India: Trends In The Merger Review Process In India

The past two years have been very eventful for the merger control regime in India. The regime has witnessed a number of important legislative amendments and landmark decisions of the Competition Commission of India ("CCI"). In the last two years, the CCI has approved over 155 proposed transactions with an unprecedented average disposal time of 15-18 days. The CCI continues to demonstrate its pragmatic approach through its acceptance of innovative remedies to address the competition concerns arising out of contemplated transactions.

The year 2020 has been dominated by the impact of the COVID-19 outbreak. In a globalised world, India is as affected by the COVID-19 as other parts of the world. However, the CCI has remained as open for business as it can be in the circumstances. Notices are being filed electronically and pre-filing consultations are taking place through video-conference. The CCI is also actively clearing combinations to meet the transaction timelines.

The key trends in the merger review process in the past two years are discussed below.

INTRODUCTION OF GREEN CHANNEL

In August 2019, the CCI introduced the green channel route for automatic approval of combinations where the parties have no horizontal overlaps, no present or potential vertical relationships and are not engaged in any complementary businesses.¹ Under this route the combination will be deemed to have been approved upon filing the notice with the CCI in the prescribed format. The parties will not have to await the approval of CCI before giving effect to or closing the proposed transaction. Till date, the CCI has approved around 20 transactions under the green channel route. The green channel route is a welcome move towards ease of doing business in India.

REVISED GUIDANCE NOTES TO FORM I

In furtherance of its goal to provide an improved competition law framework, the CCI published revised Guidance Notes to Form I (short form) on 27 March 2020 ("Guidance Notes"). A number of new clarifications have been provided, including on the scope of information and documents to be submitted along with a Form 1 filing.

The CCI has now clarified that the market shares of the parties for the three preceding years must be given only in cases where the combined market share is 10% or more in any plausible market (in case of horizontal overlaps, vertical relationships or complementary activities). This will substantially reduce the burden on the parties in filing. Further, the CCI has also clarified the definition of complementary products by providing that complementary products are those which are: (i) related because they are combined and used together; and, (ii) do not compete with each other, actually or potentially, and are not vertically related.²

In furtherance of the CCI's intent to investigate common minority shareholding in competing enterprises, the CCI has clarified that parties must disclose and undertake assessment of horizontal overlaps, vertical relationships or complementary activities for any entity in which the parties have: (i) a direct or indirect shareholding of 10% or more; or (ii) a right or ability to exercise any right (including any advantage of a commercial nature with any of the parties) that is not available to an ordinary shareholder; or (iii) a right or ability to nominate a director or an observer.

The introduction of a shareholding threshold of 10% is an extremely welcome change and is likely to reduce the burden of collecting and providing information on many large, global companies. However, a key onerous change is that, even in the case of a less than 10% shareholding, a party will have to provide details and undertake overlap mapping with an entity in which it has a right or ability to appoint a director or even merely an observer on the board. This will impose a significant compliance burden on private equity players specifically where they multiple sector-focused investments.

Moreover, such detailed information on the activities (at product level or sales) of companies where there may be a prior minority shareholding can be near impossible to obtain, particularly where the prior shareholding is not a controlled investment. As such, it would be onerous and unreasonable to require the disclosure of all investments with an observer/board seat, especially where such downstream investments: (i) do not require the prior consent of the investor; and (ii) are not controlled investments.

EVOLUTION OF CCI'S APPROACH TOWARDS REMEDIES

Remedies are playing an increasingly important role in the merger review process of the CCI. The CCI has continued to take a pragmatic approach towards remedies in merger cases. In the past year, the CCI has accepted a broad range of structural and behavioural remedies. 

Notably, in Schneider Electric/MacRitchie Investments,³ involving the biggest deal in the electrical and automation space in India, the CCI, after a detailed and complex phase II investigation, for the first time approved a transaction purely on behavioural commitments offered by the parties.⁴ The CCI proposed to address serious competition concerns by requiring divestments of the target's business in a number of products. However, citing practice in the European Union, the acquirers successfully argued for a package of solely behavioural remedies including white labelling, the subsequent provision of non-exclusive technology licences and price caps.

