COMBINATIONS UNDER THE COMPETITION ACT, 2002

 

5.1 DEFINITION OF COMBINATIONS  

Combination under the Competition Act means acquisition of control, shares, voting rights or  assets, acquisition of power 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 Act specifies the thresholds in terms of assets or turnover in India  and outside India. 

When used in the context of The Competition Act, a combination means and implies M&A  transactions that meet the threshold set out in the Act. The Competition Act 2002 also uses the  expressions acquisition, merger and amalgamation in Section 5. However, only those  transactions that exceed the value of an asset or the turnover require prior approval of the  Competition Commission of India and qualify to be called a “combination”. 

The primary criterion for examining whether a combination needs to be notified is based on  thresholds fixed based on the value of assets and turnover of the parties to the combination of the assets and turnover of the group to which the parties belong. The geographic scope of the  parties/group's business operations further affects the thresholds. 

Merits of a combination are: 

1. A combination will help to acquire fast growth in the business  

2. Better resources and improvement of quality 

3. Cost Advantages like Economies of sale, Synergies in operations, Financial synergies 4. Access to technologies, different markets, facilities, etc. 

5. Diversification 

Demerits of combinations are: 

1. Problems in the integration of firms 

2. Valuation issues 

3. Adverse effect on competition 

4. Lack of economic growth impetus

KINDS OF COMBINATIONS  

HORIZONTAL VERTICAL CONGLOMERATE 

These are between rivals and  are most likely to cause  appreciable adverse effects on competition.

These are those that are  between enterprises that are  at different stages of the  production chain and are  less likely to cause  appreciable adverse effects on competition.

These are those between  enterprises not in the same  line of business or in the  same relevant market and  are least likely to cause  appreciable adverse effects on competition.

5.2 TYPES OF COMBINATIONS  

1. Acquisition [Section 2(a)(b) of the Competition Act] - It means, directly or indirectly,  acquiring or agreeing to acquire — 

• Shares, voting rights or assets of any enterprise; or 

• Control over management or control over assets of any enterprise 

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 

Directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control  over, a target company 

In simple terms, ‘When a person purchases the share capital in such a way to control the  interests enunciated with the all or substantial number of shares or assets or liabilities of the  target entity, such an agreement is acquisition.’  

2. Takeover - Takeovers can be done in two ways: first, by acquiring the liabilities and assets  of the target company and second, by developing the target company's shares. Takeovers can  be done by purchasing a majority stake in the target firm. It occurs when one company  successfully bids to assume control of or acquire another. In a takeover, the company making  the bid is the acquirer, and the company it wishes to take control of is called the target.

3. Amalgamation [Section 2 (1A) of the Income Tax Act, 1961] - ‘Amalgamation is the merger  of one or more companies with another or the merger of two or more companies to form a new  company, in such a way that all assets and liabilities of the amalgamating companies become  assets and liabilities of the amalgamated company and shareholders not less than nine-tenths  in value of the shares in the amalgamating company or companies become shareholders of the  amalgamated company.’  

4. Merger [S. 232 Explanation (i)] - Where under the scheme, the undertaking, property and  liabilities of one or more companies, including the company in respect of which the  compromise or arrangement is proposed, are to be transferred to another existing company, it  is a merger by absorption, or where the undertaking, property and liabilities of two or more  companies, including the company in respect of which the compromise or arrangement is  proposed, are to be transferred to a new company, whether or not a public company, it is a  merger by formation of a new company.  

• Horizontal Merger - It occurs when actual or potential competitors of the same product and  market and at the same level of production or distribution merge. For Example, Brook Bond  Lipton India Ltd. through the merger of Lipton India and Brook Bond 

• Vertical Merger - occurs when two entities operate at different but complementary levels  of the production chain. For Example, Nokia merged with Airtel.  

• Congeneric Merger - It is a type of merger where two companies are in the same or related  industries but do not offer the same products. For Example, Sun Direct with Cable Service  Provider 

• Conglomerate Merger - It is a merger between entities that are not linked or connected in  any form. For Example, Colgate with Rotomac Pen 

There is a slight difference between Merger and amalgamation; in merger, the companies take  up a new name and management, whereas in amalgamation, the administration is done  similarly even after consolidation.  

These both can be done in different forms,  

1. Through Absorption: It combines two or more companies into an existing company. All  companies except one lose their identity in a merger through absorption. For example, there 

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is the absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd.(TCL).TFL  transferred its assets, liabilities and shares to TCL. 

