The Merger Control Review: India
The Indian merger control regime came into force on 1 June 2011 and is primarily governed by the (Indian) Competition Act 2002 (the Competition Act) and the Combination Regulations.2 Over the past decade, the law and practice have greatly evolved as various teething issues have been addressed, and the Competition Commission of India (CCI) has now begun to tackle more nuanced merger control-related issues.
During 2020, the coronavirus pandemic occupied centre stage and adversely impacted deal-making globally. However, the CCI remained busy with several big-ticket domestic and cross-border transactions. The CCI also introduced key amendments in its guidance notes and issued important decisions relating to gun-jumping, remedies and data-centric mergers. The CCI also responded well to the covid-19 restrictions to ensure there were minimal delays in its merger review process.
i The legal framework
Under the relevant provisions of the Competition Act and the Combination Regulations, the CCI has been tasked with the duty of reviewing mergers (referred to as 'combinations'3 under Indian law). India follows a mandatory and suspensory merger control regime, and all transactions that meet the prescribed jurisdictional thresholds, and are not otherwise exempt, are required to be pre-notified to the CCI. The Competition Act provides jurisdictional thresholds on a party basis and on a group basis, and if either test (based on either assets or turnover values)4 is met, the transaction must be pre-notified to the CCI.
The Competition Act and the Combination Regulations also prescribe certain exemptions; for instance: (1) minority acquisitions of less than 25 per cent shareholding, provided that the acquisition is either 'solely for investment purposes' or is in the 'ordinary course of business' and does not lead to the acquisition of control; (2) creeping acquisitions of between 25 per cent and 50 per cent shareholding without change in control; and (3) purely internal reorganisations (subject to certain conditions). Additionally, in 2017, the government also introduced a de minimis target-based exemption pursuant to which transactions in which the value of the enterprise being acquired, merged or amalgamated (or in the case of an asset or business acquisition, the value of the assets or business being acquired, merged or amalgamated) is less than 3.5 billion rupees in India (or turnover attributable to the assets is less than 10 billion rupees in India) do not need to be notified to the CCI (target exemption).
Therefore, while the jurisdictional thresholds seek to cast a wide net, the exemptions appropriately filter out transactions that are unlikely to raise any competition concerns, ensuring that the notification process is well balanced.
ii Regular updates to the framework
Like all well-oiled machinery, the CCI regularly updates or amends the merger control framework to address prevailing and trending issues and to align with international best practice.
In January 2016, the Combination Regulations were amended to provide guidance on the scope of 'solely for investment purposes' (which is a critical limb of the minority share acquisition exemption discussed above). It was clarified that an acquisition of less than 10 per cent shareholding or voting rights of a target will be treated as solely for investment purposes, provided the acquirer: (1) is able to exercise only rights of ordinary shareholders, to the extent of their respective shareholding; (2) does not have or intend to have a seat on the board; and (3) does not intend to participate in the management or affairs of the target. This has provided much-needed clarity and has drawn a clear line in the sand, especially for private equity investors who are regularly involved in minority investments.
In November 2016, the CCI published FAQs for the first time, providing helpful informal guidance to stakeholders on various merger control-related aspects. The CCI has occasionally updated the FAQs, and certain important issues such as the methodology for calculating turnover have been clarified through these FAQs.5
In June 2017, in response to concerns raised by various stakeholders, the CCI removed the requirement of parties having to file a notification within 30 days of entering into definitive documents. The previous 30-day timeline was a sticking point for parties as it was insufficient for the preparation of a robust filing, or for aligning with filings in other jurisdictions. Now, parties are permitted to file at any time before closing, adding a lot more flexibility to the process and aligning the regime with international best practice.
In October 2018, the CCI introduced a number of helpful amendments to the Combination Regulations, in particular allowing parties to 'pull and refile' a merger notification (to avoid 'invalidations' of defective filings) and enabling parties to offer remedies before the start of a detailed Phase II investigation. This has helped in reducing the number of transactions that are required to enter a detailed Phase II investigation.
