Regulation of Combination

WHAT IS “COMBINATION”
UNDER COMPETITION ACT,2002

• Acquisition of control, shares, voting rights or

assets [Section 5(a)]
• Acquisition of control by a person over an
enterprise where such person has control
over another enterprise engaged in similar or
identical businesses [Section 5(b)]
• Mergers and Amalgamations [Section 5(c)]
 Amalgamation

• An amalgamation is a form of merging. The Income Tax Act

of 1961 (ITA) defines amalgamation as the merging of one or
more companies with another business or combining two or
more companies to establish a single company. The result of
amalgamation is the formation of a wholly new corporation.
The companies involved in amalgamation are similar in size.
The corporations participating in the merger process, on the
other hand, are distinct since an absorbing company is
expected to be bigger than an absorbed business.
• This differs from a traditional merger in that neither of
the two companies involved survives as an entity.
 Acquisition

• The acquisition is a procedure of takeover in

which a company is purchased by an acquiring
firm with the intention of incorporating the
purchased business into its operations. Merger
acquisitions both are ways to consolidate
companies. However, mergers are the joining
of two firms to form a single entity, whereas
acquisitions are the taking over of one
company by another.
 Joint Venture
• A joint venture is a partnership among multiple
businesses, usually to launch a new commercial venture.
Each party contributes assets to the joint venture and
decides how income and expenses will be shared.
• A group of individuals, firms, persons and corporations
can all participate in the joint venture. Most importantly,
each entity maintains its legal position. A contract details
the resources, like properties, money, and other assets,
that each organisation will bring to the endeavour. It
forms the basis of a joint venture. The contract also
specifies how the business will be operated. Also, it
outlines how ownership of the venture, as well as incomes
and losses, would be distributed.
 Horizontal and Vertical Combination
• Horizontal: Combination between firms at same level of
production and/or distribution of a goods or service, i.e. in
the same relevant market.
a)unilateral/non-coordinated effect
b) coordinated effect
• Non Horizontal combination
a) Vertical: combinations between firms that operate at
different but complementary levels in the chain of
production and/or distribution of the same final product.
b) Conglomerate: combination between firms that in
different markets without any vertical relationship.
 Regulatory Frame Work
• The Act Contains detailed provision on
regulation of combinations, which are as
follows:
 Definition of combination (s.5)
 Regulation of combination(s.6)
 Inquiry into combination (s.20)
 Procedure for investigating of combinations (ss.
29 and 30) and orders relating to certain
combinations(s.31)
 Definition of combinations
• Following will be combination under s.5 of the
Act:
 Direct acquisition of control, shares, voting
rights and assists
 Indirect acquisition of control
 Combination or amalgamation
 Relevant market
• Relevant market=RPM + RGM
• Section 19(7)of the Act provides an indicative list of factors which ought to be taken
in account by CCI while determining the definition of Relevant product market :
 Physical characteristics or end use of goods
 Price of goods and services
 Consumer preference
 Exclusion of in-house production
 Classification of industrial products

• Section 19(6) gives a list of factors which will be taken into account by the CCI while
determining the relevant geographic market:
 Regulatory trade barriers
 Local specification requirements
 National procurement policies
 Adequate distribution facilities
 Transport cost
 Language
 Consumer preference
 Need for secure or regular supplies or rapid after sales services.
SSNIP Test/ Hypothetical Monopolist Test
• To determine whether two products fall in the same
market , antitrust authorities around the world apply
the SSNIP Test. The test works in the following manner:
 Assuming a hypothetical monopolist increase the price
of product A by 5%-10%
 Following this price increase, would the number of
customers switching from product A to product B be
sufficient to make the price increase unprofitable for
the supplier(s) of product A due to loss of sales to
product B?
 If yes, product A and B belong to the same product
market.
 Example ssnip
• Phase 1
• Product A
• Price 10
• Sales1000
• Variable cost 5
• 10*1000-5*1000=5000
• Change by 5%(price 11. sales 800, v.cost 5)
• 11*800-5*800=4800
 Example cont.

