Friday, September 23, 2011

Provisions, Rules, Regulations and Compliances for Investment outside India by the Indian Investors/ Parties



Indian resident investors are allowed to make direct investments outside India by complying certain Rules and regulations. This allowance is granted under clause (a) of sub-section (3) of section 6 of the Foreign Exchange Management Act 1999, (42 of 1999) read with FEMA Notification 120/RB-2004 dated July 7, 2004, (GSR 757 (E) dated November 19, 2004), viz. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

Since overseas investments are the sensitive economic issues it needs to be regulated as well as liberalized keeping in view the global investment opportunities and India’s economic growth and its needs. Overseas investments in the form of JV or wholly owned subsidiaries strengthens economic and business co-operation between India and other countries. In addition it facilitates technology transfer research and development, promotion of brand image in the international market etc. Theses investments are also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.

The Reserve Bank has been continuously and progressively relaxing the rules and simplifying the procedures for promoting overseas Investments. But while investing certain rules and regulations has to be complied with which we will discuss below.

It can be discussed under following major points:

1.                  Investment Routes
v     Automatic Route and eligibility under this route
v     Approval Route and eligibility under this route
v     Prohibitions
2.                  General Permissions
3.                  Methods of Funding of Overseas Investments
4.                  Investment in Securities of the Foreign Companies
5.                  Post investment changes / additional investment in existing JV / WOS
6.                  Obligations of Indian Investing Party and Reporting Requirements

Investment Routes
There are two routes under which overseas investments can be made:
1.      Automatic Route and
2.      Approval Route


1.                  Automatic Route


Under automatic route an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth as on the date of its last audited balance sheet. The net worth here means paid up capital and free reserves. Further Indian party means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank. It means we can sum up as:
a)      Investment can be made under wholly owned subsidiary and joint venture forms.
b)      The maximum investment that can be made is  400% of the net worth of the Indian investing party
c)      Investment under automatic route can be made by the following persons
-           Companies incorporate under Indian Companies Act 1956
-           Any body corporate created under the Act of parliament
-           A partnership firm registered under Indian Partnership Act 1932

Note:
                     i.            The ceiling of 400 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI (Annex A) and prescribed enclosures / documents for effecting remittances towards such investments.

                   ii.            While calculation the ceiling of 400% the following shall be included :

–    Contribution to the capital of the overseas JV/WOS,
-     Loan granted to the JV/WOS
-     100 percent of the guarantees other than performance guarantee and 50 per cent of the amount of performance guarantees issued to or on behalf of the JV/WOS.

Conditions related to guarantee on Investments made in the form of guarantee:

The investments under this route are subject to the following conditions:
1.         The Indian party / entity may extend loan / guarantee only to an overseas JV/ WOS in which it has equity participation.

2.         Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:
                     i.                              All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth as on the date of the last audited balance sheet of the Indian party.

                   ii.                              No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.

                  iii.                              In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400 per cent of the net worth of the Indian Party, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

                 iv.                              As in the case of corporate guarantees, all guarantees (including performance guarantees) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

                   v.                              Specific approval of the Reserve Bank will be required for creating charge on immovable property and pledge of shares of the Indian parent/ group companies in favour of a non- resident entity.


The following are the general conditions for Investment abroad under automatic route:

              I.      The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

           II.      All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

         III.      In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.

        IV.      In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by swap of shares.

           V.      In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings.

        VI.      An Indian party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India, provided:

-                     ADRs/GDRs are listed on any stock exchange outside India;

-                     The ADR and/or GDR issued for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party;

-                     The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI;  

-                     Valuation of the shares of the foreign company shall be (a) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or (b) based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.

Obligations of Indian Investing Party and Reporting Requirement

The Indian entity investing outside India is under the following obligation
a)      The Indian Party is required to report in form ODI to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction.

b)      Receive share certificate or any other document as an evidence of investment,

c)      Repatriate to India the dues receivable from foreign entity, and

d)      Submit the documents / Annual Performance Report to the Reserve Bank,

e)      The share certificate or any other document as evidence of investment has to be submitted to and retained by the designated AD Category - I bank, who is required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category – I bank to the Reserve Bank along with the APR (Part III of Form ODI).


