The Ministry of Corporate Affairs came up with notification on Section 5 & 6 of the Competition Act, 2002. The Competition Commission of India ("Commission") had earlier issued draft regulations regarding procedure of transaction of business relating to combinations. These regulations were not only insufficient, but also ambiguous on various aspects. Lot of questions were raised by the corporate world and by legal luminaries on issues and concerns such as those regarding territorial nexus, categories of the transactions which needed to file information under Schedule I, among others. The Commission, after much deliberation and discussions, finally gave a hearing to concerns of the Indian industry and has come up with new draft regulations in an attempt to address these concerns. These regulations (as on May 23, 2011) are a welcome step as India joins a club of 100 other countries that have a merger control regime. The final regulations are a marked improvement on the earlier ones. The latest regulations provide a significant change from the draft version and are clearer on several issues of concern.
Newly notified Section 5 and 6 of the Act, deal with the 'Combination' regulations. The term Combination in terms of the meaning given under the Act includes any merger, amalgamation, acquisition of the control in the target. The Act makes it obligatory to notify the Commission when the target's turnover or assets exceeds the threshold limit (as prescribed under the new notifications).
An important issue clarified by the Commission relates to applicability of the regulations to ongoing transactions. A lot of questions were raised to as to whether it will be the date of order of High Court or filing of such order with ROC or some other event which will be taken as a relevant date for the notifying such transaction. The Commission has made it clear that only those transactions to which the Board of Directors has given final approval to after June 1, 2011 or where the binding agreement will be executed after June 1, 2011 will be required to be notified to the Commission. It further makes it clear that merely signing of term sheet or merely entering into discussion will not trigger the applicability of such regulations.
One of the important issue which got clarified is with respect to category of transactions covered under Schedule I of the notifications. Earlier regulation made it compulsory for the entities, involved in transaction specified in Schedule I of the regulation to notify to the commission, however, the new regulation has exempted such transactions from notifying the Commission. Schedule I of the earlier regulation consisted of transactions e.g. acquisition of stock in trade, raw material in ordinary course of business, acquisition of shares in ordinary course of business etc. which literally meant all the transactions to be notified to the Commission even where it has nothing to do with competition. Present regulations exempt such transactions in normal circumstances.
The earlier regulations circulated by the Commission contained provisions regarding "Pre Merger Consultation" which was scrapped by regulations of May 11, 2011, however the same has been reintroduced and the Commission has announced that it would very soon be issuing guidelines governing the same. Under the Pre Merger consultation any enterprise which proposes to enter into a Combination may request in writing to the Authority for an informal and verbal consultation about filing these notification under the regulations. This concept would play a crucial role for the Industry as there might be issues and concerns which require clarification in case of ambiguity, especially in the initial years. As a new age regulator it was expected of the Commission to be more Pro Active. Moreover, the Commission is not the only Authority having such schemes, other regulators for example Sebi also has a Informal Guidance Scheme, there is also provision of advance rulings under the Income Tax Act. In last few days the way the Commission has responded to various concerns raised by the corporate world has not only shown its pro active side but also the maturity to understand the issues concerning competition.
Territorial nexus was another concern raised by both Indian industries and global corporates that has been addressed by the Commission. Territorial nexus means the connection of the transaction taking place outside India with the Indian company due to its relationship with the company acquiring the target outside India. Under earlier regulations in case of parent company registered in UK and having a subsidiary in India and is acquiring a target in Sri Lanka, then the Indian company would have been required to notify the Commission. As per the new regulations any combination which is entirely outside the territory of India and has insignificant local nexus or effects on Indian Markets is exempt from notifying the same to the Commission. This has brought a great sigh of relief for multinationals having a presence in India.
Merger and acquisitions are going to play a very important role in the growth story of the India. Radical changes are on their way in the field of mergers and acquisition. Their real effect will be seen only in coming time, but the Competition Commission of India has a very big challenge of fine balancing between ensuring the competition in the market and making sure that mergers are not unnecessarily restricted.
Ashish Suman is Principal Associate, and Shailendra Sharma is Associate at MV Kini & Co, a Delhi-based law firm