REGULATION OF MERGERS, DEMERGERS, AMALGAMATIONS & COMBINATION UNDER COMPETITION ACT, 2002

1. REGULATION OF MERGERS, DEMERGERS, AMALGAMATIONS & COMBINATION UNDER COMPETITION ACT, 2002 Presented By: Manisha Chaudhary, Advocate Partner, UKCA Law Chambers

2. Definitions AMALGAMATION [Section 2(1B) of Income Tax Act, 1961] Amalgamation in relation to Companies means the merger or combination of two companies wherein the assets and liabilities of both are vested in a third company, with the effect that both former companies lose their identities to form a new company. NATUREOFAMALGAMATION (As per A.S. 14): An Amalgamation may be either: (a) An amalgamation in the nature of Merger. (b) An Amalgamation in the nature of purchase. (Continued…)

3. Definitions MERGER– is an arrangement whereby the assets & liabilities of two or more companies become vested in, or under the control of one company (which may or may not be one of the original two companies), which has as its shareholders all or, substantially all the shareholders of the two companies1. ACQUISITION [Section 2(a) of Competition Act, 2002]– The Acquiring, directly or indirectly of shares, voting rights, assets or control over management or assets, of another enterprise. Mergers, Amalgamation & Takeovers- ICSI 1 (Continued…)

4. Definitions ENTERPRISE (Section 2(h) Competition Act, 2002) Means a person who is engaged in any activity relating to production, storage, supply, distribution, acquisition or control of any goods, or the provision of services, or in investment or securities, either directly or indirectly, but does not include sovereign functions of the government.

5. Reasons For Mergers & Acquisitions • To deal with overcapacity through consolidation in mature industries • To roll-up competitors in geographically fragmented industries • To extend into new products or markets • To exploit eroding industry boundaries by inventing an industry.

6. An Overview of Mergers & Acquisition with the Perspective of Competition Act, 2002

7. Competition Act, 2002 The Competition Act, 2002 aims at removing the impediments with the purpose of promoting the competition amongst Domestic & Foreign Companies. The objective of the Act is to shun the concentration of firms which may lead to make use of anti competitive practices. “The Act regulates the various forms of Business combinations through Competition Commission of India. The purpose of the Competition Act is not to get rid of the combinations, rather the Act aims at wiping out its destructive effects ”

8. COMPETITION ACT,2002 Competition Act seeks to modernize competition regime and provides for repeal of the M.R.T.P. Act. The objectives of the Act will throw light on the necessity of this new Act. OBJECTIVES To prohibit the use of Dominant position To prohibit Anti Competitive Agreements To regulate combinations including Mergers. Establishment of Competition Commission of India

9. Section 3: Anti Competitive Agreements Anti competitive Agreements (Section 3): No enterprise or association of enterprise or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition with in India. There are two types of Anti Competitive agreements on which restraints have been put up by the Act: (Continued…)

10. Horizontal agreements(including cartels): These type of agreements have been prohibited which includes Price fixation; Limiting Production, supply & technical Developments; sharing Markets & Bid Rigging. Vertical Agreements: The agreements inhibiting in them Tie in Arrangement, exclusive supplies, exclusive distribution, refusal to deal & resale price maintenance are restricted by this Act.

11. Section 4: Abuse of Dominant Position As per section 4 of the Act the abuse of the Dominant position arises in the following situations: • If an Enterprises imposes unfair or discriminatory purchase or sale price. • Where an Enterprise limits the production, sale , markets or technical or scientific developments relating to the goods or services to the prejudice of the customers.. • Denies market access. • Uses its dominant position in one relevant market to enter or project other relevant market.

12. Section 5: Combination (Acquisition, Acquisition of Control & Merger or Amalgamation). Combination: The frame work of Combination is provided under section 5 of the Act. The Combination as per sec.5 of the Act includes in its ambit: • Acquisition of control, shares, voting rights or assets by the parties to the acquisition, being the acquirer, of an enterprise; • Acquiring of control by a person over an enterprise when such person already has control over another enterprise engaged in production, distribution and trading of similar or identical or substitutable goods or services; • Any Merger or amalgamation. (Continued…)

13. A Person has: (I) In India assets valued at more than Rs. 1000 crores or turnover of More than Rs 3000 crores. (ii) In India or outside India assets valued at more than U.S.$500 million or turnover of more than U.S.$1.5 billion. However, whereby the resulting entity in the lieu of such “Acquisition” or “Acquisition of Control” or “Merger or Amalgamation” by: A Group has: (I) In India assets valued at more than Rs. 1000 crores or turnover of more than Rs 3000 crores. (ii) In India or outside India assets valued at more than U.S.$500 million or turnover of more than U.S.$1.5 billion. or Threshold Limit A “notification” of the such combination will have to be given to the CCI. (Continued…)

14. Group: Means two or more enterprises which, directly or indirectly, are in a position to: (i) exercise twenty-six per cent, or more of the voting right in the other enterprise; or (ii) appoint more than fifty percent, of the members of the board of directors in the other enterprise; or (iii) Control the management or affairs of the other enterprise. (Continued…)

