CHAPTER 5

REGULATION OF COMBINATIONS

Contents

5.1 Thresholds for Combinations under the Act

5.2 The Review Process

5.3 Forms of Notification

5.4 Time Limit for Giving Notice to the Commission

5.5 Failure to File Notice

5.6 Procedure for Investigation of Combination

5.6.1 Inquiry into Combination

5.6.2 Acts Taking Place outside India but having an Effect on

Competition in India (Section 32)

5.7 Descriptive Analysis of the cases filed under Section 5

5.8 Landmark Cases

5.9 The Highlights and Lowlights of The Procedure Followed By

CCI In Regulations Of Combinations

5.9.1 Highlights

5.9.2 Lowlights

5.10 References

105

The Competition Act, 2002 (as amended), follows the philosophy of modern

competition laws and aims at fostering competition and protecting the Indian markets

against anti-competitive practices. The Act prohibits the anti-competitive agreements,

abuse of dominant position and regulates combinations (mergers and acquisitions) with a

view to ensure that there is no adverse effect on competition within India. The provisions

of the Act relating to regulation of combinations have been enforced with effect from 1st

June, 2011

Broadly, a combination under the Act means acquisition of control, shares, voting

rights or assets, acquisition of control by a person over an enterprise where such person

has direct or indirect control over another enterprise engaged in competing businesses.

Combinations are classified into horizontal, vertical and conglomerate

combinations. If a proposed combination causes or is likely to cause appreciable adverse

effect on competition, it cannot be permitted to take effect.

Horizontal combinations are those that are between rivals and are most likely to

cause appreciable adverse effect on competition. Vertical combinations are those that are

between enterprises that are at different stages of the production chain and are less likely

to cause appreciable adverse effect on competition. Conglomerate combinations are those

that are between enterprises not in the same line of business or in the same relevant

market and are least likely to cause appreciable adverse effect on competition.

The thresholds are specified in the Act in terms of assets or turnover in India and

outside India. Entering into a combination which causes or is likely to cause an

appreciable adverse effect on competition within the relevant market in India is

prohibited and such combination shall be void.

5.1 Thresholds For Combinations Under The Act

The current thresholds for the combined assets or turnover of the combining

parties are as follows:

“Individual: Either the combined assets of the enterprises are more than 1,500

crores in India or the combined turnover of the enterprise is more than 4,500 crores in

India. In case either or both of the enterprises have assets/ turnover outside India also,

then the combined assets of the enterprises are more than US$ 750 million, including at

106

least 750 crores in India, or turnover is more than US$ 2250 millions, including at least

2,250 crores in India.

Group: The group to which the enterprise whose control, shares, assets or voting rights

are being acquired would belong after the acquisition or the group to which the enterprise

remaining the merger or amalgamation would belong has either assets of more than 6000

crores in India or turnover more than 18000 crores in India. Where the group has

presence in India as well as outside India then the group has assets more than US$ 3

billion including at least 750 crores in India or turnover more than US$ 9 billion

including at least 2250 crores in India. The term Group has been explained in the Act.

Two enterprises belong to a “Group” if one is in position to exercises at least 26 per cent

voting rights or appoint at least 50 per cent of the directors or controls the management or

affairs in the other. Vide notification S.O. 481 (E) dated 4th March, 2011, the

government has exempted “Group” exercising less than fifty percent of voting rights in

other enterprise from the provisions of section 5 of the Act for a period of five years.”

The above thresholds are summarized in table 5.1

Table 5.1

Thresholds of Combinations under the Act

In India

Applicable

to

Assets Turnover

Individual Rs 1500 Cr Rs 4500 Cr

Group Rs 6000 Cr Rs 18000 Cr

Assets Turnover

In India and

Outside

Total Minimum

Indian

Component

Total Minimum

Indian

Component

out of Total

Individual

Parties

$750m Rs 750 Cr $2250 m Rs 2250 Cr

Group $3bn Rs 750 Cr $9 bn Rs 2250 Cr

1 crore = 10 million

Source: Competition Act, 2002

The turnover shall be determined by taking into consideration the values of sales

of goods or services. The value of assets shall be determined by taking the book value of

the assets as shown in the audited books of account of the enterprise, in the financial year

107

immediately preceding the financial year in which the date of proposed combination falls,

as reduced by any depreciation. The value of assets shall include the brand value, value

of goodwill, or Intellectual Property Rights etc. referred to in explanation (c) to section 5

of the Competition Act.

5.2 The Review Process

The review process for combination under the Act involves mandatory pre-

combination notification to the Commission. Any person or enterprise proposing to enter

into a combination shall give notice to the Commission in the specified form disclosing

the details of the proposed combination within 30 days of the approval of the proposal

relating to merger or amalgamation by the board of directors or of the execution of any

agreement or other document in relation to the acquisition, as the case may be. In case, a

notifiable combination is not notified, the Commission has the power to inquire into it

within one year of the taking into effect of the combination. The Commission also has the

power to impose a fine which may extend to one per cent of the total turnover or the

assets of the combination, whichever is higher, for failure to give notice to the

Commission of the Combination.