2. Through Consolidation: Combining two or more companies into a 'new company'. All  companies are legally dissolved in this merger, creating a new entity. For example, the  Merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software  Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd 

5.3 SECTION 5 OF THE BARE ACT 

Section 5 & CCI notification dated March 4th, 2016 gave the following threshold:- 

Indian Parties	Applicable  to	Assets		Turnover
	Individual	Rupees 2 Thousand Crore		6 Thousand Crore
	Group	8 Thousand Crore		24 Thousand Crore
Indian Parties +  Foreign	Applicable  to	Assets		Turnover
		Total	Within  India	Total	Within  India
	Individual	1 Billion US  Dollar	1000 Crore	3 Billion US  Dollar	3000 Crore
	Group	4 Billion US  Dollar	1000 Crore	12 Billion US  Dollar	3000 Crore

De Minimis Exemption – March 4, 2016.  

Those whose control, shares, voting rights or assets are being acquired have assets of not more  than Rs. 350 crore in India or turnover of not more than Rs. 1000 crore in India, are exempt  from Section 5 of the Act for five years. , the revised thresholds for availing of the De Minimis  exemption for acquisitions are: 

THRESHOLD FOR AVAILING OF DE FOR ACQUISITIONS
		Assets	Turnover
Target Enterprise	In India	<350 INR crore	≤1000 INR crore

MCA revised the target exemption on 27th March 2017; it said that In addition to assets, the  Revised Target Exemption now extends to mergers/amalgamations, as well 

Where a portion of an enterprise/division/business is being acquired, taken control of, merged  or amalgamated with another enterprise, the value of assets or turnover of such  portion/division/business and attributable to such portion/division/business will be considered to calculate whether the thresholds of the Revised Target Exemption are being breached. The  value of such assets or turnover is to be determined from the annual report of the target  enterprise for the preceding financial year in which the transaction takes place or from the  auditor's report in case financial statements are not available 

5.4 REGULATORY PROCESS  

Section 6 (1) of the Competition Act states that No person or enterprise shall enter into a  combination that 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. 

If a combination is causing or is likely to cause AAEC can be determined under Section 20 (4) of the Competition Act, which provides for relevant factors:  

(a) actual and potential level of competition through imports in the market  (b) extent of barriers to entry into the market;  

(c) level of combination in the market;  

(d) degree of countervailing power in the market;  

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

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

These types of combinations are regulated through the following process: STEP 1: RECEIVING INFORMATION 

The Commission may, upon its knowledge or information relating to the acquisition or  acquiring of control or merger or amalgamation, inquire into whether such a combination has  caused or is likely to cause an appreciable adverse effect on competition in India, Provided that  the Commission shall not initiate any inquiry under this subsection after the expiry of one year  from the date on which such combination has taken effect, or through Suo Moto.  

STEP 2: REQUIREMENT OF NOTIFICATION [SECTION 6(2)]

Any person or enterprise who or which proposes to enter into a combination shall give NOTICE  to the Commission and the fee &in the prescribed form- ‘Form II, as specified in schedule II, which may be determined, by The Competition Commission of India (Procedure regarding the  transaction of business relating to combinations) Regulations, 2011 disclosing the details of the  proposed combination, within thirty days of: 

(a) APPROVAL OF THE PROPOSAL [Section 5 (c)] relating to merger or amalgamation 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 or  acquiring of control [Section 5 (a) and (b)] 

For example, in the following cases, CCI gave penalties for  

1. Delay in Filing Notice: Johnson and Johnson Innovation – Ethicon – Google - Delay of 43  days in filing the notice- The Commission imposed a fine of Rs. 5 lakhs.  2. Absence of Filing Notice: Piramal Enterprises Limited - Shriram Transport Finance  Company - Imposed a penalty of Rs. 5 Crore. 

STEP 3: PRIMA FACIE OPINION  

CCI, on receipt of NOTICE, deals with according to Sections 29(1) & Regulation 19 

CCI will form a Prima facie opinion within 30 days of receipt of the notice whether the  proposed combination will cause an AAEC within the RELEVANT MARKET in India 

STEP 4: SHOW CAUSE NOTICE  

If the CCI forms an Opinion that the Combination will cause an AAEC, then - 

CCI will issue a Show Cause Notice to the Parties to the Combination to respond within 30  days. After receiving a response from the Parties, CCI may call for a Report from the Director General.  

If the CCI is of the Opinion that the Combination will cause AAEC, [Section 29(2)]  

Then, within seven working days, on the receipt of the response from Parties & DG’s Report, whichever is later, CCI would direct the Parties to PUBLISH the details (to make them aware the Public) of the Combination within ten working days of such direction CCI may invite  written objections from the Affected Persons of the Combination. The parties shall file written  complaints within 15 days of Publication by the Parties to the Combination [Section 29(3)]. 

After the above 15-day period expires, CCI may call for Additional or Other Information, as it  may deem fit, from the Parties to the Combination [Section 29(4)].  

The Parties shall furnish Additional Information within 15 days after the expiry of the period  mentioned above of 15 days mentioned in 29(4). Within 45 working days after the expiry of  the 15 days mentioned above, CCI shall proceed to deal with the case by Section 31.  

