Challenges related to merger control in India

Challenges related to merger control in India 11 April 2015 NLU, Jodhpur YamanVerma

Competition and Mergers/Acquisitions • Purpose of Competition Act • Approach in Section 3 and 4 different from approach in merger control • Look a priori at potential effects of a combination-check for appreciable adverse effects on competition (AAEC) • Assess unilateral and coordinated effects (more on this later) • Clear/Prohibit/Modify proposed transactions

What is a Combination? • Section 5: An acquisition, merger or amalgamation which meets the relevant asset or turnover thresholds stipulated under the Competition Act is a “combination” • Section 6: Combinations (that don’t qualify for any exemption) require notification to and approval from the CCI before they can be implemented • Exemptions provided under • Relevant Government of India Notifications • Competition Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations, 2011

Combinations – Prescribed Thresholds • Thresholds in Competition Act increased by notification (Section 54 gives the CCI the central government the power to do this) • Consider the consolidated, audited financial statements of the previous financial year

Combinations – Prescribed Thresholds Privileged & Confidential

Combinations—What is notifiable • Acquisitions of: • Shares • Any security (as defined in the Competition Act/SCRA) • Indirect acquisition of shares of a downstream entity • Voting Rights • Assets • Control • including positive, negative, direct, indirect, joint, or sole • Demergers and Joint Ventures • Mergers and Amalgamations • Interconnected Transactions: Analyse separately, file together, implement after approval

Combinations—Statutory Exemptions • Section 6(4): Acquisitions by public financial institutions, banks, venture capital funds and foreign institutional investors (as deifned under the Indian Income Tax Act, 1961) pursuant to an investment agreement or a loan agreement are excluded from the prior notification requirement • A post facto intimation under Form III is required to be made within 7 days of the acquisition

Combinations—Government Exemptions • Section 54 • Target Exemption: Acquisitions where the target enterprise has either assets in India of less than INR 250 crores or turnover in Indian of less than INR 750 crores • Clarificatory corrigendum dated 27 May 2011, Valid till 3 March 2016 • Failing banks: Notification exempting combinations involving failing banking companies (notified under S. 45 of the Banking Regulation Act, 1949)

Combination Regulations-“Exemptions” • “Ordinarily” unlikely to cause an AAEC and “normally” do not need to be notified • Key exemptions for Acquisition of shares/voting rights • Less than 25% + Not leading to control + Solely as an investment/in the ordinary course of business • Creeping acquisitions of up to 5% a year from 25% to 50% • All acquisitions where acquirer already has 50% except when going from joint to sole • Intra-group acquisitions and mergers

Is it an Acquisition, Merger or Amalgamation? When is a merger notification required? • Is it Excluded or Exempted? YES NO Are the Notification Thresholds exceeded? YES TRANSACTION IS NOTIFIABLE Privileged & Confidential

Scope of Merger Control • Mandatory requirement of prior notification and approval • Suspensory effect: Cannot give effect to any part of the transaction till clearance is received or 210 days pass from notification • Covers both domestic and international transactions • Penalties for failure to file/belated filings: Up to 1% of combined assets or turnover of the Combination • Combinations causing or likely to cause an AAEC will be void • Modifications may be ordered by the CCI or offered by the Parties • Pre merger consultation—informal and non-binding

When to notify • Obligation to file the notification within 30 days of: • Mergers/Amalgamation: final approval of scheme of amalgamation by the boards of directors of the amalgamating companies • Acquisitions: execution of a final binding agreement or other document conveying an intent to acquire---communication to statutory body • Aditya Birla/Pantaloons: Sufficient finality required in the trigger document—MoU missing several important terms of the transaction • Tesco/Trent: FIPB application considered trigger-fine of INR 3 crores for delayed filing • Thomas Cook and ZFCL: Implemented market purchases of less than 25% shares before notifying agreement to purchase more than 25% shares: Fined INR 1 crore for implementing part of a notifiable transaction

Which Form to file • Form I: Short Form and Default Form • Form II: Detailed form requiring much more information: CCI “prefers” that this form be used when transactions involve parties that have: • A horizontal overlap with market shares over 15% • Vertical relationships with market shares of over 25% • If you get it wrong: Show cause (Jet) and asked to file again in Form II (invalid notice, and no return of fee) • Material change to combination: File again (restart clock but fee credit) • Form III: Intimation after transaction: Section 6(4) • Inter-connected transaction: File a composite form

Contents of Forms • Form I - Simple, short & relatively user friendly Form requiring basic information on the Combination • Type, nature and purpose of the proposed Combination • Area of activity of parties • Expected timeframe for completion • Relevant market to which the Combination relates • Horizontal overlap or vertical arrangements post combination • Information on products/services of parties • Market size by volume and value • Details of sales and volume of parties • Estimate of market shares of parties Privileged & Confidential

