Focus: New Indian merger laws – implications for Australian businesses
17 May 2011
In brief: The Competition Commission of India this week issued the final version of its merger regulations, which are likely to have significant consequences for mergers and acquisitions involving companies with operations or assets in India. Partners David Brewster (view CV) and Fiona Crosbie (view CV) and Lawyer Timothy Lamb report on this move, which follows the recent announcement by the Government of India that will bring into force the merger control regime contained in the Indian Competition Act 2002 with effect from 1 June 2011.
- The merger thresholds
- Transactions covered by the Indian merger control regime
- Substantive competition test
- Merger notification
- Filing deadlines
How does it affect you?
- The Competition Act establishes a mandatory pre-merger notification regime.
- This regime captures a broad range of transactions. Provided one party to the transaction has existing turnover or owns assets in India exceeding specified thresholds, then the transaction will need to be notified unless it falls within certain exemptions.
- The Competition Commission of India (the CCI) must approve a notifiable transaction before completion. This may have a material impact on the timing of a deal, as there will be long timeframes for clearance.
A company (the acquirer or the target) with assets or turnover exceeding the merger thresholds in India may be required to notify the CCI whenever it enters into a merger or an acquisition anywhere in the world. In particular, transactions between non-Indian companies may trigger a notification requirement if one or both of those companies has subsidiaries or other operations in India that generate turnover or own assets exceeding the thresholds.
The obligation to notify under the Competition Act is triggered if the following thresholds are met or exceeded:
- individually or together the acquirer and the target have:
- combined assets in India of INR1500 crores (approx A$320 million) or combined turnover in India of INR4500 crores (approx A$960 million); or
- combined worldwide assets of US$750 million, including combined assets in India of INR750 crores (approx A$160 million); or
- combined worldwide turnover of US$2.25 billion, including combined turnover in India of INR2250 crores (approx A$480 million); or
- the combined company group to which the target will belong post-acquisition has:
- assets in India of INR6000 crores (approx A$1.3 billion) or turnover in India of INR18,000 crores (approx A$3.85 billion); or
- worldwide assets of US$3 billion, including assets in India of INR750 crores (approx A$160 million); or
- worldwide turnover of US$9 billion including turnover in India of INR 2250 crores (approx A$480 million).
Assuming the above thresholds are met and the exemptions below do not apply, the merger control regime will capture:
- share acquisitions;
- asset deals; and
- the establishment of an incorporated joint venture, as well as, potentially, unincorporated joint ventures.
The Regulations provide that certain transactions do not require notification even if the merger thresholds are exceeded. The categories of exempt transactions have been expanded from what the CCI initially proposed, following significant concerns about the breadth of the regime. Non-notifiable transactions include acquisitions:
- of less than 15 per cent of shares in the target;
- where the acquiring party already has 50 per cent or more of the shares in the target;
- within the same corporate group;
- of assets not directly related to the business activity of the acquiring party;
- for a transitionary five-year period, involving a target with assets of less than INR250 crores (approx A$53 million) and turnover of less than INR750 crores (approx A$160 million); or
- taking place entirely outside India, with insignificant local nexus and effects on markets in India.
While the expanded list of non-notifiable transactions is a welcome development, there are still likely to be problems in the application of the Regulations, given the uncertain interpretation of some key expressions, and potential anomalies in the treatment of global share transactions versus assets acquisitions.
The Indian Competition Act provides for lengthy timeframes for clearance that are likely to materially impact deal timetables. Completion of any notifiable transaction must not take place until either:
- the CCI makes an order in relation to the proposed transaction; or
- the expiry of a period of 210 days from the day on which the transaction was notified.
In an attempt to allay concerns in relation to these timeframes, the CCI has stated that it will seek to clear between 90 to 95 per cent of cases within 30 days and will endeavour to clear any cases with serious competition issues within 180 days. However, there is no requirement in the Competition Act for these shorter timeframes to be achieved.
If a transaction requires notification, the substantive test set out in the Competition Act requires the CCI to investigate whether the combination is likely to cause an 'appreciable adverse effect on competition'.
Responding to criticism that the merger notification forms would impose an undue administrative burden on business, the Regulations now propose a short-form (Form I) or long-form notification (Form II). A short-form notification may be submitted for certain transactions, notably:
- horizontal mergers that give rise to a combined market share of less than 15 per cent in the relevant market; and
- vertical mergers in which one or both of the parties combined have a market share of less than 25 per cent in the relevant market.
Other transactions will typically require a much more extensive notification (ie Form II). The Regulations reduce the amount of information that is required to be submitted should the CCI require a Form II notification. However, a Form II notification will still require the provision of very substantial amounts of information. Given the level of detail required, there is likely to be substantial scope for the CCI to claim that the merger filing is incomplete and 'stop the clock' on the already long waiting periods.
There is also a specific form (Form III) for share subscriptions, financing facilities or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement. This must be filed within seven days from the date of the acquisition.
Any merger notification to the CCI must occur within 30 days of 'approval of the proposed merger or amalgamation ... by the board of directors of the enterprises concerned' or 'the execution of any agreement or other document for [the] acquisition'.
Companies are therefore likely to come under considerable pressure to submit the merger filings within the statutory timetable. Failure to notify or notifying late can subject a business to a fine of up to 1 per cent of total turnover or assets relating to the transaction. It is therefore crucial that companies are on top of any Indian merger control issues as early as possible in the transaction.
The implications of the new merger regime are wide ranging. The breadth of transactions potentially captured by the Indian merger control regime and the timeframes for clearance are likely to impact on Australian businesses.
While the CCI and the Indian Government have clarified some aspects of the Competition Act, there remains uncertainty about certain key aspects of its implementation.
- David BrewsterPartner,
Ph: +61 3 9613 8707
- Fiona CrosbiePartner,
Ph: +61 2 9230 4383
- Kon StelliosPartner,
Ph: +61 2 9230 4897
- Carolyn OddiePartner,
Ph: +61 2 9230 4203
- Jacqueline DownesPartner,
Ph: +61 2 9230 4850
- Ted HillPartner,
Ph: +61 3 9613 8588