India's merger control regime still leaves many questions unanswered

Nine years after the Competition Act, 2002 was enacted, its provisions in relation to merger control have finally come into force. From 1 June 2011, any transaction resulting in the acquisition, merger or amalgamation of enterprises in which the parties have assets or turnover beyond certain thresholds must be reported to the Competition Commission of India (CCI).

In anticipation of the new regime, on 11 May 2011, the CCI issued its final merger control regulations. The merger regulations have travelled some way in allaying the concerns raised by stakeholders in response to the first draft published by the CCI in early March 2011.

The merger regulations are, to a degree, in a state which businesses find ‘acceptable’. There of course remain several grey areas, which, if resolved, could make India’s merger control regime a progressive one.

Intra-group mergers

The CCI recognises that certain routine transactions do not change the competitive landscape of the market and therefore do not need to be notified.

However, conspicuously, intra-group mergers and amalgamations (as opposed to acquisitions) are missing from schedule 1 of the merger regulations.

Intra-group mergers and amalgamations often yield shareholding structures such that the merging/amalgamating parties remain a part of the same group both before and after the transaction. As this does not change the competitive nature of the market, there is no obvious rationale to exclude these transactions from coverage.

It is presently unclear whether the CCI will treat intra-group mergers and amalgamations in the same way that it plans to treat intra-group acquisitions. Therefore, merging or amalgamating businesses could potentially be caught by the merger control regime.

Convertibles and options

Concerns have also arisen in relation to the definition of shares under the Act and how this definition should be interpreted in the context of convertible securities/instruments and options.

Section 2(v) of the Act defines shares as including “any security which entitles the holder to receive shares with voting rights”. As such, it appears that convertibles and/or options could fall within the scope of the definition of shares, even though it is not clear whether such entitlement needs to be present or if it includes future entitlements.

It is possible that the issuance of such convertible securities may therefore be construed as the acquisition of shares for the purposes of the merger control regime, thereby requiring the parties to pre-notify the CCI.

Ambiguity also arises as to when such options/convertibles would be notifiable to the CCI, i.e. upon grant/issuance or exercise/conversion.

The CCI may interpret the provisions of the Act in a manner which requires the grant/issuance of options/convertibles to be notified as being an acquisition of shares, even if the grantee has no intention of exercising or converting them at such time. This would be an absurd outcome given that, at the time of grant/issuance, the holder of the option/convertible would not be able to exercise any form of decisive influence or control.

Therefore, it seems logical that options/convertibles should not be notifiable unless the option is exercised or convertible security is converted, or if there is a clear intention on the part of the holder to do so. This would reflect the international treatment of such securities.

Financial thresholds

As mentioned earlier, a transaction qualifies for merger control review if the parties/group are large enough to cross certain asset and/or turnover-based jurisdictional thresholds.

Across the world, competition regulators publish detailed guidance on how notifying parties should calculate such thresholds. In India, however, the position is far from clear.

For instance, it is not clear how turnover or assets of subsidiaries will be attributed without double counting, or how intellectual property rights in foreign jurisdictions, the value of licensed brands and non-core incomes will be treated.

Guidance from the CCI on these and other issues will go a long way in helping parties to conduct their assessment as to whether they meet the jurisdictional thresholds.

The author gratefully acknowledges the contributions of Shweta Shroff Chopra and Rohan Arora to this article.