15. Notification Requirements: Procedure Section 5 of the Act stipulates that any person who proposes to enter into an agreement or combination shall give notice to the commission in the prescribed Form within 7 days of occurrence of the following: • The Board of Directors of respective companies accepting a proposal of Merger. • The Conclusion of negotiations of an agreement for an acquisition or acquiring control. (Continued…)

16. The execution of a joint venture agreement or share holder agreement or technology agreement. The most important aspect of regulation is that a combination shall be void only when it causes or is likely to cause an appreciable adverse effect on competition (Continued…)

17. Notification Requirements: Procedure However the commission will not enquire into all types of combinations. An enquiry will be initiated if the threshold limit specified under section 5 of the Act, for the acquirer company and the one being acquired in terms of assets and turnover are triggered. Whether a Combination exceeds the limit prescribed under the Act If Yes If No There is no requirement for Notification or Investigation. Merger will Qualify for Investigation Procedure for Investigation under Sec. 29 will be triggered. Suo-Moto Enquiry.

18. Section 6: Regulation of Combination Regulation of combination (Section 6): • No Person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition with in the relevant market • A person entering into a combination may give notice to the CCI disclosing details of the combination within 7 days of (a) approval of the merger by the boards of the enterprises, or (b) execution of any agreement for acquisition referred to in 5(a) or acquiring of control. (Continued…)

19. Section 6: Regulation of Combination Exception – Section 6 does not apply to share subscription or financing facility or any acquisition by a PFI, FII, bank or venture capital fund pursuant to any covenant of a loan agreement or investment agreement.

20. Important Issues of Combination Covered by Competition Act. To Regulate the Combinations including Mergers the following issues are mainly covered or taken up by the Competition Act,2002: • Threshold limits: Competition Law to have surveillance over combinations beyond threshold limit (Section 31). • Notification of Combinations is mandatory if within the limits as prescribed under the Act. • Strict time frame for decision: CCI is mandated to decide with in 90 days or it will be considered as deemed approval. However, suo-moto investigation or inquiry can be taken up only with in a period of one year. Also the Notifications by the Financial Institutions, Banks etc is mandatory.

21. Section 20 Inquiry into Combination by Commission • The Commission may inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition either on the basis of its own knowledge or information related to Clause (a), (b)& (c) of sec.5. But the commission cannot initiate the inquiry after the expiry of one year. • The commission shall, on receipt of notice under section 6(2) or on receipt of reference under section 21(1) inquire whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition. (Continued…)

22. However for the purpose of determining the appreciable adverse effect of the combination, the Commission shall give due regard to the following factors: • 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; (Continued…)

23. h)market share, in the relevant market, of the persons or enterprises in a combination, individually and as a combination; i) likelihood that the combination would result in the removal of a vigorous and effective competitor in the market; j) nature and extent of vertical integration in the market; k) possibility of falling business; l) nature and extent of innovation; m) relative advantage, by way of the contribution to the economic development by any combination having or likely to have appreciable adverse effect on competition; n) whether the benefits of the combination outweigh the adverse impact of the combination, if any.

24. Section 29: Procedure for Investigation of Combination • If the commission is of the opinion that the combination is likely to have adverse effect on competition it shall with in 7 working days from the date of the receipt of the response of the parties to the combination direct the parties to the said combination to publish details of combination within 10 working days of such direction. • The Commission may invite any person or member of the public, affected or likely to be affected to file objections within 15 days from the date on which the details of the combination were published. • After receiving all the information Commission must come to a decision with in a period of 45 days.

25. Section 30: Inquiry into Disclosures underSub Section (2) of Section 6 Where a person or enterprise has given a notice under sub section (2) of section 6, the commission shall inquire: (a) Whether the disclosure made in the notice is correct. (b) Whether the combination has, or is likely to have, an appreciable adverse effect on competition.

26. Section 31: Orders of Commission on Certain Combinations • The Commission has been vested with he powers to approve or reject the merger or to approve with certain modifications. • If the modifications suggested have been accepted by the parties the merger shall be approved and if the modifications are not agreed, the merger shall be refused and agreement shall be declared as void. • However, the Commission shall pass the final order within 90 working days from the date of publication, failing which the merger shall be deemed to be approved.

27. PENALITIES

28. Section 44: Penalty for Making False Statement or Omission to Furnish Material Information If any person being a party to combination: (a) Makes a statement which is false in any material particular, or knowing it to be false; (b) Omits to state any material particular knowing it to be material, Such person shall be liable to a penalty which shall not be less than Rupees fifty Lakhs (50 Lakhs) but which may extend to Rs One Crore(1 Crore), as may be determined by the Commission.

29. Section 45: Penalty for Offence in Relation to Furnishing of Information With out prejudice to the provisions of section 44, if any person, who furnishes or is required to furnish under this Act any particulars, documents or any information • Makes any statement or furnishes any document which he knows or has reasons to believe to be false • Omits to state any material fact (Continued…)

30. c). Willfully alters, suppresses or destroys any document which is required to be furnished The commission shall impose on such person a penalty which may extend to rupees ten lakhs. The commission may also pass such other order as it deems fit.