In August 2019, in response to industry feedback that review timelines often acted as a bottleneck, and could even delay the implementation of non-problematic transactions, the CCI introduced the 'green channel' route. Under this route, transactions in which there are no horizontal overlaps, vertical relationships or complementary activities between the parties (including their groups) will be 'deemed approved' on the day of filing the notification form itself (in the prescribed format) with the CCI. This is a welcome change and has greatly facilitated the government's 'ease of doing business in India' mission.
Most recently, in March 2020, the CCI introduced certain key clarifications through its guidance notes. For the first time, it clarified the scope of entities that are required to be included while determining overlaps, and clarified that it should include all entities where a party has a 10 per cent or more shareholding, or the right or ability to exercise any rights not available to an ordinary shareholder, or the right or ability to nominate a director or observer. This has significantly widened the scope of the overlap analysis, especially for private equity firms that typically have minority investments in multiple portfolio entities. Various stakeholders have raised concerns that these goalposts established by the CCI are too wide, and will make the information-gathering process extremely burdensome and complex.
The March 2020 guidance notes also provide helpful guidance on the scope of 'complementary activities', which is an important issue for any competitive assessment, as well as in examining the availability of the green channel route (discussed above). The guidance notes now clarify that products and services shall only be considered complementary when they are related products as they are typically combined and used together (e.g., printers and ink cartridges), and in general, a complementary product or service will enhance the value of the other complementary product or service. This is helpful as there was previously no guidance from the CCI on its understanding of complementary activities, and parties were shooting in the dark while setting out their analysis of these.
Further, in response to covid-19, in March 2020 the CCI also swiftly introduced measures allowing for electronic merger filings and virtual pre-filing consultation meetings with the case teams, ensuring there were no roadblocks created as the world moved into a remote working environment. This was a significant logistical change as the CCI was previously a stickler for hard copy filings and furnishing of original documents.
Accordingly, the legal framework is constantly being fine-tuned, which has greatly contributed to the regime evolving fairly quickly. Having said that, there are still several holes that need to be plugged as the CCI matures in its practice, as is further discussed below.
Year in review
Over the past decade, the CCI has reviewed approximately 800 transactions, with remedies being imposed in approximately 22 cases (3 per cent of all cases). Only eight cases (1 per cent of all cases) have moved into a detailed Phase II investigation (all others have been approved during Phase I), and no transaction has been blocked as yet, demonstrating that the CCI has largely followed a business-friendly approach. The CCI had its hands full in 2020, and reviewed close to 88 transactions, with remedies being imposed in three cases. The busiest sectors were finance, power, IT and pharmaceuticals.
With the CCI having gained considerable experience over the years, it has begun to grapple with more nuanced and complex merger control-related issues. We set out below various key issues and trends.
i Evolution of the CCI's approach towards remedies
In its early days, while the CCI was still finding its footing, its 'go-to' remedy was divestments, which are globally considered to be the easiest and cleanest fix. To date, the CCI has imposed divestments in approximately 11 cases.6 However, the CCI's orders have received some criticism from the industry as being over-interventionist and excessive at times.
Over the past couple of years, the CCI has demonstrated its willingness to accept other forms of remedies, provided that they are sufficient to address the competition concerns. The CCI has signalled that it will not follow a 'one size fits all' approach and will carefully tailor its remedies to the specific harm identified in each case.
In April 2019, in Schneider/L&T,7 the CCI cleared a Phase II investigation purely based on behavioural remedies to address horizontal concerns for the first time. The transaction involved a merger of two large players in the electrical and automation components sector. The CCI raised concerns in six out of the 29 overlapping markets, where parties had high combined market shares and where there were insufficient competitive constraints from other players. To address the concerns identified, the CCI accepted an array of behavioural remedies, including price caps, private labelling arrangements, removal of any exclusivity obligations in the parties' distribution agreements, granting of technology licences, agreed minimum research and development spend and commitment not to reduce current product lines. Importantly, the parties were able to present effective arguments on why a divestment was not feasible in this case, owing to the specific industry dynamics.
In October 2019, in Hyundai/Kia/Ola,8 the CCI accepted remedies in the form of undertakings filed by parties not to engage in certain discriminatory conduct, to allay concerns around self-preferencing.