On the other hand, in approving the proposed acquisition of WABCO Holdings Inc. by ZF Friedrichshafen AG,⁵ the CCI rejected the behavioural remedies proposed by the parties and cleared the transaction only with a structural remedy requiring divestment of the acquirer's stakes in a joint venture company in India. 

By now, the CCI has considerable experience with more complex transactions which have required effective engagement on remedies to address competition concerns. In its decisional practice, the CCI has adopted a balanced approach vis-à-vis global remedies. In transactions that involve a global remedy package, the CCI has sought to be consistent with the international remedy and aligned its own decisions with those of the competition authorities in other jurisdictions. At the same time, the CCI has not shied away from taking a different view from that of its international counterparts and awarded India specific remedies if the global remedies do not allay the competition concerns of the Indian market. For example, in Metso Oyj/Outotec Oyj transaction,⁶ the CCI requested for remedies/commitments in India, even though the combination was approved unconditionally in all other jurisdictions. On the other hand, the CCI has also cleared transactions which have been blocked elsewhere: for example, in the Siemens/Alstom transaction, the CCI granted unconditional approval although the transaction was ultimately prohibited by the European Commission.⁷

In another recent decision, the CCI cleared the proposed acquisition by automobile manufacturers Hyundai and Kia for minority shareholdings in ride-sharing company ANI Technologies ("OLA") and its electrical vehicles arm, Ola Electric Mobility, together with strategic cooperation in various areas.⁸ In this case, the CCI considered the implications of the transaction for the radio taxi supply chain, looking at the online system of the OLA App and the process of matching passengers and cabs on the OLA marketplace platform. The CCI highlighted its concerns that drivers of Hyundai and Kia cars might be favoured in the OLA marketplace. These concerns were addressed by a voluntary modification offered by the parties that the strategic collaboration would be on a non-exclusive basis and that the algorithm / programme of the OLA marketplace would not give preference to the drivers driving Hyundai / Kia cars or discriminate against drivers driving other manufacturers' cars. This is first of its kind remedy that has been accepted by the CCI. This is another evidence of evolution of the CCI as a regulator and shows that it is open to accepting niche and effective remedies rather than blocking a transaction. Further, the CCI has become increasingly flexible to promote ease of doing business in India.

TREATMENT OF INTER-CONNECTED TRANSACTIONS

Where a transaction qualifies as a notifiable combination, the notifying party/parties must also notify any inter-connected transactions, even where independently such transactions are not notifiable. Failure to do so can result in penalties under Section 43A of the Competition Act, 2002 ("Competition Act") for failure to notify. Parties failing to disclose such inter-connected transactions in the notification may also be penalised under Section 44 of the Competition Act for omitting to furnish material information (failure to make full and complete disclosure).

The CCI published an order together under Section 43A and 44 of the Competition Act, imposing a penalty of INR 50 lakhs (approx. USD 70,000) on the Canadian Pension Plan Investment Board ("CPPIB") where it had notified an acquisition of an energy company without notifying a subsequent acquisition made by the energy company and indeed without providing details of the second transaction in the notification form submitted to the CCI.⁹ In concluding that the transactions were inter-connected, the CCI took a deep dive and went beyond the transaction documents and scrutinised the press releases issued by the parties as well as internal documents such as e-mail correspondences between the parties. The CCI stated that it would not apply a narrow test in determining whether transactions were inter-connected.

The CCI held that there was no need to show absolute dependence or simultaneity of the transactions and the mere fact that the second transaction could possibly have taken place independently of the first did not mean that they were not interconnected. In relation to non-disclosure, the CCI found there was no specific mention of the second transaction.

This is the first time that the CCI has used Section 43A and Section 44 of the Competition Act together. The order highlights the need for parties notifying a transaction to identify past, current and future transactions that might be inter-connected with the proposed transaction and to ensure that there is full specific disclosure, including of any potential intent in the future.