• Phase 2
• Product A:price 10, sales:1000, v.cost5
• Product B: price13, sales 800,v.cost4
• Product c : price 9, sales 1100, v cost 4
• X controls a b c
• Profit of x: 10*1000-5*1000+13*800-
4*800+9*1100-4*1100=17700
• Change in a of 10% and b&c constant
• 11*800-5*800+13*900-4*900+9*1200-
4*1200=18900
 revised thresholds for availing of the De Minim exemption
for acquisitions

THRESHOLDS FOR AVAILING OF DE MINIMIS EXEMPTION FOR ACQUISITIONS

Read more at: Assets Turnover

https://taxguru.in/corporate-law/revised-thresholds-combinations-competition-act-20
02.html

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Target In India <350 INR crore OR <1000 MR
Enterprise crore
 Exemption from Notifications – Reg 4
• Applicable to acquisition of shares and voting rights- Sec 5(a) and 5
(b) ONLY
• The Commission by way of Regulation 4 of The Competition
Commission of India (Procedure in regard to the transaction of
business relating to combinations) Regulations, 2011 has included
some categories of combinations in Schedule I that are ordinarily not
likely to cause an appreciable adverse effect on competition in India.
• As per Regulation 4, the notice for such combinations need not
normally be filed.
• De minimis exemption
acquisition where enterprises whose control, shares, voting rights or
assets are being acquired have assets of not more than Rs 350 crore
in India or turnover of not more than Rs 1000 crore in India , are
exempted from Sec 5 of the Act (2016 Notification)
 Exemptions from notification by GOI
notifications
• Central Public Sector Enterprises 5 years
from the
(operating in the oil and gas sectors) date of
publication
• Nationalised Banks of
• Regional Rural Banks notificatio
n ( 2017)
 Triggering of notification requirements

• Once the parties to the merger are sure that the transaction meets
the thresholds and is notifiable , the question arises at what stage
should the notice be given to the Commission? Sec 6(2)
• any person or enterprise, who or which proposes to enter into a
combination, [shall] give notice to the Commission, in the form as
may be specified, and the fee which may be determined, by
regulations, disclosing the details of the proposed combination,
within [thirty days] of—
(a) approval of the proposal relating to merger or amalgamation,
referred to in clause (c) of section 5, by the board of directors of
the enterprises concerned with such merger or amalgamation, as
the case may be;
(b) execution of any agreement or other document for acquisition
referred to in clause (a) of section 5 or acquiring of control
referred to in clause (b) of that section.”
 Form of Notification
• Regulation 5 of The Competition Commission of India
(Procedure in regard to the transaction of business relating to
combinations) Regulations 2011
• Two forms for filing a notification namely, Form I and Form II (
a more detailed form )
• As per sub-regulation 2 of regulation 5,the notice shall
ordinarily be filed in Form I. Sub-regulation 3 allows the
parties, at their option, to file notice in Form II and also
specifies certain conditions fulfilling which, it would be
preferable to file notification in Form II
• Amount of fee: The amount of fee to be paid for filing of
combination notice is specified in Regulation 11. The fee
payable for filings in Form I is Rs.15, 00,000/- and for Form II
 Procedure followed after receipt of
notification- Sec 29 , Competition Act
• Scrutiny of the notice- after receipt of the notice
by the Commission , scrutiny to remove any
defects in the notice-ask party to remove them
• Prima facie opinion- Within 30 days of the
receipt of the said notice, the Commission forms
a prima facie opinion under sub sec 1 of Sec 29
Transaction not likely Transaction likely to
to cause AAEC cause AAEC

Approve the combination under

Sec 31 (1)
 Likely to cause AAEC
1. Show Cause Notice- to the parties to respond within 30 days of
the receipt of the notice as to why investigation in respect of
such combination should not be conducted
2. Receipt of response from the parties
3. Option to call a report from the DG-Commission may ask DG to
submit report on this behalf
4. Directing parties to publish the details of the combination -
The Commission may direct the parties to the said combination
to publish details of the combination within ten working days
of such direction, in such manner, as it thinks appropriate, for
bringing the combination to the knowledge or information of
the public and persons affected or likely to be affected by such
combination. The time provided for issuing this direction is 7
days from the date of receipt of response from parties if DG
report has not been called upon and 7 days from the receipt of
DG report in the other case. [Section 29(2)].
 5. Inviting objections from any person or member
of public, affected or likely to be affected by the
said combination- within 15 days of publication
of details of the combination - Sec 29 (3)
6. Going back to the parties for additional
information- Within 15 days of the expiry of the
period specified under Sec 29(3), CCI can call for
additional information from the parties within
the next 15 days
7. Proceed for the final Order- Sec 31

