The Competition Commission of
India (CCI) has penalised two companies for failure to notify and seek advance clearance for their acquisition
of minority interests which they claimed were passive investments and therefore
exempt from the merger control requirements. The CCI has been aggressive in
fining parties for breach of the notification requirements and fined Tesco last
year 30 million rupees (approximately 450,000 euros) for delayed notification
of its acquisition of Trent Hypermarket.
In the first case the
agricultural company SCM Soilfert was fined 20 million rupees (approximately
300,000 euros) for failing to notify two creeping acquisitions in Mangalore
Fertilizers & Chemicals. SCM acquired
a 24.46 per cent interest in Mangalore. It claimed that the deal fell outside
the Indian notification requirements where acquisitions of 25 per cent or more
need to be filed with the CCI. SCM argued that the transaction was exempt as
this was aimed “solely as an investment”. The CCI disagreed and was persuaded
by SCM’s press releases at the time which described the acquisition as a “very
strategic” decision. SCM then proceeded
to acquire a further 0.8 per cent interest which was notified but the shares
were placed in an escrow account on the understanding that the rights attaching
to them would not be exercised until the CCI approved the transaction. However, the CCI said that Indian law does
not allow for any such exemption and SCM was in breach of the pre-notification
requirement.
The case is an interesting
contrast with the position under EU merger control where there is an exception to the general suspensory rule in that public bids, or a
series of transactions in securities admitted to trading on a market such as a
stock exchange amounting to a creeping takeover, can be implemented prior to
clearance from the European Commission provided two conditions are
satisfied. These are that the
concentration is notified to the Commission without delay and the acquirer does
not exercise the voting rights attached to the securities in question, or does
exercise those rights but only to maintain the full value of its investments
based on a derogation granted by the Commission.
In another case Zuari Fertilizers
& Chemicals was fined 30 million rupees for failing to notify its
acquisition of a 16.43 per cent interest in Mangalore. Zuari also maintained
that the acquisition was intended solely as an investment but the CCI was not
persuaded. The CCI said that no evidence
had been provided to substantiate this claim.
Furthermore, an executive of the company publicly stated in a TV news
interview that the motivation behind the acquisition was to enter a JV.
These cases contain a number of
lessons. First, under Indian law minority acquisitions even below 25 per cent
can be treated as notifiable concentrations. Second, there is no flexibility to
avoid the suspensory obligation by electing not to exercise the votes attaching
to shares pending clearance, whether in public or private transactions. Third,
the argument before the competition authority that a transaction is solely for
investment purposes may be difficult to support if a different rationale has
been put forward by the company or its officers in the media.
These cases illustrate the
difficulties in applying the Indian merger control rules and the lack of
clarity around the exemption rules.
Until the CCI comes out with a clear policy on this issue it may be
inundated with failsafe applications by parties notifying their deal ‘just in
case’. For those who decide not to file
the steady stream of fining cases comes as a reminder that the CCI is vigilant
in enforcing its rules. This is an area
where an appellate body could provide useful clarification although, as yet, there
has been no appeal of the CCI’s decisions to impose a penalty for breach of
merger filing requirements.
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