Most recently, in June 2020, while considering the proposed acquisition by Outotec of the minerals equipment business of fellow Finnish company Metso, the CCI accepted a remedy pursuant to which Metso India was required to transfer its business by granting an exclusive and irrevocable licence of its technology to a third party. This was the first time that the CCI accepted the transfer of rights for a technology as a stand-alone remedy to address competition concerns.9
Thus, the CCI has recently demonstrated flexibility in crafting remedies, provided it believes that they are sufficient to address the concerns identified.
ii Close attention to private equity deals
Recently, the CCI has been keeping a very close eye on transactions involving minority investments by private equity funds. The CCI's focus has been on issues arising from cross shareholding in competing enterprises and interlocking directorates.
In ChrysCapital/Intas,10 for the first time, the CCI imposed a remedy in a transaction involving a minority acquisition by a private equity fund. The CCI approved the transaction on the condition that the acquirer fund would remove its nominee director on the board of a competing portfolio entity (to the target) and would not exercise its veto rights on certain strategic matters in the competing entity. This represents a shift in the CCI's previous light-touch approach in transactions involving common minority ownership.
The CCI will need to be mindful that it does not overextend itself as it has been previously criticised for inappropriately distinguishing between control rights and mere minority protection rights, often blurring the line between the two. Accordingly, the CCI will need to strike an appropriate balance in its approach.
Further, with the March 2020 guidance notes (discussed in Section I.ii), the CCI has significantly widened the scope of overlap analysis, not only in its purview of controlled entities, but of all entities in which a party has a direct or indirect shareholding of 10 per cent or more, or the right or ability to exercise any rights not available to an ordinary shareholder, or the right or ability to nominate a director or observer. This has made the entire notification process rather cumbersome and time consuming, leading to a significant increase in the level of information required to be disclosed (especially by private equity firms) in notification forms.
Additionally, the CCI has also recently announced that it is conducting a market study on the private equity investments landscape in India.11 The study is aimed at understanding the trends and patterns of common ownership by private equity investors across various sectors in India and should help the CCI attain a better understanding of these aspects.
Therefore, private equity firms should be careful in structuring transactions in India as the CCI is 'interested' if, pursuant to an investment, the investor receives any rights (including the right to appoint an observer) not available to an ordinary shareholder. Also, given the CCI's focus on investments in the same sector, an extensive review of portfolio investments is necessary prior to notifying the CCI.
iii Hard line on gun-jumping
The merger control regime in India is suspensory in nature. Accordingly, if parties consummate a notifiable transaction (or any step of a notifiable transaction) prior to CCI approval, the CCI has the power to impose a penalty of up to 1 per cent of the combined turnover or assets of the transaction, whichever is higher.
The CCI refrained from imposing penalties during the first two years of the merger control regime. However, thereafter, it has not shied away from this, including in cases where parties may have made a bona fide mistake, signalling its 'zero-strikes' policy to the industry going forward.
Over recent years, the CCI has had the opportunity to address a number of different forms of gun-jumping conduct, and has come down hard on errant enterprises. The forms of conduct found to be violative have included:
- a valuation methodology that the CCI believed would allow the acquirer to exercise notional control over the target prior to closing;12
- pre-payment of consideration;13
- grant of a loan to the target prior to closing;14
- providing a corporate guarantee on behalf of the target to secure a loan, prior to closing;15
- gaining permissions to use the target's trademarks prior to closing;16 and
- closing the global leg of a deal, pending CCI approval.17
In its most recent penalty order (November 2019), the CCI imposed a fine of 5 million rupees on a party for failing to disclose a subsequent 'inter-connected' transaction while seeking approval for a transaction, and not notifying and closing the subsequent transaction.18 The CCI rejected the parties' arguments that at the time of the original investment, the subsequent transaction had not attained finality. It was of the view that, notwithstanding the uncertainty around such a future step, the parties were still required to disclose and seek approval for it as part of the original investment. The approach adopted by the CCI in this case has added another layer of complexity in notifying transactions, as future steps of a reportable transaction may need to be disclosed, even where these are still being contemplated and there is no finality to them at that stage.
There were no penalty orders issued in 2020 or to date in 2021, demonstrating that parties have become more aware of the legal regime in India, and there are less 'slip-ups'.
iv Recent spotlight on portfolio effects
Initially, when the CCI was still sharpening its blade, it focused more on unilateral effects (i.e., the strength of the combined entity and its ability to increase prices or engage in other anticompetitive conduct post-transaction) and coordinated effects. However, of late, the CCI has been venturing into other, more nuanced theories of harm, such as portfolio effects.
