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The Viewpoint – Anti-trust review of intra-group restructurings

The Viewpoint – Anti-trust review of intra-group restructurings

Bar & Bench

By Nandish Vyas and Vijay Manjrekar

One of the significant milestones of 2011 has been the notification of the M&A related provisions of the Competition Act, 2002 (“Competition Act”), through a notification dated March 4, 2011. With this notification, Sections 5, 6, 20, 29, 30 and 31, inter alia, dealing with regulation of ‘combinations’ were brought into force with effect from June 1, 2011. India was one of the last countries amongst Russia, Brazil and China (BRIC nations) to have a comprehensive anti-trust law.

Prior to the Competition Act, the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) was India’s anti-trust legislation, but unfortunately did not give enough teeth to the regulator to look into mergers/combinations. Further, Sections 108A to 108-I of the Companies Act, 1956 (introduced pursuant to the amendment of MRTP Amendment Act, 1991) which dealt with acquisitions of or by dominant undertakings, required prior Central Government (a) approval in case the acquisition exceeded 25% of the paid-up share capital of the target company and (b) intimation in case of transfer of 10% shares of the target company. However, these provisions were seldom enforced. After the coming into effect of the merger related provisions of the Competition Act, the Ministry of Corporate Affairs has issued a clarification declaring that the aforesaid provisions cease to have legal force.

Section 5 of the Competition Act sets out individual and group level thresholds and parameters for the acquisition of an enterprise or the merger and amalgamation of enterprises that would trigger the filing requirements. Section 6 of the Competition Act prohibits combinations that cause or are likely to cause an appreciable adverse effect on competition within a relevant market in India and treats such transactions as void. To supplement the implementation of the above-mentioned provisions, the Competition Commission of India (Commission) (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”) were brought into force on June 1, 2011.

Since the coming into effect of the merger related provisions, the Competition Commission of India (“Commission”) has passed significant decisions (in the context of combinations), including in relation to (a) acquisition by Reliance Industries Limited and Reliance Industrial Infrastructure Limited, of a 74 per cent equity stake in the joint venture companies Bharti AXA Life Insurance Company Limited and Bharti AXA General Insurance Company Limited, (b) acquisition of UTV Software Communications by Walt Disney (Southeast Asia) Private Limited, (c) acquisition by G&K of the nutrition business of Wockhardt Limited and the contract manufacturing business of Carol Info Services Limited on slump sale basis and the acquisition by Danone of certain intellectual properties by way of sale and assignment by Wockhardt EU Operations (Swiss) AG, (d) acquisition of the laminates division of Bombay Burmah Trading Corporation Limited by Aica Kyogo Company Limited through its wholly owned subsidiary, Aica Laminates India Private Limited.

An issue relating to the new competition regime which witnessed a fair amount of debate and discussion during 2011 was whether the ‘exemption’ under clause 8 of schedule 1 of the Combination Regulations, which related to intra-group ‘acquisitions’, also exempted intra-group mergers and amalgamations. The first intra-group amalgamation approved by the Commission was the amalgamation of Alstom Holdings (India) Limited, an NBFC (non-deposit taking), with its group company Alstom Projects India Limited, a company engaged in the power and transport segment. The Commission held that both entities were part of the Alstom group and would continue to be under the same management post-amalgamation subsequent and as such, the proposed merger was not likely to have an appreciable adverse effect on competition in India. Thereafter, the Commission approved the merger/amalgamation of Siemens VAI Metals Technologies, Morgan Construction Company India Private Limited and Siemens Limited, all part of the Siemens group. The Commission approved the merger/amalgamation noting that since the parties were operating in different markets and since there was no change in the ultimate control of any of the parties, the amalgamation would not have any appreciable adverse effect on competition.

Towards the end of 2011, in its decision approving a intra-group merger between Tata Chemicals Limited (TCL) and Wyoming 1 (Mauritius) Private Limited (Wyoming), the Commission specifically confirmed the non-availability of the intra-group ‘exemption’ under clause 8 of schedule 1 of the Combination Regulations, which related to intra-group ‘acquisitions’, with respect to intra-group mergers and amalgamations. The Commission also held that a parent and a subsidiary company were two separate ‘enterprises’, and could not be treated as a single entity in order to avoid notifying such a merger.

The Commission observed that it is clear that the term ‘subsidiaries’ as used in the definition of the term ‘enterprise’, has been used with respect to one of the modes in which enterprise is carrying on the specified activities and does not emphasize consideration of subsidiaries as being a part of the holding company. A subsidiary is a separate and distinct legal entity and would constitute a separate enterprise if its meets the requirements of section 2(h).

The Commission concluded in the Tata Chemicals case that since the combination is pursuant to a scheme of amalgamation (and not an ‘acquisition’), the exemption under clause 8 of Schedule 1 of the Combination Regulations was not applicable. Accordingly, the Commission held that the parties were required to give a notice of the proposed combination under section 6(2) of the Act.

Other groups whose intra-group mergers have been approved by the Commission include Akzo Nobel, Shriram and IVRCL. Interestingly, after the Tata Chemicals order, with respect to certain companies which had made a belated application to the Commission for clearance of an intra-group merger, the Commission approved the merger but separately initiated proceedings for penalizing the parties for a late notification to the Commission.

On February 23, 2012, the Commission notified the Competition Commission of India-Procedure in regard to the transaction of business relating to combinations – Amendment Regulations, 2012 (“Amendment Regulations”) with a view to make the Combination Regulations consistent with the Securities and Exchange Board of India Takeover Regulations; to widen the scope of exempt transactions; and to shift the Commission’s resources from assessing internal restructurings to transactions which may have an effect on competition in India. One such welcome relief introduced by the Amendment Regulations is the reduction in compliance related issues by companies with respect to intra-group restructuring whereby companies are no longer required to seek prior approval of the Commission for intra-group mergers or amalgamations involving enterprises wholly owned by the group companies.

However, not all intra-group mergers/amalgamations have been exempted and some of them would still require a notice to the Commission. Only intra-group mergers or amalgamations between a parent and a subsidiary that is wholly owned by group companies of the parent, or between two subsidiaries that are wholly owned by companies belonging to the same group, are now exempt. This is in contrast to the exemption provided under the Combination Regulations for intra-group acquisitions which equally applies to acquisitions of shares, voting rights, assets or control of entities within the same group irrespective of their ownership patterns.

Whilst the exemption specified in the Amendment Regulations is a positive development, it ignores the fact that in all intra-group mergers, there is no change in the ultimate identity controlling entity, and for all practical purposes, these are transactions where there is no change in market dynamics, competitive or bargaining power or even assets or turnover. This has in fact been acknowledged almost all of the CCI’s decisions in relation to intra-group mergers and amalgamations. A significant part of the efforts of the CCI in approving M&A transactions have so far been utilized for approving intra-group mergers, which are essentially transactions that do not change the quantum of assets or turnover which a group possesses, on a comparison of pre-merger and post-merger scenarios. Therefore, CCI should consider exempting intra group mergers altogether from regulatory approval, which are largely efficiency enhancing restructuring transactions, considering that there is no ultimate change of control post merger and thus no appreciable adverse effect on competition.

Nandish Vyas (pictured left) and Vijay Manjrekar (pictured right) are Senior Associates at AZB & Partners. The views expressed in this article are the personal views of the authors and do not represent the views of the Firm.