Competition Bill: Brings larger M&As under CCI’s Purview

A new Competition (Amendment) Bill was drafted and introduced in the Indian Parliament on 5 August 2022. The Bill attempts to ‘modernize’ the current competition law regime in India. It is a concerted effort to harmonize the current framework with business realities. The changes are both substantive and procedural in nature.

The Bill has currently been forwarded to the Standing Committee for further review. The Bill will be further debated upon in the upcoming Winter Parliament Session as the Competition Commission of India (CCI) is tightening its grip over anti-competitive practices, especially in e-commerce.

What are the proposed changes?

The following are the proposed key changes to the Competition Act:
 

• Introducing ‘deal value thresholds’ pursuant to which ‘large value’ transaction and ‘substantial business operations in India’ would need explicit approval of the CCI.
• Relaxations in implementation of open offers and stock exchange purchases.
• Shortened timelines for approval and review mechanisms of applications for combinations from 150 days from 210 days; CCI must form opinion within 20 days of the receipt of notice
• Amendment to the word ‘control’; may include the phrase ‘material influence’
• Facilitating exchange between various departments of the Central Government and the CCI.
• Allowing for settlement and commitments with the CCI in case of investigation into anti-competitive practices.
• Penalty for incorrect/false disclosure may extend to one percent of the total turnover or the assets or, value of the transaction, whichever is higher.
• Penalty for making a false statement or omission to furnish material information to be increased from INR 1 crore to INR 5 crore.
• The Bill has also introduced a limitation period of 3 years from the date when the cause of action arises for filing information. Suo moto cases have no time limitation.
• Expansion of the powers of the Director General (DG) under CCI.

Why are changes being proposed?

• The Bill aims at aligning the Competition Act with the current business environment and realities. It aims to promote a trust-based regime with facilitating ease of doing business and providing regulatory certainty. It aims to hold big market players (Multi-National Corporations) responsible for Mergers & Acquisitions (M&As) in India that may impact competition in the market.
• The ‘deal value threshold’ was brought in on the recommendation of the Competition Law Review Committee (CLRC). The report focused on acquisitions in the digital market where the target company derives its value from its products/services and not a huge asset base or turnovers. Digitally, companies initially survive on user growth and sales and turnover is not a good indicator for competition. Hence, the Bill proposes the ‘value of transaction’ as a more suitable metric. The working of this metric will be further clarified if the Bill is accepted.

Impact of potential changes

The potential impact of the changes proposed in the Bill may be as follows:

Deal Value Threshold:

• This condition is based on the asset and turnover of the parties involved in the transaction. With the current law, it has been stated that many transactions circumvented the regulatory authorities, despite adversely impacting competition in the digital economy, simply because their asset and turnover value did not cross the prescribed limit/test.

• The Bill now proposes that any merger/acquisition exceeding a global deal value of INR 2,000 Cr (USD 252 million) will demand approval from the CCI, subject to either party having ‘substantial business operations’ in India.

 

Expedited Review:

• Apart from reducing the timeline for review of a deal to 150 days, the reduction in forming an opinion within 20 days from receipt of a notice means that, initially, parties will make consultations with the CCI to ensure that the notice sent is comprehensive. Any loopholes in the notices may invalidate it.

Exemption for Stock Market purchases:

• Such purchases may be exempted from standstill obligations. A ‘standstill obligation’ agreement is a contract that contains provisions that govern how a bidder of a company can purchase, dispose of, or vote stock of the target company. This helps limit the chances of a hostile takeover.

• Standstill agreements create barriers in conduct of business while negotiations for a deal are on. They also resulted in gun-jumping penalties. The amendment allows for a notice of the stock purchase by the acquirer, but prevents the acquirer from exercising any rights on it till receiving CCI approval – thereby providing a balanced proposition.

 

Settlements & commitments with CCI:

• Settlements and commitments form a remedial part in competition law in many jurisdictions. Commitments are remedies proposed by the parties to the concerns highlighted by the regulator. If the regulator accepts the remedies, they are binding and are held for infringement. Commitments can be invoked at preliminary stages of proceedings.

• In settlements, however, infringement is established by the regulator and an investigation is launched. A pre-condition to offering a settlement is admission of guilt, which may attract the applicable penalty. No penalties are attracted in commitments.

