquiry.
Around 5% of mergers are allowed or granted provisional approval.

MERGER, ACQUISITION AND AMALGAMATION are widely used terms in the business
world. Usually they sound to have similar meanings yet they do have few major differences, in
the crux of which organizations come to a neutral perspective to work for common goals or
survive in a symbiotic relationship to attain their respective intended values.
[Type here]
Merger: Merger of companies basically involves the process of Fusion/Absorption of at least 2
different companies, either of which loose its existence.

Acquisition: Acquisition loosely refers to one company acquiring or purchasing the business of
another company, generally with the intention of being the parent company for their respective
interests. The acquired company, also referred to as the “target company” is usually smaller in
terms of valuation.

In Acquisition neither of the companies, the acquiring or the acquired firm, loose their existence,
rather they co-exist.

Amalgamation: Amalgamation is the process of two or more organizations, dissolving their

businesses, and forming an entirely new organization in order to achieve yet new objectives.

In amalgamation, after the dissolution of the entities, all the assets and liabilities of the
companies get diluted as well.

MERGER, ACQUISITION AND AMALGAMATION: GOALS

Merger, Acquisition and Amalgamation are accomplished for various purposes.

· Synergy: Synergy is the concept which states that the combined value and performance of the
2 entities is greater than that of the individual entities. To achieve that performance
and outcomes, companies undergo the decisive action of such parallel working.

· Elimination of competition: Merging, Acquiring or Amalgamating companies allows an entity

to eradicate potential competition of the future.

· Growth: Through such activities, an organization can expand it’s value, market share and
market penetration without significant efforts thus catapulting their growth.

· Increasing the span of organization: To survive in critical crisis, sometimes organizations

take calculative decisions of such likes and maintain a symbiotic relationship.

· Expand into new ventures: Talking about a corelative relationship, acquiring a company’s
business not only helps the target company to survive, but also helps the acquiring company to
explore new businesses or expand the processes of their existing business.

[Type here]
THRESHOLDS FOR COMBINATIONS UNDER THE ACT

India is one of the fastest-growing economies in the world. The growth process is driven both by
organic and inorganic (through the mergers and acquisition route) growth of enterprises. It is
neither feasible nor advisable to review all the mergers and acquisitions. It is natural to presume
that in the case of small-size combinations, there is less likelihood of appreciable adverse effects
on competition in markets in India. The Act provides for sufficiently high thresholds in terms of
assets/turnover, for mandatory notification to the Commission.

The Act also provides for revision of the threshold limits every two years by the government, in
consultation with the Commission, through notification, based on the changes in the Wholesale
Price Index (WPI) or fluctuations in exchange rates of the rupee or foreign currencies. Vide
notification S.O. 480 (E) dated 4th March 2011, the government has enhanced the value of assets
and turnover mentioned in section 5, by fifty percent. The current thresholds for the combined
assets/turnover of the combining parties are as follows:

Individual: Either the combined assets of the enterprises would value more than (INR) 1,500
crores in India or the combined turnover of the enterprise is more than (INR) 4,500 crores in
India. In case either or both of the enterprises have assets/turnover outside India also, then the
combined assets of the enterprises value more than US$ 750 million, including at least (INR) 750
crores in India, or turnover is more than US$ 2250 million, including at least (INR) 2,250 crores
in India.

Group: The group to which the enterprise whose control, shares, assets or voting rights are
being acquired would belong after the acquisition or the group to which the enterprise remaining
the merger or amalgamation would belong has either assets of value of more than (INR) 6000
crores in India or turnover more than (INR) 18000 crores in India. Where the group has
a presence in India as well as outside India then the group has assets of more than US$ 3 billion
including at least INR 750 crores in India or turnover of more than US$ 9 billion including at
least INR 2250 crores in India.

The term Group has been explained in the Act. Two enterprises belong to a “Group” if one is in
a position to exercise at least 26 percent voting rights or appoint at least 50 percent of the
directors or controls the management or affairs of the other. Vide notification S.O. 481 (E) dated

[Type here]
4th March 2011, the government has exempted “Group” exercising less than fifty percent of
voting rights in other enterprises from the provisions of section 5 of the Act for five years.

The turnover shall be determined by considering the values of sales of goods or services. The
value of assets shall be determined by taking the book value of the assets as shown in the audited
books of account of the enterprise, in the financial year immediately preceding the financial year
in which the date of the proposed merger falls, as reduced by any depreciation. The value of
assets shall include the brand value, value of goodwill, Intellectual Property Rights, etc. referred
to in explanation (c) of section 5 of the Act.

