Introduction

For firms in a healthy financial state, Mergers and Acquisitions (‘M&As’) are strategic manoeuvres for their growth and expansion. However, for distressed entities undergoing the Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), M&As assume a markedly different significance. While regular M&As serve as a means for expansion, CIRP-driven acquisitions represent a crucial survival strategy, with liquidation being the stark alternative.

This scenario presents an interplay of two critical objectives: ensuring the efficient allocation of resources as mandated by IBC and upholding a fair and competitive market as guaranteed by competition law. However, this equilibrium can be disrupted when IBC-driven acquisitions result in an Appreciable Adverse Effect on Competition (‘AAEC’), potentially leading to market dominance or restricted competition. While the existing competition and IBC’s regime in India demonstrates a degree of effectiveness, specific challenges emerge when dealing with distressed firms.

The blog identifies the existing discrepancy in streamlining merger approvals for distressed firms undergoing the IBC process. It proposes leveraging India’s Green Channel mechanism, designed for faster merger approvals, to expedite these critical transactions. It argues that the current Green Channel, established by the Competition (Amendment) Act, 2023, excludes most IBC-driven acquisitions due to their inherent overlap limitations. This paper proposes amending the Combination Regulations to include these acquisitions within the Green Channel framework. The blog supports the argument by taking support of the Failing Firm Defence, a well-recognized exception to the general norm of merger control.

The existing Competition Regime in India

In India, the existing framework for scrutinizing M&As operates through a two-pronged approach: pre-merger notification and post-merger investigation. While the former applies to combinations surpassing the thresholds outlined in Section 5 of the Competition Act, 2002; (‘the Act’) the latter grants the Competition Commission of India (‘CCI’) substantial ex-post powers (including suo-moto authority) for later examination of anticompetitive behaviour, as exemplified by the case of Consumer Unity & Trust Society against the proposed PVR-INOX merger.

Despite regulations aiming to balance compliance with IBC’s core objective of swift company revival, the process remains lengthy. Acquiring companies undergoing insolvency (CIRP) in India requires navigating complex approvals from the National Company Law Tribunal (‘NCLT’) and potentially the CCI. While the extension to 330 days offers some relief, the average CIRP completion time in FY 2022-23 stands at 831 days, significantly exceeding the legal limit. This discrepancy necessitates streamlining the resolution process within IBC framework to minimize negative impacts on stakeholders and the market.

Green Channel

The Indian Competition Law Review Committee (‘CLRC’), in its report, submitted to the Ministry of Corporate Affairs in July 2019, advocated for the introduction of a Green Channel for faster approval of mergers by the CCI. This mechanism has now been adopted by the Competition (Amendment) Act, 2023 through the insertion of Section 6(4) and Section 6(5) in the Act. It aims to streamline the approval process for qualifying transactions, bypassing the usual 210-day ex ante (preliminary) examination by the CCI with a reduction to 150 days.

The Green Channel operates through an automatic system of approval. Parties seeking to utilize this route are responsible for self-assessing and scrutinizing their proposed merger to ensure it aligns with the established criteria for deemed approval. This approach eliminates the need for the CCI’s involvement and expedites the merger process, thereby eliminating the mandatory 150 days period as applicable for ‘Combinations’. Among other compliances, the said regulation essentially stipulates that mergers seeking Green Channel approval must not involve horizontal or vertical overlaps between the merging entities.

The CLRC Report proposed that IRP-driven combinations should automatically qualify for the Green Channel. This would mean that these combinations will not be scrutinised by the CCI even if they cross the thresholds mentioned in the CCI’s Combination Regulations framed under the Act.

While the legal framework does not explicitly prohibit IBC-driven combinations from benefiting from the Green Channel, the current criteria governing its application effectively excludes most such combinations. This is due to the requirement of minimal market overlap, horizontal or vertical or complimentary, in Green Channel-eligible mergers. To add on to the lacuna, IBC acquisitions frequently involve competitors acquiring failing firms, inherently creating overlap and as a consequence, rendering them ineligible for the expedited Green Channel process. This assertion can be further supported by examining CCI notifications post the 2016 enactment of IBC as per which the CCI was notified of sixteen IRPs containing combinations out of which eight had horizontal overlaps.

Additionally, numerous NCLAT rulings, particularly the Binani and BPSL cases also demonstrate a propensity for creditors, who hold voting rights on IRPs to favour larger acquirers, therefore being antithetical to competition. Hence, there is an urgent need to amend the Combination Regulations, i.e., to modify the rules to include IBC-driven acquisitions within the Green Channel framework. This modification can be justified through the lens of the Failing Firm Defence, an exception to the general norm of merger control.

Failing Firm Defence

The Organization for Economic Co-operation and Development (‘OECD’) defines a Failing Firm as: “one that has been consistently earning negative profits and losing market share to such an extent that it is likely to go out of business. The concept becomes an issue in merger analysis when the acquiring firm argues that the acquisition of such a firm does not result in substantial lessening of competition since it is likely to exit the market anyway. If this is true, the “current” market share of the failing firm may have no “future” competitive significance and should be weighted accordingly.”

