Catch the wrong fish? Oddity of Intra-Group Acquisition Exemption in Indian Merger Control – An Assessment and the Way Forward – Corporate and Corporate Law
To print this article, all you need to do is be registered or log in to Mondaq.com.
The onset of the COVID-19 pandemic at the start of 2020 brought both a sudden economic downturn and a massive cultural shift in the way of doing business. As India Inc seeks to overcome financial difficulties and adapt to the new business climate, corporate restructuring programs are central to their transition. Public reports suggest that large conglomerates, including Vedanta Limited1Shriram Group2Shapoorji Pallonji3IDFC4 are already assessing the feasibility of such organizational overhauls.
Corporate restructuring is a catch-all term that includes changes in capital structure through intra-group acquisitions, intra-group mergers, intra-group mergers, spin-offs, etc. possibly an unintended “failure” of the intra-corporate acquisition exemption provided for notifiable transactions under India’s merger control regime.
Merger control – In brief
A transaction must be notified to the Indian competition authority, i.e. the Competition Commission of India (ICC) if the parties to the transaction jointly exceed certain monetary thresholds under the Competition Act 2002 (Law). Relevantly, a Notifiable Transaction cannot be consummated (in part or in whole) until it has been approved by the ICC. The objective of this suspensive regime is to ensure that the potential anti-competitive impact of a transaction does not affect a market, before the ICC is able to examine and remedy the potential impact, if necessary.
Aware of the broad scope of the law’s monetary thresholds and of the fact that not all types of transactions are likely to have an anti-competitive impact on the markets, the CCI has introduced certain transactions which should not normally be notified.5.
These categories of operations are registered in Annex I of the Combination Regulation. Simply put, transactions included in Schedule I of the Combination Regulation are, for all intents and purposes, exempt from notification requirements.
In this article, we discuss entries 8 and 9 of Annex I of the Combination Regulation, which deal with intra-group acquisitions and intra-group mergers/mergers respectively.
By Entry 8 of Schedule I of the Combination Regulation, an intra-group acquisition is exempt from the notification requirements if the following two criteria are met: (i) the acquirer and the target both belong to the same “group”; and (ii) the post-combination target, i.e. the “acquired business”, will not be under the joint control of one or more businesses, outside of that group (Item 8).
On the other hand, by entry 9 of Schedule I of the Combination Regulation, an intra-group merger/merger is exempt from notification requirements if the following two criteria are met: (i) both parties to the merger/merger belong to a variant of the “group “6; and (ii) the merger/combination does not result in a change from “joint control” to “sole control” (Item 9).
Obviously, the requirements of points 8 and 9 of the combined regulation are distinct from each other. While point 8 is strictly inapplicable if the target, after the acquisition, would be controlled by more than one group, under point 9, an intragroup exemption remains applicable to the two targets controlled alone and jointly – as long as it is not there is no change in the nature of the control.
The following section breaks down this key distinction and explains the implications of the constructs in points 8 and 9.
Understand the dichotomy
To better understand the difference in requirement under Items 8 and 9, readers should first familiarize themselves with the idea of ”control” from the perspective of Indian competition law.
“Control” in Indian competition law is a vague concept that is used to capture even the smallest degree of influence that one company can exercise over another company. For context, an illustrative list of “control rights” identified in the ICC decision includes affirmative rights relating to starting a new line of business, the right to appoint an observer, detailed information rights not available to ordinary shareholders, rights relating to amendments to charter documents, etc.
Having stated the above, we return to the assessment of the implication of the distinction between point 8 and point 9.
Point 8 is inapplicable in the event that the target is jointly controlled by another group, to which the acquirer does not belong. At first glance, the requirement may not seem prohibitive. But let’s take for example a target “X” with a diversified shareholding structure. The main shareholding of “X” (for example, 70%) belongs to the promoting group/family. However, the remaining shareholding of “X” is distributed among private equity investors who simply enjoy certain investor protection “control” rights (such as the right to an observer seat) in “X” or certain selective veto rights relating to the absence of modification of the charter documents or entry into a new sector of activity, etc.
