INDIA REVIEWS MERGERS

In 1999, the Government of India formed a committee to make recommendations regarding a modern competition law. The new competition law took the form of the Competition Act, 2002 which was enacted and notified in January 2003. It replaced the Monopolies and Restrictive Trade Practices Act constituted in 1970. However, due to some reservations within the legal and business communities, the Competition (Amendment) Act, 2007 (“Act”) was enacted by Parliament in September 2007 and will be notified later this year.
The Act “[prevents] practices having adverse effect on competition, [promotes] and [sustains] competition in markets, [and protects] the interests of consumers.” It creates the Competition Commission of India (“CCI”) which has broad powers to regulate “combinations” (mergers, acquisitions, and amalgamations), “abuse of [a] dominant position” and the forming of cartels (monopolies) by any “enterprise or group”. The Act also creates the Competition Appellate Tribunal that will hear appeals to decisions made by the CCI.

The Act provides for a review mechanism that echoes the United States Hart-Scott-Rodino Act (“HSR Act”). Both mechanisms have broad similarities in that both intend to protect effects of anticompetitive transactions and require a mandatory pre-merger filings requirement triggered by certain threshold asset amounts. They also provide the commission with wide discretionary powers.

That is where their similarities end and the differences begin. In the United States, for a review process by either the Federal Trade Commission (“FTC”) or the Department of Justice’s Antitrust Division (“DOJ”) to be triggered, companies involved in a transaction must pass a two-step test: size of transaction and size of person tests. This review process lasts for 30 days and can be extended to another 30 days.

In India, the Act provides only for one strict asset/turnover test to trigger a review process that can last up to 210 days (seven months). The review process can be triggered if:

• an acquiring company and the acquired company, in India, jointly have assets greater than Rs. 1,000 crore ($235 million) or a joint turnover greater than Rs. 3,000 crore ($705 million)

• any smaller sized company that is part of a group, in India, that has assets greater than Rs. 4,000 crore ($940 million) or a joint turnover greater Rs. 12,000 crore ($2.8 billion)

• an acquiring company and the acquired company, either in India or abroad, jointly have assets greater than $500 million including at least Rs. 500 crore ($117 million) in India or a joint turnover greater than $1.5 billion including at least Rs. 1,500 ($352 million) in India

• any smaller sized company that is part of a group, either in India or abroad, jointly have assets greater than $2 billion including at least Rs. 500 crore ($117 million) in India or a joint turnover greater than $6 billion including at least Rs. 1,500 ($352 million) in India

Many analysts believe that the thresholds for filing mergers are too low. This can be troublesome in the sense that mergers in capital intensive industries such as oil and gas would have inconsequential mergers reviewed. Although a new draft of regulations for the CCI states that a decision must be reached within 30 days of notification (or 60 days depending on the type of form used for notification), the review process can still take up to 210 days.

In addition, companies that pass the asset threshold must notify the CCI within 30 days. In the U.S. and European Union, there are no such notification deadlines. Furthermore, the FTC and DOJ often provide early termination requests that lead to an expedited process for filings that are not suspect. The Competition Act, on the other hand, requires all companies to wait for the CCI’s decision.

Another provision in the Competition Act requires an Indian company seeking to acquire a foreign company that has no presence in India, to seek the CCI’s approval. This will have an impact on the current boom in foreign acquisitions by Indian companies. Moreover, foreign companies owning a certain size of assets and not generating sales in India must comply with the notice period requirement as well. This may have an effect on the level of foreign investment in India especially for companies that own manufacturing facilities but do not generate sales in India.

The Competition Act also allows for third parties to object to any merger being reviewed by the CCI. In a country that has a civil administration as large as the one in India, there is a significant risk for redundancy and high preparation costs. Another deficiency in the Competition Act is that its enforcement is reliant on a thinly staffed CCI of 120 professionals. Currently the CCI is only staffed with 26, including the Acting Chairman, Vinod Dhall. The Indian Institute of Management in Bangalore recommends that the CCI be strengthened to 480 professionals including lawyers, economists, and financial analysts.

With the passing of the Act, there is a growing concern among multinational companies and international law firms that many high-profile transnational mergers and acquisitions would be delayed or thwarted. Multinational companies are concerned that the newly formed CCI will become more active in scrutinizing transactions particularly in industries such as telecommunications, cement, airlines, and shipping. For example, Ranjit Shahani, head of Novartis India and former president of the Bombay Chamber of Commerce, told the Financial Times that had the new antitrust regime “been in place two years ago the deals such as Tata/Corus would never have taken place.” Some current transactions being reviewed in other jurisdictions that may find increased scrutiny in India and China include BHP Billiton/Rio Tinto and Microsoft/Yahoo. However, it is still unclear whether enforcement authorities in India will review deals already announced.

Robert Doyle
(202) 589-1834
rdoyle@dbmlawgroup.com