The European Commission (‘EC’) has issued Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings which outlines a three-pronged test for assessing the applicability of the Failing Firm Defence in mergers potentially leading to an AAEC. The criteria are as follows: “the allegedly failing firm would in the near future be forced out of the market because of financial difficulties if not taken over by another undertaking; there is no less anti-competitive alternative purchase than the notified merger; in the absence of a merger, the assets of the failing firm would inevitably exit the market.”

The applicability of the criteria has surpassed various jurisdictions including those of the United States (‘U.S.’) and Canada. The Kali and Salz decision (1993) marked the first successful application of the failing firm defence in Europe. Even though the merger created a monopoly in two markets, the EC approved it due to the failing firm’s dire situation.

Further, in BASF/Euridol/Pantochim, the third prong was refined, and consumer’s detriment from the exit of the firm’s assets was emphasised upon. These cases demonstrate a nuanced approach adopted by competition regulators in balancing competition concerns with the potential benefits of rescuing distressed firms and safeguarding valuable assets for the marketplace.

The foundation of the extensive use of the defence lies in the acknowledgement that the inevitable exit of a distressed entity, even in the absence of a merger, would indeed diminish competition to a degree comparable to or greater than the anticipated acquisition. This assertion stems from the fact that distressed firms often lose their viability as competitors due to difficulties in repurposing their assets post-liquidation, making it tough for them to contribute meaningfully to the market, ultimately impacting both consumers and overall competition.

In context to the Indian competition regime, the CCI lacks specific, comprehensive guidance on merger control. While it provides a non-binding Competition Advocacy Booklet explaining the applicable law concerning combinations, the document is not highly detailed. Consequently, the applicability of the failing firm defence in India remains ambiguous.

While the absence of dedicated failing firm defence guidance exists, Section 20(4)(k) of the Act, offers a glimmer of hope. This provision explicitly mentions the “possibility of a failing business” as a factor for the CCI to consider during its assessment of mergers. This recognition implies that the Indian competition framework acknowledges the relevance and significance of the failing firm defence, opening the door for its potential future application in a nuanced manner.

Moreover, even the Raghavan Committee Report underscores the potential “efficiencies” that specific mergers could generate, even if they are likely to result in anti-competitive effects. This perspective suggests a consideration for compensating any welfare losses that might arise due to the merger, thereby aligning with the Legislators’ viewpoint.

Encouragingly, the CCI has, in several instances, including in the case of Reliance’s acquisition of Alok Industries, approved mergers involving failing firms, even when there is market overlap between the merging parties, thereby prioritizing keeping assets in the market. This can be based on the rationale that the market share of the failing firm would be absorbed by existing competitors, inevitably impacting competitive constraints.

The CCI has recently approved all 17 notifications received under a resolution plan, many of which involve multiple overlaps. However, it is crucial to clarify that this does not imply that the CCI allows failing firms to exit the market without consideration. The argument here is that, in many cases, safeguarding competition in a market may be better achieved by approving a transaction that allows the assets of a failing firm to remain in the market. Without such approval, the market share of the failing firm would be absorbed by existing competitors, inevitably impacting competitive constraints. Based on this rationale, it is suggested that there is no compelling reason to delay the approval of a combination involving the acquisition of a failing target once the resolution plan has received approval from the Committee of Creditors, even if the resolution applicant is a competitor.

Therefore, it is now crucial to explore how mergers driven by IBC could leverage the Green Channel. To address this, amendments to the Combination Regulations may be required to extend the Green Channel benefit to these combinations. This extension could involve excluding IBC-driven mergers from the requirement of not having horizontal or vertical overlaps. Additionally, legislative measures could be taken, drawing inspiration from the EC decision in Aegean/Olympic II, which deliberated on the failing firm defence.

Conclusion

Finding a balance between efficient corporate restructuring and robust competition safeguards is crucial for a healthy market. The current system for approving mergers involving distressed firms undergoing the IBC process suffers from lengthy delays. This discrepancy hinders the very balance it seeks to maintain. The solution lies in leveraging India’s Green Channel mechanism, designed to expedite approvals for qualifying mergers. Amending the Combination Regulations to effectively include IBC-driven acquisitions within this framework is key. This approach leverages the Failing Firm Defence, acknowledging that a failing firm’s exit, even without a merger, would likely reduce competition.

By incorporating IBC-driven mergers into the Green Channel, the review process can be streamlined for qualifying transactions. This will lead to a faster and more efficient system, ultimately fostering the revival of distressed firms while safeguarding healthy competition in the market. Additionally, a streamlined system can expedite economic recovery for distressed firms, preserve jobs, and create a more attractive environment for potential acquirers, fostering a more robust market ecosystem.