STEP 5: ORDER  

Under Section 31, the CCI can give the following orders: 

1. Approval 

2. Rejection 

3. Modification 

• Structural Remedies: Modification 

• Behavioural Remedies: Prohibition of certain conducts.  

Section 6 (2A) and section 31(11) say that the Proposed Combination shall not take effect for  210 days from the date the Parties NOTIFY CCI or until CCI passes an order approving the  Combination, whichever is earlier. 

(Means the Combination shall be deemed to be approved if CCI doesn’t pass an order in 210  days) 

Under Section 53A, an appeal can be filed against an order passed u/s 31. It should be dealt  with as expeditiously as possible, and endeavour shall be made by it to dispose of the appeal  within six months from the date of receipt. The appellate forum is the National Company Law  Appellate Tribunal, constituted under Section 410 of the Companies Act 2013. 

5.5 METHODS OF COMBINATION  

1. Falling Firm Defence - A financially distressed firm qualifies as failing. The causes that  have positioned the firm to be economically distressed are essential. The firm's failure is an  acceptable ground for the CCI to approve a merger. The failing entities seeking shelter through mergers and acquisitions for survival may receive deemed approval by the CCI if  the entities involved are not engaged in identical businesses. Section 20 (4)(k) provides for  the Possibility of Failing Business. The doctrine of ‘failing firm defence’ requires three  conditions: 

• The failing of the firm would result in it exiting the relevant industry, thereby diminishing  competition; 

• There is no other practical alternative that would result in more competition in the industry  other than the proposed merger/acquisition between competitors; 

• The exit of the failing firm from the industry would adversely impact the industry's  competition and prove detrimental to the consumers. 

2. Green Channel Fillings - It eliminates the statutory 210-day time limit prescribed under the  Act for ex-ante examination of combinations by CCI. If, after considering all plausible alternative market definitions, the transacting parties do not have any: 

• Horizontal overlaps (i.e., they must not be already producing any similar, identical or  substitutable products/services) or 

• Vertical overlaps (i.e., they must not be engaged in activities at different stages or levels of  the production chain) or 

• Complementary overlaps (i.e., products/services, when combined and used, enhance the  value of the combined good/service). 

Under the Competition Commission of India (Procedure regarding the transaction of  business relating to combinations), Amendment Regulations,2019 Green Channel route  provides for automatic approval of certain combinations under the Competition Act. 2002 The notifying parties must self-assess that the Green Channel Criteria have been met. If  such criteria are met, the notifying parties must file a valid and complete Form-I and a  declaration confirming that the proposed combination satisfies the Green Channel Criteria  and "is not likely to cause any adverse effect on competition". 

They deemed approval from the date of receipt of the acknowledgement of filing of the  Notice in Form 1 in CCI. 

3. Cross Broder Mergers - under Section 32, when a combination has taken place outside India  or any party to the combination is outside India, if such combination has, or is likely to  have, an appreciable adverse effect on competition in the relevant market in India.  For example, Tata Steel – Corus: Tata Steel Limited concluded a merger deal by acquiring  the Anglo-Dutch steel company Corus Group Plc. 2007. The merged enterprise, Tata-Corus, employs 84,000 people across 45 countries. It can produce 27 million tons of steel  per annum, making it the fifth-largest steel producer in the world. 

GE/HONEYWELL proposal: There was a proposal by General Electric to take over  Honeywell International Inc. GE was attracted by Honeywell's aerospace businesses. The  merger had been passed by the United States Department of Justice, with the  recommendation that GE divest itself of Honeywell's military helicopter unit to protect the  US military. European Competition Commissioner held that: 

‘Merger between GE and Honeywell would create too powerful an entity and consequently,  have adverse effects on the competitive position in the aerospace industry’. The merger would give the two companies a huge combined market share in the standard  markets in which they operated and the opportunity to bundle their complementary  products in the future. This would harm competitors and customers by creating a near monopoly situation. The EC demanded substantial structural changes. The demands were  unacceptable to GE; hence, the proposed merger failed.  

4. Gun Jumping - Gun Jumping refers to a situation wherein the parties to the combination  consummate the conversation directly without seeking approval from CCI. Such an act by  the parties is punishable by a fine under Section 43A of the Competition Act,2002. To seek  permission for a merger, amalgamation, or execution of an agreement for the acquisition,  the merger had to be filed with the CCI within 30 days of approval. The 30-day requirement  period was removed by MCI notification in 2017. The requirement notifying the CCI about  the combination and seeking the CCI’s prior approval before consummating the transaction  is a mandatory procedure, and failure to comply with the same exposes the parties to gun jumping. 

SCM Solitifert Ltd. And Anr v. Competition Commission of India 

Supreme Court observed held that the legislative mandate of Section 6 is that every  combination would have to be notified before entering into the same. This allows CCI to  see that such a combination will have an appreciable adverse effect on the market. If the  approval for the combination is sought after the combination has been consummated, it will  defeat the whole purpose of the act.