Portfolio effects have become a hot topic with the CCI and it has been a key point of consideration in at least three recent deals. In Bayer/Monsanto,19 one of the key theories of harm identified by the CCI was portfolio concerns, and one of the remedies imposed in this case was an undertaking by the parties not to bundle any products. In Schneider/L&T,20 portfolio effects once again occupied centre stage, and one of the key issues identified by the CCI was that the industry was characterised by the bundling of products. It noted that the combined entity would gain a significant advantage by having access to a wider portfolio of products after the transaction. As discussed in Section II.i, this transaction was ultimately approved based on a variety of behavioural remedies. Similarly, in 2020, in the Siemens Healthineers/Varian transaction,21 the CCI again undertook a detailed portfolio analysis of the parties' medical equipment portfolios and ultimately concluded that there were no serious portfolio or other concerns.
The CCI's close attention to portfolio effects is further evidenced by the 2020 guidance notes, in which it provides guidance on the scope of complementary activities for the first time, as discussed in Section I.ii.
Therefore, parties should be mindful of this newest arrow in the CCI's quiver and should internally undertake a detailed portfolio analysis (in addition to the more traditional unilateral and coordinated effects analysis) prior to filing, to mitigate any potential competition concerns.
v Examination of data-related issues
Similar to other agencies around the world, the CCI has demonstrated a great interest in big data and data-related theories of harm.
In 2020, in at least two transactions, the CCI considered the consequences of data sharing between the relevant parties.22 In both cases, the CCI ultimately came to the view that the transactions did not raise any data-related or other concerns. Previously, in 2018, in the Bayer/Monsanto transaction,23 one of the key remedies imposed by the CCI while approving this major agrochemicals merger was that parties were required to provide the government of India with free access to their Indian agroclimatic data.
In the coming years, we anticipate that data will continue to play a key role and we can also expect more data-centric remedies to be imposed.
vi Distressed company transactions
The CCI has been receiving an increasing number of notifications for transactions filed pursuant to the (Indian) Insolvency and Bankruptcy Code (2016). The Code sets out a specific timeline for the bankruptcy process, and there were concerns regarding whether the CCI would be able to review transactions within the framework of the Code. The CCI has reviewed approximately 12 such transactions in the past two years, and has approved all of these relatively quickly, within Phase I, allaying any concerns around timelines.
Given that none of these transactions raised any significant competition concerns, the failing firm defence (which is recognised under the Competition Act to some extent) has not yet been called into play. However, with the number of these transactions likely to increase (especially owing to the pandemic), it will be interesting to see how amenable the CCI will be to accepting this defence.
The trends discussed above demonstrate that the CCI is becoming a more experienced authority and has started sinking its teeth into more complex merger control issues. Parties should be mindful of these trends to ensure they do not trip up in their filings with the CCI.
The merger control regime
i Timelines and review process
The CCI's review process involves two phases, namely Phase I and Phase II (the latter being reserved for more problematic transactions that are not cleared during Phase I).
In its Phase I review, the CCI is required to form a prima facie opinion on whether a transaction causes or is likely to cause an appreciable adverse effect on competition (AAEC) in India, within 30 working days of the filing. This period will be extended by 15 working days if the CCI reaches out to third parties (such as customers, competitors, suppliers and government agencies). This period may be further extended by 15 calendar days if the parties offer remedies in Phase I. If the CCI requests additional information or requires the parties to remove defects, it 'stops the clock', which is restarted only once the parties have filed the complete information sought. Therefore, in practice, the Phase I review typically lasts between 60 and 90 days.
If the CCI forms a prima facie view that a transaction is likely to cause an AAEC in India, it will issue a show cause notice asking the parties to explain within 30 calendar days why an in-depth investigation should not be conducted. After reviewing the parties' response, if the CCI is still of the view that the transaction is likely to cause an AAEC in India, it will proceed with a detailed Phase II investigation.
To date, all but eight transactions have been cleared by the CCI during Phase I.