5.3 Forms of Notification

The Combination Regulations 2011 set out three different forms for filing a

combination notification:

Form I (short form) with a fee of Rs 10 lakhs - Combination notifications must

usually be filed in Form I (Regulation 5(2)).

Form II (long form) with a fee of Rs 40 lakhs - The parties to the combination

have the option to give notice in Form II. Form II is preferred where (Regulation

5(3)):

The parties to the combination either individually or jointly have a market share

after combination of more than 25% in the relevant market, in the case of any vertical

overlaps; or

The parties to the combination have a combined market share after combination

of more than 15% in the relevant market, in the case of any horizontal overlaps.

108

Procedure also mandates the compulsory filing of a Compact Disk (CD) with all

the necessary forms and documentation as part of the Combination Regulations.

Form III In case of public financial institutions, FIIs, bank or venture loan or any

investment agreement without fees in Form III

5.4 Time Limit For Giving Notice to the Commission

Any person or enterprise proposing to enter into a combination shall notify the

Commission in the specified form disclosing the details of the proposed combination

within 30 days of the approval of such proposal by the board of directors or of the

execution of any agreement or other document.

The proposed combination cannot take effect for a period of 210 days from the

date it notifies the Commission or till the Commission passes an order, whichever is

earlier. If the Commission does not pass an order during the said period of 210 days the

combination shall be deemed to have been approved. The draft regulations propose to

dispose of notifications within 30 days in respect of Combination, which, in the opinion

of the Commission, has little or no potential for appreciable adverse effect on competition

in Indian markets.

In case of share subscription or financing facility or any acquisition, inter alia, by

a public financial institution, foreign institutional investor, bank or venture capital fund,

pursuant to any covenant of a loan agreement or investment agreement, details of such

acquisition are required to be filed with the Commission within seven days from the date

of acquisition.

5.5 Failure to File Notice (Regulation 8)

Where the parties to a combination fail to file notice, then Commission upon its

own knowledge or information relating to such combination, inquire into whether such a

combination has caused or is likely to cause an appreciable adverse effect on competition

within India and direct the parties to the combination to file notice in Form II within 30

days of the receipt of the notice.

5.6 Procedure for Investigation of Combinations

As per the Combination Regulations, the Commission shall form its prima facie

opinion as to whether the combination is likely to cause or has caused appreciable

109

adverse effect on competition within the relevant market in India within 30 days from the

receipt of the notice. If the Commission is prima facie of the opinion that a combination

has caused or is likely to cause adverse effect on competition in Indian markets, it shall

issue a notice to show cause to the parties as to why investigation in respect of such

combination should not be conducted. On receipt of the response, if Commission is of the

prima facie opinion that the combination has or is likely to have appreciable adverse

effect on competition, the Commission shall deal with the notice as per the provisions of

the Act.

5.6.1 Inquiry Into Combinations

Combination evaluation involves the following process:

(a) Identification of the relevant market, consisting of relevant product market and

relevant geographic market

(b) Consideration whether the Combination has appreciable adverse effect on

competition in the relevant market in India

(c) Approval, rejection, or approval with modification of the Combination

5.6.1.1 Identification of the Relevant Market

The Act envisages appreciable adverse effect on competition in the relevant

market in India as the touchstone. The concept of relevant market is clearly defined in the

Act. It consists of the relevant product (including goods and services) market and the

relevant geographic market.

The relevant market means “the market that may be determined by the

Commission with reference to the relevant product market or the relevant geographic

market or with reference to both the markets”. The Act lays down the factors, any one or

all of which shall be taken into account by the Commission while defining the relevant

product/geographic market as the case may be.

Relevant product market is defined in terms of substitutability of products. It

means “a market comprising all those products or services which are regarded as

interchangeable or substitutable by the consumer, by reason of characteristics of the

products or services, their prices and intended use.”

110

Relevant geographic market is defined in the Act in terms of “the area in which

the conditions of competition for supply of goods or provision of services or demand of

goods or services are distinctly homogenous and can be distinguished from the conditions

prevailing in the neighbouring areas”.

5.6.1.2 Evaluation of Appreciable Adverse Effect on Competition

The Act envisages appreciable adverse effect on competition in the relevant

market in India as the criterion for regulation of combinations. In order to evaluate

appreciable adverse effect on competition, the Act empowers the Commission to evaluate

the effect of Combination on the basis of factors mentioned in sub section (4) of section

20. These factors are indicated below:

Factors to be considered by the Commission while evaluating appreciable adverse

effect of Combinations on competition in the relevant market

(sub -section (4) of section 20 of the Act)

“(a) Actual and potential level of competition through imports in the market;

(b) Extent of barriers to entry into the market;

(c) Level of concentration in the market;

(d) Degree of countervailing power in the market;

(e) Likelihood that the combination would result in the parties to the combination

being able to significantly and sustainably increase prices or profit margins;

(f) Extent to which substitutes are available or are likely to be available in the

market;

(g) Market share, in the relevant market, of the persons or enterprise in a

combination, individually and as a combination;

(h) Likelihood that the combination would result in the removal of a vigorous and

effective competitor or competitors in the market;

(i) Nature and extent of vertical integration in the market;

(j) Possibility of a failing business;

(k) Nature and extent of innovation;

(l) Relative advantage, by way of the contribution to the economic development, by

any combination having or likely to have appreciable adverse effect on

competition;

111

(m) Whether the benefits of the combination outweigh the adverse impact of the

combination, if any.