If no AAEC – Approve u/s If AAEC is shown then Eliminate AAEC by modification

31 (1) Blocked u/s 31(2) to the combinations u/s 31(3)
 Sec 43A
Power to impose penalty for non-furnishing of
information on combinations
If any person or enterprise who fails to give
notice to the Commission under sub-
section(2) of section 6, the Commission shall
impose on such person or enterprise a penalty
which may extend to one percent, of the total
turnover or the assets, whichever is higher, of
such a combination.]
 Time period
• Sec 2A introduced by 2007 Amendment of
the Competition
Act, 2002
• No combination shall come into effect until
210 days have passed from the day on which
the notice has to be given to the CCI under Sec
6(2) or the Commission has passed orders
under Sec 31( whichever is earlier)
 Factors relevant to competition assessment/
Inquiry – Sec 20 (4)
The merger assessment in accordance with section 20(4) factors requires
the quantitative as well as qualitative evaluation of the case particulars.
Some of the important factors are :
1. State of market concentration ( best indicator of likelihood of
unilateral and concentrated effects)
2. Degree of competition between the acquirer and the target
3. Assessment of competitive ability of the other players post merger
4. Contestability of markets- entry barriers ( eg: cost and regulatory )
5. Efficiencies- synergies such as cost saving, development of newer
products – trade off to adverse effect on competition
6. Other factors- nature of industry, sunset or sunrise , sector specific
regulations, etc
 Landmark cases
• Jet Airways ( India) Ltd and Eithad Airways
• Tesco Overseas Investment Ltd and Trent
Hypermarket Ltd
• Sun Pharmaceutical and Ranbaxy
combination
 s.20(4) list of factors CCI needs to take in account to determine
whether a combination would have an AAEC on competition:

• Actual and potential competition through imports in the market

• Entry barriers- sunk cost/technological lead
• Concentration level - CR, HHI
• Countervailing power
• Likelihood of increase in prices or profit margins
• Effective competition after combination
• Substitutes – actual or potential
• Market share
• Removal of vigorous and effective competitor or competitors in the market
• Extent of vertical integration
• Failing business
• Nature and extent of innovation
• Contribution to economic development
• Whether benefits outweigh the adverse impact
 APPEALS
• NCLAT is also the Appellate Tribunal to hear and dispose
of appeals against any direction issued or decision made
or order passed by the Competition Commission of India
(CCI) – as per the amendment brought to Section 410 of
the Companies Act, 2013 by Section 172 of the Finance
Act, 2017, with effect from 26th May, 2017.
• The Commission also has the power to impose a fine
which may extend to one per cent of the total turnover
or the assets of the combination, whichever is higher, for
failure to give notice to the Commission of the
combination
 Calculation of asset value

• Value of assets will be determined by taking

the “book Value” of the assets as shown, in
the audited books of account of the enterprise
, in the financial year immediately preceding
the financial year in which the date of
proposed merger falls. One has to take in
account both gross and fixed assets reduced
only by depreciation)and gross current assets
for calculating asset value.
 Calculation of turnover
• Value of sale of goods and services.
• View taken by practitioners is that gross turnover minus
indirect taxes are taken for calculation of turnover.
• The competition amendment bill 2012 seeks to amend
the definition of turnover to state the following: “
Turnover” includes value of sale of goods or services
“excluding the taxes, if any, levied on sale of such goods
or provisions of services”
• The term taxes has not been defined. However it is
presumed the taxes to be excluded would be limited to
specefic indirect taxes such as sales tax , excise duty
etc..
 Group
• Explanation (b) of S.5 defines group as follows:
(b) Group means two or more enterprises which
directly or indirectly , are in 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.
iii. Control the management or affairs of the
enterprise.
 Control
• Explanation (a) of S.5 defines control as
follows:
(a) Control includes controlling the affairs or
management by-
i. One or more enterprises, eother jointly or
singly, over another enterprise or group
ii. One or more groups , either jointly or singly,
over another group or enterprise
 Sole control and joint control
• Sole control is when only one entity controls the
target enterprise i.e. only it can determine the
strategic commercial decissions of the target
enterprise.
• Joint controll is deemed to exist in a situation
when two enterprise exercise decisive influence
on the target enterprise and both the enterprises
have the power to take /block startegic
commercial decissions of the target enterprice.
Filings by Foreign Cos (In or outside India)