CLOSER REVIEW OF INTERNAL DOCUMENTATION

Recently, the CCI in reviewing large/high profile transactions is, in line with the practice adopted by the EU and the US regulators, increasingly requesting copies of all documents (including board agendas, studies and internal analysis, pricing studies or any research data) related to the transaction, which were considered by the board of directors and/or the senior management of the company. As seen above, the CCI placed immense reliance on the internal documents of the parties in order to penalise CPPIB for failure to notify and to make full and complete disclosure. Further, recently, the CCI in Adani Port decision, reviewed the internal documents and investor presentation while assessing the information received from the parties and approving the proposed transaction.¹⁰

All such documents, presentations, internal analyses, etc. should be drafted in a conscious manner to ensure that nothing contained in those documents could potentially be used against the parties during the merger review process as well as for future deals.

REMOVAL OF QUERY ON NON-COMPETE

Earlier this year the CCI proposed to amend the Combination Regulations by removing the requirement to identify and justify any non-compete restrictions amongst the parties in the notification form.¹¹ In December, the CCI amended the Combination Regulations to this effect.¹² Subsequently, on 31 December 2020, the CCI also withdrew their guidance note on non-compete restrictions.¹³

The CCI has thus omitted the mandatory query which seeks information on any non-compete obligation, covering 'duration, scope in terms of persons, product(s)/service(s) and territory(ies) and corresponding justification'. It has reasoned that, although it may be possible to conduct a detailed examination on a case to case basis, the approach may not be feasible considering the timelines for combination cases. The CCI has also stated that prescribing a general set of standards for assessment of non-compete restrictions may be not be appropriate in modern business environments. This is a welcome and business friendly approach as the CCI has addressed the commercial realities and the dynamic nature of businesses (i.e., a "one size does not fit all" approach).

This will give the parties flexibility in determining non-compete restrictions, whilst also reducing the information burden on them. However, the parties will continue to be responsible for ensuring that their non-compete arrangements are competition compliant. The CCI has emphasized that any competition concerns that may arise from non-compete restrictions can be assessed under Section 3 (prohibiting anti-competitive agreements) or Section 4 (prohibiting abuses of dominant position) of the Competition Act. This means that, while the CCI has reduced the burden on the parties to detail their non-compete restrictions while seeking prior approval of the transaction, the parties are not being exempted from indulging in anti-competitive activities. This obligation of self-assessment in relation to Sections 3 and 4 of the Competition Act was, in any case, already required to be exercised by the parties. The amendment simply reiterates the CCI's approach and removes the onus on the parties to provide details of the non-compete in the notification form. 

THE CLRC AND THE NEXT ROUND OF AMENDMENTS

The Competition Law Review Committee ("CLRC") was set up in October 2018 to review the Competition Act and related rules and regulations in view of the changing business environment and to recommend the required amendments. The much-awaited report of the CLRC was finalised in July 2019 and was published on 14 August 2019.¹⁴ The CLRC made a number of recommendations for amending or improving the competition law regime, including the merger control regime.

Following the recommendations of the CLRC, the Ministry of Corporate Affairs notified the Draft Competition (Amendment) Bill, 2020, seeking public comments ("Draft Amendment Bill").¹⁵ A number of proposed amendments may result in more transactions being subject to the CCI review. The following major changes to the merger control regime had been recommended by the CLRC in its report:

1. Introduction of the green channel route for the automatic approval of certain transactions. As highlighted earlier, the Combination Regulations have already been amended to this effect;
2. Adoption of an enabling provision which would empower the Government of India to introduce the necessary thresholds including a deal-value threshold for combinations to be notified to the CCI. This recommendation is reflected in the Draft Amendment Bill which proposes to allow the Central Government to introduce any notifiability criteria such as deal value, market share or other notifiability criteria. This may result in strategic high value transactions, especially in digital markets, becoming subject to merger review; 
3. Dilution of the obligation not to implement a merger before the CCI clearance (the "standstill" obligation) in case of public bids and hostile takeovers; and
4. The redefinition of "control" as the ability to exercise "material influence" as opposed to "decisive influence". The Draft Amendment Bill seeks to codify this standard of "material influence". This will significantly dilute the test of control and will likely increase the number of transactions that will have to be notified. 

Lastly, on a positive note, in an attempt to speed up the review process, the Draft Amendment Bill proposes to reduce the current overall 210-day review period to 150 calendar days. This will significantly reduce the clearance time for combinations in India and will be a significant step towards government's policy of promoting ease of doing business in India.