If the transaction moves to Phase II, the CCI has an overall period of 210 calendar days from the date of notification to conclude its entire review. However, this 210-day period excludes two periods of 30 working days (which is the time taken to negotiate remedies), as well as any extensions taken by the parties to furnish additional information. Therefore, in several cases, the overall period has exceeded 210 days.
Parties can generally seek to accelerate timelines by regularly engaging with the case team formally and informally to address any concerns. Further, engaging in pre-filing consultations with the CCI before making the formal filing, on both procedural and substantive issues, also helps to speed up the formal review process once the formal filing goes in.
ii Third-party involvement
Third parties may be involved in both Phase I and Phase II of the review process. In Phase I, the CCI can reach out to third parties for their comments and observations on the transaction. The CCI is increasingly using this power and is contacting third parties during the Phase I review period. If the review goes into the detailed Phase II process, public consultation is a mandatory requirement. Any member of the public may file written objections within 15 working days of the date of publication of the details of the combination in the public domain. In various cases (for instance, PVR/DT,24 Bayer/Monsanto25 and Schneider/L&T26), numerous third parties filed their objections to the transaction. However, the CCI typically allows notifying parties a fair opportunity to address any concerns raised by third parties.
Any person aggrieved by a CCI order approving or prohibiting a transaction, or imposing fines for gun-jumping, may file an appeal with the National Company Law Appellate Tribunal (NCLAT) within 60 days of receipt of the order. Orders of the NCLAT can be further appealed to the Supreme Court of India (i.e., the apex court of India). Previously, in Jet/Etihad,27 the appellate authority held that a third party was not an 'aggrieved party' and the appeal was dismissed. However, in the Walmart/Flipkart case,28 the NCLAT adjudicated an appeal filed by a third party on its merits. It therefore appears that third parties may have a right to appeal merger decisions in certain limited cases if they are able to demonstrate that they are an aggrieved party.
Other strategic considerations
Cooperation with other jurisdictions
With the surge in multi-jurisdictional filings, the call for international cooperation among competition authorities has greatly increased. To this end, the CCI has signed memoranda of understanding (MOUs) with several foreign competition authorities, including those in the European Union, the United States, Brazil, Russia, South Africa, Canada and Australia, setting up a framework for mutual cooperation between the CCI and the competition authorities in these jurisdictions.
In numerous cases, the CCI has relied on such MOUs to engage with other authorities. For instance, in the EMC/Denali transaction,29 the CCI engaged with authorities in Australia, the EU and the US to align on issues such as market definition. Thereafter, in two cases in the agrochemicals space (Chemchina/Syngenta30 and Dow/DuPont31), the CCI reached out to various foreign authorities to align on various issues, including remedies. Accordingly, parties should be mindful of the possibility of the CCI reaching out to other authorities in multi-jurisdictional filings and should therefore seek to take consistent positions across their filings.
Outlook and conclusions
Over the coming years, it is expected that most economies will still be reeling from the after-effects of the pandemic, and it will be some time before we return to 'business as usual'.
We expect the CCI to play a constructive role, given that a conducive deal-making environment will be a priority for the government for the next few years, and the CCI has already proven itself as sufficiently experienced in crafting innovative remedies to address competition concerns.
The economic downturn is also likely to result in an increase in the number of transactions filed with the CCI pursuant to the Insolvency and Bankruptcy Code.
Further, private equity deals are expected to proliferate and the CCI is likely to continue to closely examine and address issues arising from common ownership in competing entities. However, the CCI will need to be mindful that it does not overextend itself and will need to strike an appropriate balance in its approach while dealing with minority investments. The CCI will need to apply principles that are more acceptable and business-friendly and not impose an undue burden on parties.
We also anticipate that the CCI will continue to draw a hard line on gun-jumping cases and will punish even technical and bona fide errors. Parties should be mindful of this and should try to be as careful and honest as possible on this issue.
Further, given the internet of things movement and growth of e-commerce, we believe that the number of data-related transactions filed with the CCI will likely increase over the next few years. The CCI is well equipped to deal with these transactions and has demonstrated its capabilities in the past year.
Additionally, we believe the CCI will also continue to evolve its substantive analysis and will increasing rely on robust economic analysis and tools to finesse its assessment. In terms of review timelines, we expect the CCI to continue to operate efficiently (as it has done over the past year) without any significant delays in its review process. Further, digital filings and virtual hearings are likely to continue to be the norm for at least the next three to six months.
