Provisions of Competition Act, 2002 relating to Combinations and Regulations of Combinations

Background :-The Government of India (GOI) have issued notifications on 4 March 2011 to bring into force, from 1 June 2011, the provisions of sections 5, 6, 20, 29, 30 and 31 of the Competition Act 2002 (the Act). Section 5 of the Act contains provisions relating to “Combination” and Section 6 of the Act contains provisions relating to “Regulations of Combinations”.

Sections 20, 29, 30 and 31 of the Act contain procedural provisions relating regulations of the Combination. GOI has, in consultation with the Competition Commission of India (CCI) – the regulator appointed under the Act – enhanced by 50% the threshold of monetary limit of “assets” and “turnover” under Section 5 of the Act for reckoning ‘Combination’.

Meaning of Combination

As per the Act, a ‘Combination’ comprises of any of the following –

• any acquisition of – control / shares / voting rights / assets of enterprises
• acquiring of control by person over an enterprises, where such person already has direct / indirect control over another enterprise engaged in similar / competitive business
• any merger or amalgamation between enterprises if it exceeds the monetary threshold of assets and or turnover as under:

* Assets – book value as per audited accounts and includes intangibles ^ Group means two or more enterprises, which directly or indirectly –

• Exercise => 26% of voting rights in other enterprise
• Appoint > 50% of board members in other enterprise
• Control (#) the management or affairs of the other enterprise

# Control include controlling the affairs or management, either singly or jointly:

• by one or more enterprises over another enterprise or group; or
• by one or more groups over another group or enterprise

As mentioned above, GOI has enhanced the monetary limit of “assets” and “turnover” under section 5 of the Act. The above table is after considering such enhancement.

Exemptions from Section 5 of the Act:

1. An enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than ~ 2.50 billion or turnover of not more than ~ 7.50 billion is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011.

2. A ‘Group’ exercising less than 50% of voting rights in other enterprise is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011.

Overview of Regulation of Combination

Section 6 of the Act inter alia provides that no person or enterprise shall enter into a Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.

If any proposed Combination exceeds the threshold of assets and / or turnover specified in Section 5 of the Act (as aforesaid), the person / enterprise need to intimate the same to the CCI within 30 days of board approval / entering into of the agreement for Combination for approval.

A Combination cannot come into effect until a period of 210 days has passed from the day on which the notice was given to CCI or CCI has passed an order under Section 31 of the Act, whichever is earlier.

Above mentioned requirement of obtaining approval of CCI for the combination is not applicable to share subscription/ financing facility or any acquisition by public financial institution, Foreign Institutional Investor (FII), Venture Capital Fund, Bank pursuant to any covenant of a loan / investment agreement.

Under section 31 of the Act, broadly if the CCI opines that the combination

• Does not or is not likely to have an appreciable adverse effect on competition, it would order approval of the combination.
• Is or is likely to have an appreciable adverse effect on competition, it would order that the combination shall not take effect.
• Is or is likely to have an appreciable adverse effect on competition but such an adverse effect can be eliminated by suitable modification of such combination, the CCI may suggest appropriate modification to the combination for approval by the parties. CCI, in such case would pass appropriate order based on response received from the parties to the Combination.

Conclusion :-On and from 1 June 2011, any acquisition or merger or amalgamation that exceeds the monetary threshold specified in Section 5 of the Act will require approval of CCI. These provisions are aimed at ensuring that the proposed Combination is not anti-competitive. This may lengthen the time required to complete the Combination. If CCI is convinced that the Combination is not anti-competitive, it should not be difficult to obtain the approval. The CCI has also released draft rules for public comments on provisions relating to Regulations of Combinations. Once this is finalized and notified, it will facilitate implementation of the provisions relating to Combination.