In pursuance of a strategy that promotes competition

If a law or regulation operates in a manner that it is unable to achieve the benefits it is intended to provide, then it has to be revisited and revamped. A law is tested in its enforcement, and it is not always possible to anticipate and address all potential risks, particularly if the subject matter is complex. This is more critical for economic laws, as such laws have to keep pace with growth and be constantly updated. For the last decade, Indian law makers have been grappling to make competition law operational and effective. Finally on M & A compliances, there appears to have been a break-through.

 

Competition policy and international trade policy are laws of the same genre, as both endeavour to achieve promotion of competition and prevention of dominance. But unlike trade, which is tariff oriented, competition policy has to deal with business manoeuvres and conspiracies which are difficult to detect and bring to book. Since such practices often have international dimensions, legislation on competition law has to be reliant on disclosures and compliances, and of course enforceability.

Therefore, it’s important to understand that merger regulations and enforcement are possibly one of the most difficult tasks a regulator may have. It took China 12 years to have its draft competition law in place. The clarifications to the Competition Act, 2002 (‘Act’), or more specifically, the Notification dated 11th May, 2011, relating to Combinations, as provided in Section 5, has made significant changes in responding to the industry’s demand. That the merger controls will not apply to deals inked before June 01, even if not concluded, has been welcomed, as have the substantial reductions in the fee. However, high fees ultimately cannot be avoided as the regulator’ operations are high cost.

The changes in Section 5, read with Schedule I, are the exempted transactions, where the acquisition of shares/voting rights do not exceed 15% of that of the target company, or the acquirer is already a substantial stakeholder in the Enterprise. Acquisitions of non-core assets, i.e. not relating to the business activity of the enterprise or giving rise to control have been excluded. As have been sundry transactions, such as acquisition of stock in trade, raw material, or creation / augmentation of shareholding by bonus issue, stock splits etc which are in the ordinary course of business. Acquisitions not requiring the enterprise’s consent, e.g. arising out of foreclosures, bankruptcy sales also fall in this category. Re-organisation of holdings or acquisitions within a group has been excluded. Regulation 4 provides that such categories of combinations are ‘ordinary’ and “not likely to cause appreciable adverse effect” the notice under section 6 need not be filed. The language is vague, perhaps to afford the regulator residuary power and flexibility to determine and adopt exceptions.

It’s Regulation 10 in Schedule 1, providing for exclusion of a combination taking place entirely offshore with “insignificant local nexus” that appears unwarranted. Section 32 of the Act provides for the various situations where the Competition Commission has extra territorial jurisdiction, which includes a combination taking place outside India, or any party to the combination being located outside India, or any other matter, practice or action arising out of the combination agreement is outside India. Any one of the above situations would require compliance. Is there any perceptible distinction between ‘nexus’ and ‘jurisdiction’? Nexus in its broadest sense means a connection, link or contract, which can give rise to jurisdiction under Section 32 of the Act. In the absence of any Explanation, this insertion creates scope for ambiguities.

There are the usual minor drafting changes on Combinations- the definition of the term ‘Enterprise’ is introduced, possibly to rectify the non-capitalisation in Section 2 and elsewhere. For the sake of uniformity, the terms ‘group’ and ‘control’ should have been capitalised as well.

On the downside again, no specific sector has been exempted from the application of the Act, though this was expected. Possibly this will be handled under Section 54 of the Act sectorwise The dismantling of the pre-filing consultation procedure has also disappointed investors.

And finally, in the matter of timelines of the open offer under and the CCI notice, the inherent contradiction remains unresolved. Also, the Act and the Regulations do not take creeping acquisitions into account. These inconsistencies will have to be addressed. In the meanwhile, a power struggle between the two regulators is a possibility.

Kumkum Sen is a partner at Bharucha & Partners, Delhi Office and can be reached at kumkum.sen@bharucha.in