CCI Vs. SEBI: An Analysis of the Indian Merger Regime
‘Merger’ or ‘Amalgamation’ is a market term that refers to combination of two companies in which at least one company loses its existence. With the growth of Indian Market, the Legislature understood the sentiment and worked in order to safeguard consumers against stonewalling by monopolistic approaches of enterprises. It sought for protection to small enterprises against forceful takeover by dominant enterprise and to check the creation of monopolies.
While there are number of governing statutes for mergers in India, the writers focus on two prominent legislations - Competition Act, 2002 and Securities and Exchange board of India (substantial acquisition of shares and takeovers) Regulations, 2011 (hereinafter SAST Regulations). The former legislation is market centric in its approach to mediate and dispense disputes, while the latter focuses to govern investments. The selection is made based on the kind of ambiguity of position of law present in these legislations in application. The aim shall be to introduce two essential discrepancies related to these legislations- ambiguity in relation to approval of combination notice and gargantuan scope of term ‘control’ under Competition Act.
Ambiguity in relation to approval of combination notice
In order to maintain a check on competition in the relevant market, CCI and SEBI make it mandatory for the merging parties to file application before them and seek approval.
In the CCI, a notice is to be given within 30 days of the approval of proposal for merger by the board of directors of the companies. The Commission is granted with a period of 210 days within which it has to either approve or disapprove of the combination. If the Commission doesn’t decide on the basis of notice about the merger, on expiry of 210 days i.e. 7 months, the combination is deemed to be approved.
Approval for mergers by SEBI is granted as per SAST Regulations, 2011. SEBI takes cognizance of matters especially when there is acquisition of more than 25 per cent of shares in the Target Company by the acquirer individually, or by persons acting in concert. In such a case, the acquirer is required to issue a public offer with respect to acquisition of shares or voting rights or control over the company. Such public offer shall be made on the date of acquisition of shares or voting rights or control over the acquired company. After the completion of above mentioned procedures, the acquirer has to complete the acquisition within the period of twenty-six weeks from the expiry of the offer period.
The dispute between legislations arise when the parties to a combination, before the lapse of seven-month period for CCI’s approval, once they have received permission from SEBI, go ahead with it, even before CCI permitting it. In such a condition, there is lacunae between two statutory bodies, most importantly when it comes to imposing penalties on the parties. Now, it is by the understanding of the general principle of law that a newer legislation prevails over the older legislation. It is of utmost importance that the legislations should have a common ground based on which decision making is to be done, more importantly in the case of ambiguity. However, the rationale while imposing penalty on parties to combination should take into account whether a sectorial regulator has given affirmation to such combination or not. In matters where the affirmation has been granted by SEBI, it should be intimated to CCI at the earliest and to the parties to approach CCI for further approval, considering that Competition Act has dominance as per the above mentioned rationale. Hereafter, if CCI fails to take cognizance of the same, the parties can proceed further with their combination.
Gargantuan scope of term ‘control’ under Competition Act
As already stated, for any combination, be it a merger or acquisition, approval has to be taken from both CCI and SEBI. Approval from SEBI is mainly taken when voting rights in the target company while acquisition, exceed 25 per cent. When any individual or an entity acquires more than 25 per cent share, a public announcement has to be made for the purposes of an ‘open offer’ under the SEBI Takeover Code. This open offer allows the investors to either exit the shareholding at a reasonable price, or retain their shares at the fixed price.
The point of triggering the takeover code is the determination of ‘control’ as per the increase in voting rights. While every merger is brought before the SEBI, some mergers are exempted from filing with the CCI provided that the said merger is for the purpose of investment. However, if the same act is for acquiring ‘control’, a notification shall have to be filed before the CCI. Moreover, explanation clause of Section 5 of the Competition Act specifically states its jurisdiction over the issue of “Controlling the affairs or management” by one or more ‘enterprises’ or ‘groups’, either jointly or singly, over another enterprise or group. Even though, these provisions lay emphasis on acquisitions, there are number of transactions that fall under the ambit of CCI, on account of change in effect on competition.
Thus, both the regulatory mechanism have an equal right to inspect and be notified when an issue of ‘control’ comes up in relation to mergers. The issue, however, is the variation in definition of the term ‘control’. Due to high discrepancy in interpretation, both the regulatory mechanism work on their own understanding and subject the entities to unreasonable penalties.