If the family of the promoter wished to undertake an internal restructuring of the group and transfer its 70% stake in “X” to “Y”, an entity wholly owned by the family of the promoter group, the operation would not benefit from the exemption of intra-group acquisitions. Indeed, “X” is technically under the “joint control” of the promoter’s family and several minority private equity investors. The result is an absurdity according to which the simple transfer of participation from point A to point B, between members of the same group, without acquiring any additional right of control, is declarable to the ICC.
Indeed, the ICC has in the past assessed transfers of intra-group interests involving “joint control”. In the
Taurus-Capricorn Case7Max India Limited (Max) sold its interest in certain entities (Target) to its wholly-owned subsidiaries. However, the target was jointly controlled by Max and other companies. Therefore, the ICC noted that the transaction did not benefit from the exemption of Article 8 of Schedule I of the Combination Regulation.
In contrast, consider a situation in which the planned transfer of the interest in “X” to “Y” is done differently. The revised transaction structure would proceed as follows: the promoting group/family of “X” would merge/merge “X” with “Y”; simultaneously, and in return for the merger, private equity investors would take a stake in “Y” post-merger. The revised structure would benefit from point 9 and would not be notifiable to the ICC because (i) the same promoter consortium/family exercises more than 50% participation in both “X” and “Y”, and therefore, they belong to a variation of a group”; and (ii) “X” (which is now part of “Y” after the merger) would remain under the “joint control” of the promoter group/family and the private equity investors.
At this point, it is pertinent to reiterate that the objective behind the introduction of Annex I was to allow a transfer mechanism for transactions that are unlikely to have a competitive impact on the markets. In the example of Article 8 provided above, the intra-group acquisition by “Y” will result in no change in the competitive landscape, as the control structure of “X” will in fact remain entirely unchanged. Therefore, the target entity will continue to function the same as it did before the transaction. In view of this and in the spirit of Rule 4 of the Combination Regulation and Schedule I of the Combination Regulation, this type of intra-group transactions should benefit from an exemption. Curiously, this problem is not present under item 9 since intra-group mergers/regroupings are not subject to the same quirk. Point 9 considers situations of joint control of the parties to the concentration. Therefore, the transaction as discussed in hypothetical point 9, if structured as a merger between “X” and “Y”, would be exempt from notification requirements as there would be no change of control. joint to sole control.
Here, it is relevant to observe that with the increase in private equity investments and debt/equity financing, most companies have several distinct groups exerting control over a target. And therefore, Section 8 of the Combination Regulations, although a well-intentioned provision, is unable to assert its benefit for many intra-group acquisitions.
solve the dilemma
In practice, the ICC periodically refines the Combination Rules and has amended the Combination Rules 10 times since its inception in 2011 (~10 years).
In view of the above, it might be useful for the ICC to address this issue in the next round of amendments by modifying point 8 to mimic the benefits of point 9. Such an amendment will have a double benefit. On the one hand, it will introduce consistency by removing the absurdity of the distinction between acquisitions and mergers. Secondly, it will bring much needed relief to several businesses, thus promoting the ease of doing business in India.
To see: https://www.moneycontrol.com/news/business/markets/vedantas-shares-tumble-as-it-evaluates-restructuring-what-are-the-concerns-7736481.html
2.To see: https://economictimes.indiatimes.com/industry/banking/finance/insure/shriram-group-closing-in-on-merger-insurance-biz-to-be-hived-off-into-separate-entity/articleshow/ 87595448.cms
3. To see: https://economictimes.indiatimes.com/industry/services/property-/-cstruction/shapoorji-pallonji-in-talks-to-raise-up-to-375-million-via-dubai-property-sale/articleshow/ 87875278.cms
4. To see: https://timesofindia.indiatimes.com/business/india-business/idfc-clears-merger-of-three-arms-with-itself/articleshow/87615337.cms
5. Regulation 4, Competition Commission of India (Procedure regarding Combination Business Transaction) Regulations 2011 (Combination Regulations)
6. The definition of “group” includes where one company owns 26% or more (read as 50% or more based on an exemption that recently expired on March 3, 2021) of the voting rights in the other . In point 9, the exemption applies to the account either of a party to the transaction holding more than 50% of the shares/voting rights of the other party to the transaction, or of a third party entity within the same group holding more than 50% of the shares/voting rights in each of the parties to the transaction.
7. Combined registration No C-2015/02/251.
The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]