Investment in an overseas JV / WOS may be funded out of one or more of the following sources:
           i.            Drawal of foreign exchange from an AD bank in India;
         ii.            Capitalisation of exports;
        iii.            Swap of shares
       iv.            Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
         v.            In exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinar Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India;
       vi.            Balances held in EEFC account of the Indian party; and
      vii.            Proceeds of foreign currency funds raised through ADR / GDR issues.

In respect of (vi) and (vii) above, the ceiling of 400 per cent of the net worth will not apply. However, all investments made in the financial sector will be subject to compliance with Regulation 7 of the Notification, irrespective of the method of funding.

Further a general permission has been granted to persons resident in India for purchase / acquisition of securities in the following manner:
  1. Out of funds held in RFC account;
  2. As bonus shares on existing holding of foreign currency shares; and
  3. When not permanently resident in India, out of their foreign currency resources outside India


Except the cases falling under direct investment route, prior approval of the Reserve Bank would be required e.g investment abroad by the trust, society, unregistered partnership firms or investment other than in the form of JV or WOS. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorized Dealer Category – I banks.

Reserve Bank would, inter alia, take into account the following factors while considering such applications:
  1. Prima facie viability of the JV / WOS outside India;
  2. Contribution to external trade and other benefits which will accrue to India through such investment;
  3. Financial position and business track record of the Indian party and the foreign entity; and
  4. Expertise and experience of the Indian party in the same or related line of activity as of the JV / WOS outside India.

Post investment changes / additional investment in existing JV / WOS

A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity. The Indian party should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR—Part III of form ODI) required to be forwarded to the AD Category-I bank.

3.         Prohibited Investments

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) or banking business, without the prior approval of the Reserve Bank.

Provisions, Rules, Regulations and Compliances for Investment outside India by the Indian Investors/ Parties



Indian resident investors are allowed to make direct investments outside India by complying certain Rules and regulations. This allowance is granted under clause (a) of sub-section (3) of section 6 of the Foreign Exchange Management Act 1999, (42 of 1999) read with FEMA Notification 120/RB-2004 dated July 7, 2004, (GSR 757 (E) dated November 19, 2004), viz. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

Since overseas investments are the sensitive economic issues it needs to be regulated as well as liberalized keeping in view the global investment opportunities and India’s economic growth and its needs. Overseas investments in the form of JV or wholly owned subsidiaries strengthens economic and business co-operation between India and other countries. In addition it facilitates technology transfer research and development, promotion of brand image in the international market etc. Theses investments are also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.

The Reserve Bank has been continuously and progressively relaxing the rules and simplifying the procedures for promoting overseas Investments. But while investing certain rules and regulations has to be complied with which we will discuss below.

It can be discussed under following major points:

1.                  Investment Routes
v     Automatic Route and eligibility under this route
v     Approval Route and eligibility under this route
v     Prohibitions
2.                  General Permissions
3.                  Methods of Funding of Overseas Investments
4.                  Investment in Securities of the Foreign Companies
5.                  Post investment changes / additional investment in existing JV / WOS
6.                  Obligations of Indian Investing Party and Reporting Requirements

Investment Routes
There are two routes under which overseas investments can be made:
1.      Automatic Route and
2.      Approval Route


1.                  Automatic Route


Under automatic route an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth as on the date of its last audited balance sheet. The net worth here means paid up capital and free reserves. Further Indian party means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank. It means we can sum up as:
a)      Investment can be made under wholly owned subsidiary and joint venture forms.
b)      The maximum investment that can be made is  400% of the net worth of the Indian investing party
c)      Investment under automatic route can be made by the following persons
-           Companies incorporate under Indian Companies Act 1956
-           Any body corporate created under the Act of parliament
-           A partnership firm registered under Indian Partnership Act 1932

Note:
                     i.            The ceiling of 400 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI (Annex A) and prescribed enclosures / documents for effecting remittances towards such investments.

                   ii.            While calculation the ceiling of 400% the following shall be included :

    Contribution to the capital of the overseas JV/WOS,
-     Loan granted to the JV/WOS
-     100 percent of the guarantees other than performance guarantee and 50 per cent of the amount of performance guarantees issued to or on behalf of the JV/WOS.

