The Government of India Has Notified the Merger Control Provisions of the Competition Act, 2002

April 28, 2011

Please note that the jurisdictional thresholds set out in the client alert below refer to the assets "or" turnover of entities involved in the combination.  Accordingly, if the acquirer and target, or surviving entity or group, as applicable, meet either the specified asset threshold or the specified turnover threshold, the regulations will apply.  Also, an enterprise whose control, shares, voting rights or assets are being acquired and that has assets of not more than Rs. 250 crore or turnover of "not" more than Rs. 750 crore will be exempt from the provisions of Section 5 of the Competition Act.

In the first week of March 2011, the Ministry of Corporate Affairs, Government of India ("Corporate Affairs Ministry"), issued a notification appointing June 1, 2011 as the date on which Sections 5, 6, 20, 29, 30 and 31 of the Competition Act, 2002 ("Merger Control Provisions") will become effective.  The Competition Commission of India ("Competition Commission") is now empowered to regulate and approve certain types of mergers, acquisitions and amalgamations.  The Merger Control Provisions deal with the regulation of "combinations" in India, i.e., mergers or amalgamations exceeding a prescribed size that may have an "appreciable adverse effect" on competition within the relevant market in India.  The notification of the Merger Control Provisions will impact potential M&A transactions in India.

Background:

Prior to 1991, mergers and acquisitions were subject to antitrust provisions contained in the Monopolies and Restrictive Trade Practices Act, 1969 ("MRTP Act"), a law which had its motive force in the curbing of monopolies.  As part of India’s "New Economic Policy" and liberalization in 1991 which entailed fundamental fiscal stabilization and structural adjustment, the merger control provisions of the MRTP Act were replaced and amendments were made to Indian company law.  Since then, an acquisition of more than a 25% equity stake in a company where the acquirer, seller or the resulting entity would constitute a "dominant undertaking" requires prior government approval.  Broadly speaking, a "dominant undertaking" (as defined in the MRTP Act) is an undertaking that has a 25% market share.  Given that the 25% threshold was a difficult one to meet, few transactions fell within the ambit of the extant merger control provisions which, consequently, were rarely implemented.

The Competition Act, 2002 ("Competition Act") was enacted in January 2003 with a view to better regulating competition in India by prohibiting anti-competitive agreements, the abuse of a dominant position and regulating combinations.  The Competition Act was partially enforced in 2003.  The Competition Commission itself was established on October 14, 2003.  The provisions relating to anti-competitive agreements and abuse of dominance were notified in May 2009.  However, although the Competition Act contained extensive Merger Control Provisions which would enable the Competition Commission to determine whether a "combination" was anticompetitive, the Merger Control Provisions of the Competition Act were never enforced by the Government of India, despite repeated rumors of potential enforcement.

Subject to certain amendments to the Competition Act and judicial precedents, the Corporate Affairs Ministry finally issued a notification appointing June 1, 2011 as the date on which the Merger Control Provisions of the Competition Act would become effective.

Combinations:

From June 1, 2011, all acquisitions, mergers or amalgamations which exceed the prescribed threshold (discussed below) will be subject to a mandatory pre-merger notification to the Competition Commission and will not come into effect until 210 days from the date of the notification or by order of the Competition Commission, whichever is earlier. The thresholds measure the assets or turnover of entities involved in the combination.  

Thresholds:

For the purpose of the jurisdictional thresholds, a "group" is defined to mean two or more enterprises which, directly or indirectly, are in a position to: (i) exercise 26% or more of the voting rights in the other enterprise; (ii) appoint more than 50% of the members of the board of directors in the other enterprise; or (iii) control the management or affairs of the other enterprise. However, an enterprise that exercises less than 50% of the voting rights in another enterprise has been exempted from the definition of "group". 

An enterprise whose control, shares, voting rights or assets are being acquired and that has assets of not more than Rs. 250 crore or turnover of not more than Rs. 750 crore will be exempt from the provisions of Section 5 of the Competition Act for a period of five (5) years.

Notice Requirements:

Parties are required to notify the Competition Commission of the proposed transaction within 30 days of either (a) the date of execution of any agreement or other document for acquisition, or (b) the approval of the proposal relating to the merger or amalgamation by the board of directors.

"Appreciable Adverse Effect":

Section 6 of the Competition Act prohibits any person or enterprise from entering into a "combination" which is likely to cause an "appreciable adverse effect" on competition within the relevant market in India.

Draft Regulations:

The Competition Commission issued draft regulations in March 2011 entitled "The Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations, 201_" ("New Draft Regulations") prescribing the forms and procedure for notification of combinations.  The New Draft Regulations envisage a consultation process prior to filing the proposed combination pursuant to which the parties to a proposed combination may make a written request seeking informal and verbal consultation from the Competition Commission about filing notices.

Impact:

Combinations which have been completed or closed before June 1, 2011 will not be impacted and need not be notified to the Competition Commission.  However, under the Competition Act, the Competition Commission has the power to initiate inquiry up to one (1) year from a combination having taken effect.