Contents of Forms • Form II - Extremely detailed: • All analysis, reports, surveys, studies etc. - could include due diligence reports • Assets/turnover information on the size of the Combination • Details of ownership and control of and by the parties, list of group companies, etc. • Details of all products to be provided, not just overlapping products -industrial classification, end-use, availability of specialised producers, licensing/registration requirements, etc. • Information on market structure - determination of relevant markets, factors influencing entry, extent of overlap, import/export details, demand structure, level of concentration, information on competitors/customers/suppliers, etc. • Copies of orders/decisions passed by any global Competition Authority with respect to the Combination Privileged & Confidential

Factors to be considered • In analyzing a transaction, the CCI will evaluate the possibility of unilateral effects, coordinated effects and conglomerate/portfolio effects of the combination to see if it causes an AAEC in the relevant market in India • Factors considered by the CCI: • Actual and potential level of competition through imports in the market • Extent of barriers to entry into the market • Level of combination in the market • Degree of countervailing power in the market • Likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins • Extent of effective competition likely to sustain in a market • Extent to which substitutes are available or are likely to be available in the market • Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination Privileged & Confidential

Factors to be considered • Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market • Nature and extent of vertical integration in the market • Possibility of a failing business • Nature and extent of innovation • Whether the benefits of the combination outweigh the adverse impact of the combination, if any Privileged & Confidential

Key Issues • Definition of control for the purposes of defining what is an acquisition as well as the scope of the Schedule I exemption • Broadening the scope to include minority protection rights • Scope of “ordinary course of business” and “solely for the purpose of investment” • Notifiability of Inter-connected transactions • Scope of the Thomas Cook/ZFCL decisions • Notifiability of Joint Ventures • Greenfield and Brownfield Joint ventures • Applicability of the target exemption • Mergers • Sale of businesses (Regulation 5(9))

Key Issues • Modifications • Behavioural or Structural • Non-compete • Phase I remedies • MIAL • Phase II remedies • Holcim/Lafarge and Sun Pharma • Counter Proposals and Timelines • Consequences of Gun Jumping • Transaction void if it causes an AAEC • Penalty Proceedings: Jet Airways/Etihad Airways • Consequences of late filing/failure to file • Section 43A: Up to 1% of the combination’s assets or turnover. • For acquisitions, this is imposed on the acquirer • No penalties in the first year of enforcement • Penalties of between INR 5,00,000 (Dewan Housing) and INR 3,00,00,000 (Tesco/Trent)

Review Timelines • Phase I: Prima Facie view within 30 days • “Clock stops” mean that this actually takes closer to 60 days • “continuing defect” notices • Meeting with the CCI to explain the case • Phase II: • Show cause notices • Publication and third party comments • DG Report • 6 Form II notifications and over 230 Form I notifications have been cleared, and all but 2 in Phase I

Modifications • Unconditional clearances in all but 5 cases • Orchid/Mylan-modification of non-compete clause • Gujarat Gas-competition law compliance report • MIAL-voluntary contractual commitments in phase I • Sun Pharma-divestments • Holcim/La Farge-divestments • Procedure for remedies under Section 31 • Divestments triggering fresh notifications

CCI Combination Division – Organizational Structure and Role The case team plays the largest role in the assessment of M&A filings The Commission Presentation of CAR before the Commission Briefing • Identify (i) defects, (ii) competitive concerns, and (iii) additional information required; • Analyze market(s) at issue and the economic arguments put forth in filing • Issue competition assessment report (CAR) Member Advisor Review and evaluation of the CAR Director Corrections, suggestions and direction Joint Director Third party interface Case Team* (CT) Addressing the CT’s concerns is key to allow the process to move forward Notice Received Privileged & Confidential

Key Cases- Thomas Cook/Sterling Inter-connected transactions Parties: Thomas Cook India Limited (TCIL), Thomas Cook Insurance Services (India) Limited (TCISIL) and Sterling Holiday Resorts (India) Limited (SHRIL) Transaction: • The resort and time share business of SHRIL was proposed to be transferred to TCISIL by way of a demerger – SHRIL shareholders would get shares in TCIL. SHRIL, with its residual business was proposed to be amalgamated into TCIL – SHRIL shareholders would get shares in TCIL (Transaction). • The Transaction would result in an open offer. • Transaction approved by the respective Boards on 7 February 2014 and CCI received the filing on 14 February 2014. • On 10 and 11 February 2014, TCISIL acquired 9.93 % of the shares of SHRIL through market purchases. Privileged & Confidential