Conditions related to guarantee on Investments made in the form of guarantee:

The investments under this route are subject to the following conditions:
1.         The Indian party / entity may extend loan / guarantee only to an overseas JV/ WOS in which it has equity participation.

2.         Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:
                     i.                              All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth as on the date of the last audited balance sheet of the Indian party.

                   ii.                              No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.

                  iii.                              In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400 per cent of the net worth of the Indian Party, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

                 iv.                              As in the case of corporate guarantees, all guarantees (including performance guarantees) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

                   v.                              Specific approval of the Reserve Bank will be required for creating charge on immovable property and pledge of shares of the Indian parent/ group companies in favour of a non- resident entity.


The following are the general conditions for Investment abroad under automatic route:

              I.      The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

           II.      All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

         III.      In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.

        IV.      In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Foreign Investment Promotion Board (FIPB) will also be a prerequisite for investment by swap of shares.

           V.      In case of investment in overseas JV / WOS abroad by a registered Partnership firm, where the entire funding for such investment is done by the firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV / WOS if the host country regulations or operational requirements warrant such holdings.

        VI.      An Indian party may acquire shares of a foreign company engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India, provided:

-                     ADRs/GDRs are listed on any stock exchange outside India;

-                     The ADR and/or GDR issued for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party;

-                     The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI;  

-                     Valuation of the shares of the foreign company shall be (a) as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange; or (b) based on the current market capitalisation of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.

Obligations of Indian Investing Party and Reporting Requirement

The Indian entity investing outside India is under the following obligation
a)      The Indian Party is required to report in form ODI to the AD Bank for submission to the Reserve Bank within a period of 30 days from the date of the transaction.

b)      Receive share certificate or any other document as an evidence of investment,

c)      Repatriate to India the dues receivable from foreign entity, and

d)      Submit the documents / Annual Performance Report to the Reserve Bank,

e)      The share certificate or any other document as evidence of investment has to be submitted to and retained by the designated AD Category - I bank, who is required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category – I bank to the Reserve Bank along with the APR (Part III of Form ODI).


Investment in an overseas JV / WOS may be funded out of one or more of the following sources:
           i.            Drawal of foreign exchange from an AD bank in India;
         ii.            Capitalisation of exports;
        iii.            Swap of shares
       iv.            Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
         v.            In exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinar Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India;
       vi.            Balances held in EEFC account of the Indian party; and
      vii.            Proceeds of foreign currency funds raised through ADR / GDR issues.

In respect of (vi) and (vii) above, the ceiling of 400 per cent of the net worth will not apply. However, all investments made in the financial sector will be subject to compliance with Regulation 7 of the Notification, irrespective of the method of funding.

Further a general permission has been granted to persons resident in India for purchase / acquisition of securities in the following manner:
  1. Out of funds held in RFC account;
  2. As bonus shares on existing holding of foreign currency shares; and
  3. When not permanently resident in India, out of their foreign currency resources outside India


Except the cases falling under direct investment route, prior approval of the Reserve Bank would be required e.g investment abroad by the trust, society, unregistered partnership firms or investment other than in the form of JV or WOS. For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorized Dealer Category – I banks.

Reserve Bank would, inter alia, take into account the following factors while considering such applications:
  1. Prima facie viability of the JV / WOS outside India;
  2. Contribution to external trade and other benefits which will accrue to India through such investment;
  3. Financial position and business track record of the Indian party and the foreign entity; and
  4. Expertise and experience of the Indian party in the same or related line of activity as of the JV / WOS outside India.

Post investment changes / additional investment in existing JV / WOS

A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity. The Indian party should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR—Part III of form ODI) required to be forwarded to the AD Category-I bank.

3.         Prohibited Investments

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) or banking business, without the prior approval of the Reserve Bank.