The most talked about example of the irregularity is the Jet- Etihad deal. While SEBI did not consider issues of pricing, schedule, route etc., relevant for establishment of control, the CCI held the same agreement amounting to ‘control’ on the grounds of significant implications on the market. The problem aggravated when the Supreme Court left the interpretation of the term ‘control’ open in the Subhkam Ventures v. Securities and Exchange Board of India case, where it concluded that the investor’s right to nominate one among the several directors of the target firm did not confer upon it any control. The interpretation was welcomed but has no relevance as before the matter reached Supreme Court, the parties settled and the court held that previous decisions shall have no authority.
The authors would like to further elaborate the implications of such interpretation of ‘control’ and regulatory loopholes in the recent Vodafone - Idea merger deal. The said two players announced, somewhere in March 2017, their intent to merge and being the country’s largest mobile phone operator. The said merger was important because the combined share of the two companies was totaling around 41 per cent, as against 36 per cent of Bharti Airtel's, which was in its own process of acquiring Telenor India.
As dealt before, any merger scheme attracts a variety of regulatory authorities like in the present case, the entity had to obtain approvals from the CCI, SEBI, TRAI and finally NCLT. While the approval from the CCI was plain, researchers concern themselves about the ‘conditional’ approval obtained from the SEBI.
Facts of the case were that the SEBI received a complaint about alleged violation of takeover norms. The complaint mentioned that the shareholding of Idea would increase from 21 per cent to 26 per cent pursuant to the scheme, thereby bringing the concept of ‘control’ into question.
As explained before, the ambiguous definition of the term has already had penal consequences in cases like the Jet-Etihad. This determination itself was controversial as this might need CCI’s relook at the deal. The mere announcement of SEBI investigating into allegations against Idea had decreased their share price by three per cent. This in turn brings concerns in the share market and subject the deal to the scrutiny of stock exchanges as well.
The current merger regime is in a constant state of flux and directly goes against the motto of making India a business-friendly country. The most important setback due to lack in coordination between regulators is the impact on prospective investors. Even though CCI has increased the value of the merger to be filed, an inaction on the ambit of control raises security concerns. Absence of a definite control determination criterion even hampers free flow of investment within the domestic market. In addition, it furnishes CCI with excessive discretionary power to take suo-moto cognizance of any transaction, as and when deemed feasible. The ambiguities in Jet- Etihad deal are yet to be addressed. The fact that the deal was to acquire shares below the subscribed limit and was still subjected to penalty is a point of concern.
Moreover, with so many regulators inspecting the deal, it becomes practically impossible to enforce the deal within the prescribed time limits. As discussed, the prior approval generally takes 60-90 days than the prescribed time period of 30. Above that, if an incongruous situation as stated in the Vodafone deal arises, the entities shall be shuttling front and back within the regulators and would be left with no reasonable time for an approval. Due to constant turf between the regulators themselves, the entities are often subjected to unreasonable penalties owing to mismatch of timelines between them. From the penalties levied on Thomas Cook and Tesco, it can be deduced that the CCI is particular about meeting compliances on time. Due to this, the payment of interest also becomes an issue of concern. The interest is accrued owing to contractual default on behalf of the notifying entity, which in effect is nothing but a consequence of regulatory timeline mismatch, especially between SEBI and CCI.
With so many open gray areas, it is difficult to understand why the legislature hasn’t even deliberated on this matter. The Indian merger standard has constantly underperformed which is why a relook towards other jurisdictions as to why they have been more successful in attracting business is warranted. To start with, publishing of guidelines in analyzing mergers should be done. A reference to the detailed release of merger guidelines by Australian Competition & Consumer Commission is drawn. Competition Commission of India has been authorized under section 49 to promote the provisions of the law through public awareness campaigns amongst stakeholders but still hasn’t taken any concrete steps to formulate the same.
Appreciation could certainly be given to SEBI for releasing a discussion paper on “Brightline Tests for Acquisition of Control” under SEBI Takeover Regulations. It seeks to suggest alternatives to the current regime for introducing greater certainty in the concept of “control” under the said Regulations. However at the same time, a lack of interest on the part of CCI to come up with any guidelines on the same is discouraging.
It is in the best interest of markets that the regulators chalk out a system for them to work in consonance with each other. A single agency for requisite approvals is certainly a goal to strive towards in the Indian context.