OTHER KEY TRENDS AND DEVELOPMENTS

Insolvency Cases: Failing Firm Defence

The failing firm defence is appropriate to be raised in proposed transactions involving insolvency resolution proceedings under the Insolvency and Bankruptcy Code ("IBC"). In 2019, the CCI approved 10 insolvency cases and in 2020, the CCI had approved only around 2 insolvency cases.

Increase in filing fee of notification forms

The CCI increased the filing fees payable by the parties for filing a notification form with the CCI by approximately 30%.¹⁶ The revised filing fee for filing of Form 1 is INR 20 lakhs (as opposed to INR 15 lakhs prescribed previously) and for filing of Form 2 is INR 65 lakhs (as opposed to INR 50 lakhs prescribed previously). This appears to further the recommendation of the CLRC to increase the financial independence of the CCI.

Filing and information requirements for private equity deals

Lately, the CCI is keeping a very close watch on the investments that are made by private equity players. Typically, private equity investments are notified using the short-form merger notification (Form I). However, even Form I requires detailed information, including details of investments by portfolio companies to be submitted to the CCI. Such requirements tend to be arduous for large private equity funds which are usually sector focused funds. It may also raise confidentiality concerns due to the detailed level of information required to be submitted. The CCI has been paying closer attention to: (i) "common ownership" in the simultaneous ownership of non-controlling stakes in competing companies; (ii) information rights available with the private equity players; and, (iii) internal documents such as board presentations and documentation prepared for the transaction.

Recently, the CCI has also announced to conduct a market study on the private equity investments in India.¹⁷ The study is aimed to understand the trends and patterns of common ownership by private equity investors across various sectors in India.

CONCLUSION

There have been a number of important developments in relation to merger control in India. The recent amendments are in general a welcome move in the merger control regime in India. Over the years, the CCI has gained a lot of experience in handling cases involving complex fact patterns and markets. It has shown that it has the requisite capacity to design remedies taking account of the specific characteristics of the Indian markets. It has taken steps towards adopting best practices and lessons learned from more mature merger control jurisdictions.

There are certain concerns that continue to exist, for example the approach to minority acquisitions by sector-focused private equity players and the often burdensome filing requirements for straightforward transactions. Some of these issues may be addressed by future legislative changes. In any case, it is hoped that the CCI will maintain a steady course in balancing the interests of the notifying parties in a speedy and proportionate review of their transactions with the CCI's requirement of a robust and effective merger control system. 

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Further, the views in this article are the personal views of the author.

Footnotes 

1 The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2019.

2 The CCI has drawn guidance from the Canadian Merger Enforcement Guidelines.

3 Combination Registration No. C- 2018/07/586 (18 April 2019) Schneider Electric India Pvt. Ltd. and MacRitchie Investments Pte. Ltd.

4 Combination Registration No. C- 2018/07/586 (18 April 2019) Schneider Electric India Pvt. Ltd.and MacRitchie Investments Pte. Ltd.

5 Combination Registration No. C- 2019/11/703 (14 February 2020) ZF Friedrichshafen AG/ WABCO Holdings Inc.

6 Combination Registration No. C-2020/03/735 (18 June 2020) Metso Oyj/Outotec Oyj.

7 Combination Registration No. C- 2018/07/588 (1 November 2018) Siemens/Alstom.

8 Combination No. C-2019/09/682 (30 October 2019) Hyundai Motor Company and KIA Motors Corporation.

9 CCI, Proceedings against Canada Pension Plan Investment Board and ReNew Power Limited under Chapter VI of the Competition Act, 2002 (21 November 2019).

10 Combination Registration No. C-2020/02/726 (22 July 2020) Adani Ports and Special Economic Zones Limited,

11 Available here: https://www.cci.gov.in/sites/default/files/press_release/PR102020-21.pdf

12 Available here: http://www.egazette.nic.in/WriteReadData/2020/223361.pdf

13 Available here: https://www.cci.gov.in/sites/default/files/press_release/PR492020-21.pdf

14  This was published on the website of the Ministry of Corporate Affairs (http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf).

15 Draft Competition (Amendment) Bill, 2020.

16 The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Second Amendment Regulations, 2019.