Wednesday, September 7, 2011

Mergers and Acquisitions (Combinations) under the Competition Act, 2002


Mergers (Combinations) under the Competition Act, 2002



There has been a drastic change and enhancement in this process of globalisation and also liberalisation during the last three decades. In the pursuit of this globalisation, India has responded by opening up its economy, removing controls and resorting to liberalisation in 1991. The result of the globalisation and liberalisation is that the Indian market is facing competition from within and outside. The last 2 years have witnessed significant cross-border mergers and acquisitions activity by Indian companies in India and abroad on a scale that is unprecedented. It is understood that Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and quadruple of 2005. Thus, keeping in view the economic developments of the country, to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on by participants in markets, in India, a new competition Law has been enacted. The companies use merger, a type of combination, as a business strategy to grow and consolidate and to eliminate competition. Though mergers are considered as a legitimate means by which firms may grow and are generally as much part of industrial evolution and restructuring as new entry, growth and exit; mergers and amalgamation also create market power, which may be abused. In order to control the abuse of such mergers and amalgamation the Competition Act, 2002, now provides a regulatory mechanism.

Mergers and Effects

In competition Law Merger is used in broad sense. It covers a proper merger, amalgamations, acquisition of shares, voting rights, assets, or acquisition of control over an enterprise. A Merger is broadly speaking, a transaction that brings about a change in the control of different business entities enabling one business entity effectively to control a significant part of the assets or decision making process of another. Though Merger is a normal activity within the economy and used to expand the business by the companies. However some mergers could   adversely affect the competition. Through Mergers companies trying to achieve the Market Power, which in turn can impact negatively upon competition. Mergers lead to concentration and use of market power because of two reasons: (a) Reduction of number of entities in the market and; (b) Increased market share of the merged entity. As a result the merged entity is able to exercise market power and in turn, this may lead to the prices being raised above the normal level, restricted output, increase in rival cost, increased barrier to the new entities etc.

Competition Act, 2002 and the Regulation of Mergers

Prior to the Competition Act, 2002, the Companies Act, 1956 and the Monopolies and Restrictive Trade Practices Act, 1969 (before the 1991 amendments) are the statutes, which regulate mergers. MRTP Act, 1969 still had powers under provisions relating to restrictive trade practices (RTP) and monopolistic trade practices (MTP) to take action against merger that was anti competitive but due to amendment in 1991 in the MRTP Act for making easy the liberalization process it failed to completely control the unfair mergers.

         On August 28 2009 the Ministry of Corporate Affairs issued a notification pursuant to which the Monopolies and Restrictive Trade Practices Act 1969 was repealed and replaced by the Competition Act 2002 with effect from September 1 2009. The Competition Act attempts to make a shift from curbing monopolies to curbing practices that have adverse effects on competition both within and outside India.

Position on Combinations

Section 3 of the act governs anti-competitive agreements and prohibits:
"Agreements involving production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an 'appreciable adverse effect on competition' in India."

Section 4 of the act prohibits the abuse of a dominant position by an enterprise. Under the Monopolies Act, a threshold of 25% constituted a position of strength.

Section 6 of the competition Act states that ‘no person or enterprise will enter into Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination will be void. A ‘combination’ is either a merger of two enterprises or the acquisition of the control, shares, voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional requirements set forth below. Although the Act does not expressly so state, the term ‘combination’ include horizontal, vertical and conglomerate mergers.

Criteria under Section 5 (threshold for mergers)

The most important legal issue in merger analysis is jurisdictional, that is, which mergers or amalgamations are important enough to be considered ‘combinations’ which attract regulatory scrutiny. Section 5 of the competition act defines combination by providing threshold limits on assets and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit of the thresholds constitutes a combination. The following transactions will constitute a combination:

Ø  Transactions among Indian companies with combined assets of $250 million; or $750 million in turnover of the merged entity

Ø  Cross-border transactions involving both Indian and foreign companies with combined assets of $500 million or $1.5 billion in turnover; and

Ø  Transactions that have a territorial nexus with India, where the acquirer has $125 million in assets or $375 million in turnover in India.

For acquiring groups, the threshold figures are much higher:

Ø  $1 billion in assets and $3 billion in turnover in India respectively;

Ø  Assets in excess of $2 billion; or


Ø  Turnover of more than $6 billion outside India.