• The Bill has proposed a mechanism for introducing settlements and commitments. Commitments can be offered any time before conclusion of the investigation, whilst settlements must only be offered upon the completion of the investigation but before the final order of the CCI. The Bill is silent on the operation of this mechanism currently.

Greater Power of DGs:

• The DG can now seek more information owing to greater power, including information from third parties in the course of investigation

• The proposed amendments in the Bill allows the DG to summon ‘agents’ of an enterprise and record statements under oath; they can also summon and examine ‘officers’ of an enterprise. ‘Agent’ includes bankers, auditors and legal advisors.

Concerns regarding the Bill

The following are some of the concerns that key market players impacted by the Bill have:

• An unambiguous definition of ‘substantial business operations in India’. This has not yet been proposed in the Bill but is a key criterion when discussing which deals fall under the ambit of the CCI based on the ‘deal value threshold’.

• Deal values are determined by market factors. INR 2,000 Cr. deals may mean different for different sectors. Hence, the ‘deal value threshold’ is perhaps not a good indicator to judge if the CCI should examine a particular deal.

• Power given to DG may make the CCI the ‘judge, jury and executioner’. There are concerns about the constitutionality of the institutional design of the CCI. It functions majorly as an adjudicator and, hence, should have a predominance of judicial members on board; the current Commission has none.

• Earlier the DG would report to the Ministry of Corporate Affairs (MCA) and not to the CCI. However, the amendment has brought the DG back under the administrative control of the CCI that may influence the DG’s autonomy.

•  CCI taking cognizance of big acquisitions, as discussed under the ‘deal value threshold’, could hamper growth of the Indian economy. The emergence of start-ups is based on the ability to raise foreign capital and scrutiny of acquisitions may slow this down. We need big global market players to constantly invest in India to drive the economy. Some fear that requiring a notification by the CCI before finalizing the deal is a hindrance to the same.

What can be considered omissions or false disclosures attracting penalties?

The penalties for making a false statement or omission to furnish material information has been proposed to be increased from INR 1 crore to INR 5 crore. Thus, it is important that companies take as much precaution as possible during disclosure.

There is not much literature to suggest what constitutes ‘false disclosure’. However, certain lapses in disclosure may prima facie be considered as materially false. These may be as follows:

• Agreements that demand disclosure of any litigation that either party may be involved in – any failure to disclose this would be a material breach.
• Disclosure of any thresholds, as discussed and negotiated by the parties (for example, contracts & deals over USD 500,000). Thresholds are made to ease the burden of disclosures and any failure to adhere to it may result in dispute/litigation.
• Disclosure about capitals is incomplete. These include stocks, warrants, other financial instruments.
• Non-disclosure about subsidiaries owned by the company or the percentage owned in the subsidiary. Incorporation details of the company or the subsidiary are skewed.
• The schedule of leases for the company does not contain all required information such as date of lease, title of the lease, location, landlord, security deposit, rent and other payments, etc.
• The disclosure is missing key information on employee benefits, such as medical, life insurance stock options, etc. Disclosure is missing employment agreements and key information on salaries and bonus.
• The tax disclosure schedule is incomplete, such as failing to disclose all income tax jurisdictions the company is subject to, any pending or past tax audits, any felonious tax returns, or any unpaid tax liability.

Indian company obligations before CCI

In general, Indian companies can fulfill obligations towards the CCI by:

• Meeting disclosure requirements and erring on the side of caution when in doubt about certain disclosures.
• Seek timely guidance from the CCI in case of any doubts. CCI is generally approachable when looking into potential transactions.
• Disclose to the CCI, at any stage (during or post CCI approval), any material development or information, which may influence their decision with respect to the proposed transaction. This may include mistakes or inadvertent omissions.
• All documents and information must seek to explain and enumerate on the ‘purpose’ and ‘description’ of the transaction and include relevant rights, restrictions and obligations.

Conclusion

The changes in the Competition Bill are proposed to align India with international competition law regimes. The ability to hold digital players and MNCs, in particular, is welcome. However, as the concerns highlight, India’s economy is at a stage that requires influx of investment from global market players, and the keen eye of the CCI may put some of them off. Clarity is also sought on key definitions such as ‘substantial business operations in India’, without which the amendments remain nebulous. Nevertheless, the amendments are only a proposition and need to clear the scrutinization of the Parliament in the winter session before turning into law.