Even though enacted in 2002, the substantive provisions/offences under the Competition Act, 2002, as amended, have still not come into force. By the Competition (Amendment) Act, 2007, some very significant changes were made to the Competition Act.
From a pure mergers and acquisitions (M&As) perspective, some provisions that will potentially change the way M&As currently occur in India are(i) the mandatory notification requirements in respect of combinations that satisfy the prescribed thresholds (which, given the not so high threshold limits, will sweep in many transactions), and (ii) the proposed waiting/standstill period (which may extend to 210 days) before the “coming into effect” of such M&As.
There are several practical difficulties arising from some of the provisions of the Competition Act, which require serious consideration.
To start with, there are (i) inconsistencies within the Competition Act; and (ii) practical difficulties arising from an interplay of the Competition Act with other Indian laws. An inconsistency within the Competition Act is seen in section 60 read with section 62. While section 60 of the Competition Act states that it has effect notwithstanding anything inconsistent contained in any other law, section 62 states that its provisions are in addition to, and not in derogation of, the provisions under other laws. Therefore, in a conflict situation, the position may be unclear. The principles of harmonious construction should, generally apply in such situations.
However, this will largely depend on whether authorities constituted under different statutes make consciousefforts towards such harmonization. Some provisions in the Competition Act require consideration in view of the mandatory pre-notification requirement introduced by the Amendment Act.
As an example, the exceptions to the application of the mandatory pre-notification requirements are currently limited only to certain acquisitions pursuant to a covenant of a “loan agreement” or an “investment agreement”. These may need to be broadened.
Some practical difficulties that are likely to arise are on account of the interplay of the Competition Act with other legislation.
Take, for example, the Securities and Exchange Board of India, or Sebi (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. Several combinations involving acquisition of listed companies may attract the provisions of the Competition Act and may also trigger the provisions of the Takeover Regulations.
Briefly stated, the Takeover Regulations regulate the direct or indirect acquisition of shares and control of listed companies and seek to protect minority shareholder interest by imposing public offer obligations on acquirers.
It lays down certain percentile limits for share acquisitions, and acquisitions in excess of such limits trigger public offer requirements. The public offer usually takes between 90 and 120 days to conclude.
In the context of the long outside waiting period under the Competition Act, it is pertinent to note that the Takeover Regulations provide that if an acquirer is unable to make payment to shareholders within the prescribed period of 15 days from the closure of the offer due to non-receipt of statutory approvals, Sebi may grant an extension if satisfied that the delay was not due to the acquirer’s default. This is subject to the acquirer agreeing to pay interest (as may be specified by Sebi) to the shareholders for the delay beyond 15 days.
Hence, while it is theoretically possible for a public offer to be made alongside the notification and proceedings under the Competition Act, the pricing of the offer may be different from the prevailing market price at the time of the actual acquisition, as there may be a significant gap between the dates. There may also be heavy speculation and insider trading concerns.
Further, the amount of interest payable to the shareholders may itself be substantial. The public shareholders may not be able to transfer shares accepted pursuant to the offer for a much longer period than what was originally contemplated under the Takeover Code.
Modifications suggested to the combination may, in certain circumstances, lead to a serious impact on the public offer. There may be a situation where the acquirer may be required to conclude the purchase of shares offered pursuant to the public offer without certainty on its primary acquisition transaction.
Some practical difficulties may also arise under Sebi (Disclosure and Investor Protection) Guidelines, 2000, or DIP Guidelines, which provide that a preferential allotment pursuant to a shareholders’ resolution should be completed within 15 days from the date of passing of the resolution, if the investor is to avail the price protection granted under the said DIP Guidelines. There is, however, an exception to this general rule.
The 15-day period can be extended where the allotment is pending receipt of a required regulatory approval. While the prescribed 210 days standstill period under the Competition Act could be considered the period where a regulatory approval is pending, it is not certain whether Sebi has contemplated such a long waiting period, particularly when the potential investor is then protected at a much older price for the transaction.
Next is to see the impact of the standstill period on general mergers and amalgamations in India that are concluded through the court approval route.
This process usually takes about four to six months. A legitimate concern that arises is that while this process of sanction is in progress, the outcome of the same could potentially be rendered futile or unproductive if the modifications to the combination made by the commission alter the merger/amalgamation sanctioned by the relevant high court(s).
At a practical level, there will certainly be delays in the proceedings before a high court if the commission is simultaneously examining the details of the merger/amalgamation. A solution could be to harmonize the procedures under the Companies Act, 1956, and the Competition Act so that unnecessary proceedings and issues resulting out of a possible overlap of jurisdictions can be avoided.
While it is recognized that the 210 days standstill period is the maximum time prescribed and a decision can be delivered even earlier, the fact that there is a legal possibility of the standstill period extending to 210 days means several plain-vanilla private equity transactions and financial investments, which do not ordinarily have any appreciable adverse impact on competition, can be adversely impacted. In today’s competitive world, these transactions are extremely time sensitive, both in the listed and unlisted segment.
Send your comments to firstname.lastname@example.org
This column is contributed by Vinati Kastia of AZB & Partners, Advocates & Solicitors.