Antitrust body seeks tighter M&A norms

Antitrust body seeks tighter M&A norms

New Delhi: The Competition Commission of India (CCI) wants the rules tightened to bring a larger number of mergers and acquisitions (M&As) under its scrutiny by closing a possible loophole that originates in the wording of a clarification issued in May by the ministry of corporate affairs.

The country’s antitrust agency has written to the ministry seeking the change in the competition law, said a senior CCI official, who declined to be identified. The proposed change will require companies to seek regulatory approval even for the acquisition of smaller firms.

A ministry official said the CCI representation had been received. “The ministry has not yet taken a call," he said, declining to be identified.

An M&A between two companies now needs prior CCI approval if their combined sales is more than Rs4,500 crore. For global M&As, this threshold is $2.25 billion with sales within India of Rs2,250 crore. However, in cases where the target company has sales of less than Rs750 crore the deal is exempt from CCI’s prior approval.

According to a March notification by the ministry, if one of the merging entities had assets valued at a maximum Rs250 crore or (emphasis added) had a turnover not exceeding Rs750 crore, the transaction was exempt from CCI’s approval.

After representations that this wasn’t clear enough, the wording was changed two months later.

“The March notification was further clarified in May, where a distinction was made that ‘either’ the asset of the target company should be less than Rs250 crore ‘or’ the turnover should be less than Rs750 crore for exemption to happen," said the CCI official cited above. “This has diluted the norms considerably... We have therefore asked MCA (ministry of corporate affairs) to tighten the criterion so that if one of the two conditions are met, the merging companies need to take approval of CCI before executing the deal."

The May notification does not reflect the spirit of the competition law, said K.K. Sharma, former acting director general of CCI, now on sabbatical.

“In the law, the word ‘or’ in section 5 (which defines combinations) has been used for defining what should be included for notifying CCI. The use of the word ‘or’ instead of ‘and’ has widened the window of exemption, which will exclude several M&As," said Sharma, adding that this was perhaps done inadvertently.

CCI had expressed the concern even before March that the word used in the rule should be “and" rather than “or".

The March notification had been vague and was therefore subject to interpretation by CCI, said Amitabh Kumar, senior adviser (regulatory, competition and tax) at J. Sagar Associates. The May notification did away with that and therefore may lead to the misuse of exemptions, which will weaken M&A scrutiny by CCI, Kumar said.

The CCI official cited above said the current wording could also see many M&As being exempt, “especially if the acquisition is done through creating a special purpose vehicle with zero turnover".

CCI started scrutinizing M&As in June. So far, four M&A deals have been cleared. These include the purchase of the Bharti group’s stake in Bharti Axa by Reliance Industries Ltd, and Walt Disney Co. (Southeast Asia) Pte. Ltd’s acquisition of the shares it doesn’t hold in UTV Software Communications Ltd.