EXEMPTION NOTIFICATIONS

In the exercise of the powers conferred by clause (a) of Section 54 of the Act, the Central
Government, in the public interest, has exempted:

 an enterprise, whose control, shares, voting rights, or assets are being acquired has either
assets of the value of not more than INR 250 crore in India or turnover of not more than
INR 750 crore in India from the provisions of Section 5 of the said Act for five years.
 a banking company in respect of which the Central Government has issued a notification
under Section 45 of the Banking Regulation Act, 1949, from the application of the
provisions of Sections 5 and 6 of the Act for five years.

COMBINATIONS IN RESPECT OF WHICH NOTICE NEED NOT

NORMALLY BE FILED

The Combination Regulations provide that notice in respect of certain combinations, specified
under Schedule I, need not normally be filed with the Commission as those transactions are
ordinarily not likely to cause appreciable adverse effects on competition in India.

COMBINATION NOTICE

The review process for combination under the Act involves mandatory pre-combination
notification to the Commission. Any person or enterprise proposing to enter into a combination
shall give notice to the Commission in the specified form disclosing the details of the proposed
combination within 30 days of the approval of the proposal relating to merger or amalgamation

[Type here]
by the board of directors or of the execution of any agreement or other document in relation to
the acquisition, as the case may be. In case, a notifiable combination is not notified, the
Commission has the power to inquire into it within one year of the taking into effect of the
combination.

The Commission also has the power to impose a fine which may extend to one per cent of the
total turnover or the assets of the combination, whichever is higher, for failure to give notice to
the Commission of the combination.

Any combination for which notice has been filed with the Commission would not take effect for
a period of 210 days from the date of notification or till the Commission passes an order,
whichever is earlier. If the Commission does not pass an order during the said period of 210
days, the combination shall be deemed to have been approved.

GUN JUMPING

Gun Jumping refers to a situation wherein the parties to the combination consummate the
combination directly without seeking approval from CCI. Such an act by the parties is
punishable with a fine in accordance with Section 43A of the Competition Act,2002.

Pertinently, the Indian merger control regime has been suspensory in nature. If at all the parties
to the combination want to consummate with the transaction for a combination (i.e
merger/acquisition/amalgamation), they need prior approval from the CCI.

For seeking permission for merger or amalgamation, or execution of an agreement for the
acquisition, the merger had to be filed with the CCI within 30 days of approval. However, the 30
days requirement period has been removed. But, the requirement notifying the CCI about the
combination and seeking CCI’s prior approval before consummating the transaction is a
mandatory procedure and failure to comply with the same, exposes the parties for gun-jumping.

The Supreme Court in its catena of Judgements has dealt the law with regard to gun-jumping. It
can be discussed in three parts:

 Firstly, the legislative intent behind the prohibition of gun-jumping.

 Secondly, the existence of men’s rea.

[Type here]
  Thirdly, notification regarding the interconnected transaction.

PROCEDURE FOR INVESTIGATION OF COMBINATIONS

As per the Combination Regulations, the Commission shall form its prima facie opinion as to
whether the combination is likely to cause or has caused appreciable adverse effect on
competition within the relevant market in India within 30 days from the receipt of the notice. If
the Commission is prima facie of the opinion that a combination has caused or is likely to hurt
competition in Indian markets, it shall issue a notice to show cause to the parties as to why
investigation in respect of such combination should not be conducted. On receipt of the response,
if the Commission is of the prima facie opinion that the combination has or is likely to have
an appreciable adverse effect on competition, the Commission shall deal with the notice as per
the provisions of the Act.

In the case of SCM Solitifert Ltd. and Anr v. Competition Commission of India1, 2018 the
Supreme Court outlined the legislative intent behind the prohibition of gun-jumping. It stated
that the legislative mandate of Section 6 is that every combination would have to be notified
before entering into the same. This allows CCI that such a combination will have an appreciable
adverse effect on the market. The Supreme Court duly recognized that if the approval for the
combination is sought after the combination has been consummated, it will defeat the whole
purpose of the act.

The Supreme Court held that when the approval had been gained subsequently by the parties
from CCI, it does not have that penalty under Section 43A of the Competition Act,2002 will not
be imposed for gun-jumping. There are two separate issues to be dealt with:- Firstly, the
approval of transactions by the parties. Secondly, the necessity of adherence to the suspensory
regime of CCI.

1
AIRONLINE 2018 SC 48

[Type here]
Therefore, in the light of the aforementioned Judgment, if the parties to a combination have
internally approved for the combination, the transaction cannot be further processed until
notifying the CCI about the combination and CCI approves the same. Therefore, no provision for
ex-post facto approval (i.e.CCI approval after consummation of the combination) is envisaged
under the act.

EVALUATION OF ‘APPRECIABLE ADVERSE EFFECT ON

COMPETITION’

The Act envisages appreciable adverse effects on competition in the relevant market in India as
the criterion for regulation of combinations. In order to evaluate appreciable adverse effects on
competition, the Act empowers the Commission to evaluate the effect of Combination on the
basis of factors mentioned in sub-section (4) of section 20.