Key Cases- Thomas Cook/Sterling Inter-connected transactions • The Transaction was notifiable to the CCI but the market purchase was target exempt. • CCI imposed a penalty of INR 10 Million for completing market purchases pending CCI approval of the Transaction, despite target exemption being available for the market purchases. Key Takeaways • If one step is notifiable, the entire transaction may be notifiable • Any exemptions claimed must be clearly available at such step • No single step of the transaction can be consummated until the receipt of the CCI approval for the entire transaction ZFCL/MCFL Transaction with similar issues also saw a fine imposed Privileged & Confidential

Key Cases Aditya Birla/Pantaloons & Tesco/Trent Trigger Event Obligation to file CCI notice within 30 calendar days of: • Mergers/amalgamations – final approval of merger by the boards of directors of all companies involved • Acquisitions - execution of a final binding agreement or other document for acquisition • Aditya Birla/Pantaloons – Trigger document should be of sufficient finality, interim arrangements which do not determine the exact scope of the transaction not accepted as trigger for filing. • Tesco/Trent – Parties incorrectly assessed trigger document. Application to Department of Industrial Policy and Promotion (DIPP) and Foreign Investment and Promotion Board (FIPB) was the relevant trigger. 73 days delay in filing notice. CCI imposed penalty of INR 30 Million. Privileged & Confidential

Key Cases– Mumbai Airport International Creation of an Aviation Fuel Farm Facility Modifications Parties: Mumbai International Airport Private Limited (MIAPL), Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), and Mumbai Aviation Fuel Farm Facility Limited (MAFFFL) Transaction: Creation of a joint venture company, MAFFFL, with MIAPL, IOCL, BPCL and HPCL holding 25% each of the shares of MAFFFL. MAFFFL will provide open access fuel farm at the Mumbai International Airport and will be responsible for receiving ATF from ATF suppliers, storing, handling and delivering the same to the aircrafts. CCI sent letters to Airports Economic Regulatory Authority, Petroleum and Natural Gas Regulatory Board and certain private oil companies seeking comments/views on the proposed transaction. CCI formed a prima facie opinion that the proposed combination is likely to cause an AAEC. Privileged & Confidential

Key Cases– Mumbai Airport International Creation of an Aviation Fuel Farm Facility Concerns raised by the CCI in the Show Cause Notice include: • Non-availability of off site infrastructure to other ATF suppliers • Certain restrictive clauses in the SHA, like lock-in, minimum shareholding requirementsand RoFR • Conflict of interest given the dual role of the Oil PSUs • Reduction in storage capacity Parties offered voluntary contractual amendments as modification to the CCI, avoiding a full phase 2 investigation In addition to the commitments, the parties also agreed to provide certain safeguards in the operation of MAFFFL Based on the commitments offered, the CCI approved the combination Privileged & Confidential

Key Cases – SunPharma/Ranbaxy Divestment Parties: Sun Pharmaceutical Industries Limited (Sun Pharma) and Ranbaxy Laboratories Limited (Ranbaxy) Transaction: Merger of Ranbaxy into Sun Pharma pursuant to the scheme of arrangement. The proposed combination would also result in the acquisition of 46.79 % equity share capital of Zenotech by Sun Pharma from Ranbaxy CCI formed a prima facie opinion that the proposed combination is likely to cause an AAEC. Privileged & Confidential

Key Cases– SunPharma/Ranbaxy • On the basis of (i) combined market share of the Parties, (ii) incremental market share as a result of the proposed combination, (iii) market share of the competitors, (iv) number of significant players in the relevant market, etc., the CCI focused its investigation on 49 (forty nine) relevant markets where the proposed combination was potentially to have an AAEC in the relevant market in India. • Based on further investigation, the CCI identified 7 products where the combined market shares of the parties to the combination was likely to causes an AAEC in India. Therefore, on the basis of the combined market shares along with other factors, the CCI proposed modifications to the structure of the transaction. • The Final Divestment Package consisted of divestment of seven (7) product lines (1 from Sun Pharma and 6 from Ranbaxy), including the relevant brands as well as all strengths, dosages, and packaging (in all forms), IP rights, contracts, Inventories, all licenses and permits. (Divestment Products). • Holcim Lafarge divestment order passed last week: • 6 months to find a purchaser for 2 lafarge units • Process of counter proposal Privileged & Confidential

Amendment Regulations • Change the Phase I Review period • Change to nature of non-confidential version by adding a verification • Change the authorized signatory • Solve the divestment notification problem • Invalidation of the notice • Change meaning of “other document”

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Challenges related to merger control in India