Finally, the government of India had launched a public consultation on a new draft Competition Amendment Bill, dated 12 February 2020. The proposed amendments include revisions in the process for setting thresholds (including granting the CCI the power to introduce deal value-based thresholds), changes to the definition of 'control' to lower the standard from 'decisive influence' to 'material influence', reducing the review timelines, and introducing the possibility of seeking waivers of the standstill obligation in certain cases. The Bill has still not been introduced in Parliament and while we do not agree with all of the proposed amendments, the proactive approach of the government in seeking to update and amend the law is welcome.
Therefore, it seems that the next few years will bring an interesting mix of calm waters and rough storms.
1 Naval Satarawala Chopra and Gauri Chhabra are partners, and Ritwik Bhattacharya is a principal associate, at Shardul Amarchand Mangaldas & Co.
2 Competition Commission of India (Procedure in regard to the transaction of business relating to Combinations) Regulations 2011 (the Combination Regulations).
3 'Combination' includes acquisitions (of shares, voting rights, assets or control), mergers and amalgamations, which are reportable to the CCI.
4 The jurisdictional thresholds are available at http://cci.gov.in/sites/default/files/quick_link_document/Revised%20thresholds.pdf.
5 For the first time, the FAQs clarified that intra-group turnover is not required to be included, and export turnover is required to be included, while computing the turnover value. Previously, this was a grey area with conflicting decisions and practices.
6 C-2014/05/170 Sun/Ranbaxy (5 December 2014); C-2014/07/190 Holcim/Lafarge (30 March 2015); C-2016/08/418 Abbott/Saint June (13 December 2016); C-2016/08/424 China National Agrochemical Corporation (16 May 2017); C-2016/05/400 Dow/DuPont (8 June 2017); C-2017/06/519 FMC (18 September 2017); C-2016/10/443 Agrium/PotashCorp (27 October 2017); C-2017/08/523 Bayer/Monsanto (14 June 2018); C-2018/01/545 Linde/Praxair (6 September 2018); C-2019/11/703 ZF/WABCO (14 February 2020); and C-2020/03/735 Outotec/Metso (18 June 2020).
7 C-2018/07/586 Schneider/L&T (18 April 2019).
8 C-2019/09/682 Hyundai/Kia (30 October 2019).
9 C-2020/03/735 Outotec/Metso (18 June 2020).
10 C-2020/04/741 ChrysCapital/Intas (30 April 2020).
12 C-2017/10/531 Bharti Airtel/Tata Teleservices (27 August 2018).
13 C-2016/04/387 LT Foods/DMCC (11 May 2018); C-2018/01/544 Chhatwaal Group/Infraventure (8 August 2018).
14 C-2018/01/547 Adani/Reliance (30 July 2018).
15 C-2015/02/246 Ultratech/Century (12 March 2018).
16 C-2017/02/485 ITC/Johnson (11 December 2017).
17 C-2015/07/297 Baxter/Baxalta (8 March 2016); 2015/07/289 Eli Lilly/Novartis (15 July 2016).
18 C-2017/11/536 CPPIB/ReNew (21 November 2019).
19 C-2017/08/523 Bayer/Monsanto (14 June 2018).
20 C-2018/07/586 Schneider/L&T (18 April 2019).
21 C-2020/12/798 Siemens/Varian (10 February 2021).
22 C-2020/06/747 Facebook/Jio (24 June 2020); C-2020/09/775 Google/Jio (11 November 2020).
23 C-2017/08/523 Bayer/Monsanto (14 June 2018).
24 C-2015/07/288 PVR/DT (4 May 2016).
25 C-2017/08/523 Bayer/Monsanto (14 June 2018).
26 C-2018/07/586 Schneider/L&T (18 April 2019).
27 Jitendra Bhargava v. CCI, March 2014.
28 CAIT v. CCI, March 2020.
29 C-2016/01/370 EMC/Denali (13 April 2016).
30 C-2016/08/424 China National Agrochemical Corporation (16 May 2017).
31 C-2016/05/400 Dow/DuPont (8 June 2017).