Factors to be considered by the Commission while evaluating appreciable adverse effect of

Combinations on competition in the relevant market:

(a) actual and potential level of competition through imports in the market;

(b) extent of barriers to entry into the market;

(c) level of concentration in the market ;

(d) degree of countervailing power in the market;

(e) likelihood that the combination would result in the parties to the combination being able to
significantly and sustainably increase prices or profit margins;

(f) extent of effective competition likely to sustain in a market;

(g) extent to which substitutes are available or are likely to be available in the market;

(h) market share, in the relevant market, of the persons or enterprise in a combination,
individually and as a combination;

(i) the likelihood that the combination would result in the removal of a vigorous and effective
competitor or competitors in the market;

[Type here]
(j) nature and extent of vertical integration in the market;

(k) possibility of a failing business;

(l) nature and extent of innovation;

(m) relative advantage, by way of the contribution to the economic development, by any
combination having or likely to have appreciable adverse effect on competition;

(n) whether the benefits of the combination outweigh the adverse impact of the combination, if
any.

The Supreme Court in the case of Competition Commission of India v. Thomas Cook(India)
Ltd. and Anr,2 2018 stated that when there are multiple interconnected transactions, they form a
composite transaction. Therefore, all these interconnected transactions have to be notified at the
time of notifying the principal combination. The Supreme Court in the aforementioned case
observed that certain purchases were related to the main combination. Therefore, parties to the
combination contravened the provisions of the Competition Act,2002, by consummating these
purchases before notifying the Commission.

APPEALS

Under the relevant provisions of the Act, an appeal to the Competition Appellate Tribunal
(COMPAT) may be filed within 60 days of receipt of the order /direction/decision of the
Commission.

2
AIRONLINE 2018 SC 47

[Type here]
CRITICAL ANALYSIS

One of the most contentious components of the 2002 Competition Act is the regulation of
combinations. Some of the points highlighted are discussed below.

 The Indian business sector requires consolidation to produce appropriately sized

enterprises and players capable of competing effectively in the home and international
markets. In other words, mergers will not be discouraged unless they are anti-competitive
and, more specifically, harmful to consumer interests. This must be understood in the
perspective of Indian firms competing in India and the international market. Therefore, to
have a foothold in the global market, Indian companies must first have a stronghold in the
Indian market.

 The asset and turnover threshold restrictions are high enough that most mergers will fall
outside the scope of combination regulation. Furthermore, Indian corporations have lower
threshold restrictions than international companies. For example, an Indian company with
a turnover of Rs. 3000 crore cannot acquire another company without prior notification
and approval from CCI. In contrast, a foreign company with a turnover of more than $
1.5 billion (or Rs. 4500 crore) outside India may acquire an Indian company with a
turnover of less than Rs. 1500 crore.

 The “Domestic Nexus” requirements proposed by the 2007 amendment harm Indian
companies’ interests.

 Beyond the threshold restrictions, the parties have only a voluntary (rather than
obligatory) premerger notice requirement.

 The term “combinations” does not contain the phrase “joint ventures.” Some business
chambers were concerned that including ‘joint ventures’ would depress industrialization
in the nation since the road of ‘joint ventures’ was a pragmatic and popular one followed
by its constituents.

 The idea of ‘group’ is contained in the combination regulation regulations.

[Type here]
  There was a request to exclude it because a conceivable and likely bureaucratic approach
may link unrelated endeavours. Many mergers may be derailed due to an activity being
seen as belonging to some group.

 Even intra-group acquisitions by promoters of publicly traded companies, as well as

internal reorganisations within a business group, need statutory notification, even if they
do not affect competition.

 Notifying such papers is likely to jeopardize the secrecy of commercial arrangements

before they are concluded and may be detrimental to efficiency.

 The previous time frame for the CCI to act was 150 days, which has been raised to 210
days by the 2007 Amendment, which is too long for commercially significant deals with
high stakes.

CONCLUSION

The goal of mergers and acquisitions is to promote economic growth and enhance trade practices
that can assist and benefit customers in various ways. Adding the MRTP Act to the Competition
Act substantially influenced society and resulted in several changes.

The Competition Act made mergers and acquisitions mandatory for the commission around
2007. In this statute, the Competition Commission is given extensive authority. It primarily
focuses on decreasing the negative consequences damaging to customers.

To summarise, managing the amalgamation and merger process while complying with the
Competition Act of 2002 necessitates precise preparation, thorough evaluations, and adherence
to legal standards.

Ensuring compliance not only speeds up the clearance process, but also helps to a competitive
and fair business climate that benefits customers and the market as a whole.

[Type here]