• If a foreign entity, operating in or outside India , desires to enter into a

combination in or outside India which adversely affects the relevant market in
India, then it has to give a notice to the CCI in the prescribed form by submitting
the prescribed fee and disclosing the details of such combination within 7 days
of:
a) Approval of the proposal relating to such merger or amalgamation from the
Board of Directors of such enterprise;
b) Execution of any agreement of such combination

• If the CCI is of the opinion that such combination has caused or is likely to
cause an appreciable adverse effect on competition in the relevant market in
India then-
a) It shall issue a show cause notice to the parties to such combination to
respond within 30 days as to why investigation shall not take place against
them.
b) It shall direct the parties to such combination within 7 working days after
receiving response from the parties as to publish details of such combination
to the knowledge of the affected person
c) It shall direct for suitable modifications in such combination if such adverse
effect can be eliminated
 Extra territorial jurisdiction
• The competition Act explicitly allows the competition commission to
examine a combination already in effect outside India and pass order
against it provided that it has an AAEC in India.

• The Act enables the commission to smoothen and accelerate the

exercise of its power by way of entering into arrangements and
memorandum of understanding with the regulatory bodies of other
countries in order to facilitate the entire process.

• Cross border merger regulation in India has only been partly taken care
under the regulatory landscape of Securities and Exchange Board of
India.

• With the emergence of new law regime in India a host of issues need to
be looked into as far as cross border merger regulation is concerned
and recognize the need to find a purposive solution to the possible
conflict and grey areas.
 United States Anti Trust Laws
• Antitrust Law was enacted in the US in 1890 primarily to control
the concentration of economic and industrial power.

• S.7 of the Clayton Act is the primary legislation in the U.S.

governing mergers and acquisitions, but limits itself to the
territory of the United States.

• The Clayton Act applies to both mergers with immediate

anticompetitive effects and those that have a suture probability
of substantially reducing competition.

• The principal legislation Sherman Act broadly states that every

contract, combination, or conspiracy that restrains trade or
commerce among the states, or with foreign nations, is illegal
and that every person who monopolizes or attempts to
monopolizes guilt of felony .
 EU Competition Law
• EU law is governed primarily by Articles 85 & 86 of the
treaty Establishing the European Community.

• Article 85 is designed primarily to achieve the same goal as

the Sherman Act in U.S. legislation insofar as it prohibits all
agreements and concentrated practices that effect trade
among E.U. members and which have as their main
objective the prevention, restriction or distortion of
competition.

• Article86 is designed to meet the policy objective of the

Clayton Act in that it prohibits the abuse of a dominant
market position through unfair trading conditions, pricing,
limiting production, tying and dumping.
 Comparison – India, US and EU laws
INDIA
• In Indian law, a foreign entity desiring to enter into a
combination outside India which affects the relevant market in
India, must give a notice to the CCI in the prescribed form to
establish the same.
• The CCI has the power to extend its jurisdiction beyond the
Indian shore and declare any qualifying merger or acquisition
which affects the relevant market in India as void.
• CCI can exercise its power by way of entering into
arrangements and memorandum of understanding with the
regulatory bodies of the other countries in order to facilitate
the entire process
Comparison – India, US and EU laws
UNITED STATES

– In US law, when a person including foreign nationals whose

activities affects the trade in United States, acquires any
voting securities or assets of any other person then both
the person shall file a notification in such form and contain
such documentary material and information relevant to a
proposed acquisition as is necessary and appropriate to
enable the Federal Trade commission and the Assistant
attorney General to determine whether such acquisition
may, if consummated would not violate the antitrust Laws.

– The person shall file such notification only when the

waiting period stated in S.18a of Clayton Acy of 1914 has
expired.
 European Union

• Article 4 of the Merger Regulation of European Commission

states that merger shall be notified to the Commission prior
to its notification.

• It shall be notified or jointly notified by the parties to the

merger or by those acquiring joint control.

• They shall also publish the fact of the notification, at the

same time indicating the names of the undertakings
concerned their country of origin, the nature of the
concentration and the economic sectors involved.

• The decision whether or not to refer the case shall be taken

within 25 working days starting from the receipt of the
reasoned submission by the Commission.
 Comparison
• The procedure for pre-filling notification is similar.

• Competition Act through out the world has been enacted

to protect the consumers, society, and the business
community.

• Each jurisdiction has a mandatory merger notification.

Parties must notify and supply required information for
the review of competition issues and wait for the lapsing
of established time periods before they can legally
complete the transaction.