The threshold criterion could create a deadlock because once an entity or group grows to a size of the prescribed limits, all combinations - however small will be covered by the regulations. It is to be noted that the Competition Act, 2002, does not make a distinction between horizontal, vertical and conglomerate mergers and provides the same threshold test for all of them.

Provisions of Competition Act, 2002

  1. Mandatory Notice

According to the present amended act it is mandatory for any company to notify mergers when the combined assets or turnover are beyond the threshold limits provided in section 5 of the Competition Act The act makes it mandatory to give notice to the commission within 30 days of the decision of the parties' boards of directors or of execution of any agreement or other document for effecting the combination. The terms 'agreement' and 'other document' are not defined. The general industry perception is that a memorandum of understanding or a letter of intent will qualify as an 'agreement'.

  1. 210-day waiting period and thresholds

The Competition Act provides for a post-filing review period of 210 days, during which the merger cannot be consummated and within which the Competition Commission is required to pass its order with respect to the notice received. If the commission fails to pass an order within the time limit, the proposed combination will be deemed to be approved. The 210-day period applies in case of cross-border transactions outside India where one of the contracting parties has a substantial presence in India. Regardless of the size of the transaction, notification is required where the combined asset value or turnover in India exceeds a certain value. This means that it is mandatory for a foreign company with assets of more than $500 million that has a subsidiary or joint venture in India with a substantial investment (above $125 million) to notify the Competition Commission before acquiring a company outside India.

  1. Relevant Market

Relevant market means ‘the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets’. Relevant geographic market means ‘a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and may be distinguished from the conditions prevailing in the neighbouring areas. Relevant product market means ‘a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.

For the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission will have due regard to all or any of the following factors, namely:

Ø  actual and potential level of competition through imports in the market;

Ø  extent of barriers to entry into the market;

Ø  level of combination in the market;

Ø  degree of countervailing power in the market;

Ø  likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

Ø  extent of effective competition likely to sustain in a market;

Ø  extent to which substitutes are available or arc likely to be available in the market;

Ø  market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

Ø  likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

Ø  nature and extent of vertical integration in the market;

Ø  possibility of a failing business;

Ø  nature and extent of innovation;

Ø  relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition; and

Ø  whether the benefits of the combination outweigh the adverse impact of the combination, if any

Thus, if a merger within the jurisdictional requirement of the enactment and
is having an appreciable adverse effect on competition to be determined on the basis of the aforesaid factors within the relevant market in India, the combination will be void as per the Competition Act, 2002,

  1. Forms Filing and Cost

The Competition Commission has prescribed certain forms under The Competition Commission of India (Combination) Regulations, in which the notice to the Commission shall be given. A fee of approximately $50,000, which may increase to $100,000 in certain cases, shall be paid with the notice. Further, the Competition Commission will issue a show-cause notice if it is of a prima facie opinion that the combination is likely to cause an appreciable adverse effect on competition in India. A fee of $40,000 is to be filed along with the response to the show-cause notice.

  1. Exemptions

The Competition Commission of India (Combination) Regulations, exempts 13 transactions from the preview of combinations but these exempted transactions are also required to notify to the commission. It means these transactions are not exempt from the reporting requirements.

  1. Extra Territorial Jurisdiction

In the Indian Competition Act, 2002 has the extra territorial jurisdiction. Section 32 provides that the commission shall have the power to Competition Commission shall have the power to enquire into an agreement or abuse of dominant position or combination even if the act has taken place outside India or the party or enterprise is outside India provided it has an appreciable adverse effect on competition in India. Further the Commission is allowed under proviso to section 18 to enter in to memorandum or arrangement with the prior approval of the Central Government. Section 32 states that, notwithstanding that any restrictive agreement, any party to such agreement, any enterprise abusing the dominant position, or any combination or party to the combination is outside India, the Competition Commission of India has the power to enquire into if it has an anti competitive effect within the relevant market in India.

Conclusions

The Competition Act, 2002 contains a comprehensive Merger review process. It brings various new concepts under the provision of combinations like relevant market, assets/turnover outside India and the new test of appreciable adverse effect etc. Undoubtedly, the Competition Act will play a significant role in the development of the Indian economy. Indian markets cannot function in isolation; they need to align themselves with their investors in an increasingly flat world.