5.6.1.3 Orders of Commission on Certain Combinations (Section 31)

Where Commission is of the opinion that any combination does not or is not

likely to have an appreciable adverse effect on competition it shall by order approve the

combination.-If yes then it shall direct that combination shall not take effect.-

Commission may propose to modify combination make it lawful.-If parties accept

modification then it will be approved.-If parties do not accept modification, such

combination shall be deemed to have an appreciable adverse effect on competition. If the

Commission does not on the expiry of a period of 210 days from the date of notice given

to the Commission under sub-section (2) of section 6, pass an order or issue direction in

accordance with the provisions of sub-section (1)or sub-section (7), the combination shall

be deemed to have been approved by the Commission.

5.6.2 Acts Taking Place Outside India but Having An Effect on Competition in

India (Section 32)

The Commission shall, notwithstanding that, an agreement referred to in Section

3 has been entered into outside India (a) Any party to such agreement is outside India; or

(b).Any enterprise abusing the dominant position is outside India or (c) A combination

has taken place outside India or (d) Any other mater matter or practice or action arising

out of such agreement or dominant position or combination is outside India, have power

to inquire into such agreement or abuse of dominant position or combination if such

agreement or dominant position or combination has or is likely to have an appreciable

adverse effect on competition, pass such orders as it may deem fit.

5.7 Descriptive Analysis of Cases Filed Under Section 5

The combination, either an acquisition or an amalgamation is being carried out in

various industries. A frequency count of the 103 cases reported as per industry is shown

in table 5.2 and figure 5.1.

112

Table 5.2

Frequency Count of Industries Which Filed Approval for Combination

Industry Total

Insurance 5

Media 7

Bio-Products 2

Chemicals 3

Power 3

Automotives 4

Infrastructure 7

Steel 3

Banking & Finance 21

Manufacturers & Exporters 3

Holding Company 1

Manufacturing 17

Telecom 4

Mining 3

Business Service 1

IT 7

Real estate 1

Distillery 1

Engineering 2

Jewellery 1

Shipping 2

Travel 1

Consultancy 1

Drilling 1

Gas 1

R&D 1

Total 103

113

Figure 5.1

Frequency Count of Industries Which Filed Approval for Combination

The table 5.2 and figure 5.1 shows that maximum cases of combination relate to

the Banking and Finance industry (21), 17 for Manufacturing industry, 7 each for Media,

IT and Infrastructure, 5 in Insurance industry, 4 cases relate to Telecom and Automotive

industry. For the Chemicals, Power, Steel, Manufacturers and Exporters, and Mining 3

cases each were filed. For Bio- Products, Engineering and Shipping, 2 cases were found

and for the remaining industries of- Business Service, Holding Companies, Real Estate,

Distillery, Jewellery, Travel, Consultancy, Drilling, Gas and Research and Development

1 case each was filed. In the research study the cross tabulation is done between the

nature of the case and the decision for the case. Table 5.3 and figure 5.2 indicate the

results.

Table 5.3

Nature and Decision Cross Tabulation

Nature * Decision Cross tabulation

Count

Decision Total

Unconditiona

l Approval

Order Approved Notice not valid

Action 5(a) 15 0 29 2 46

5(c) 16 8 33 0 57

Total 31 8 62 2 103

114

Figure 5.2

Nature and Decision Cross Tabulation

Table 5.3 and figure 5.2 clearly shows that out of the total cases relating to

Section 5 of the Competition Act, 1956, 46 cases are being filed under Section 5(a) i.e.

cases relating to acquisition and the remaining 57 cases relate to Section 5(c) i.e.

amalgamation. Out of the total 46 cases of Section 5(a), in 15 cases the CCI gave

unconditional approval, 29 cases were approved by the CCI, whereas for 2 cases the

notice was found to be invalid. For the 57 cases relating to Section 5(c), in 16 cases,

unconditional approval was given, for 8 cases order was passed and the remaining 33

cases were approved by the CCI.

Similarly an attempt is also done to analyze the cross tabulation results of nature

of case and time of approval. The results are indicated in table 5.4 and figure 5.3

115

Table 5.4

Nature and Time of Approval Cross Tabulation

Nature * Time of Approval Cross Tabulation

Count

Time of Approval Total

less than 30

days

30-60 days more than 60

days

Action 5(a) 25 16 5 46

5(c) 39 10 8 57

Total 64 26 13 103

Figure 5.3

Nature and Time of Approval Cross Tabulation

Table 5.4 and figure 5.3 show that out of the 46 cases filed under Section 5(a)

relating to acquisition, the time of approval was less than 30 days for 25 cases, for 16

cases the time of approval was within 30-60 days whereas, for 5 cases, the time of

approval was little longer as it extended beyond 60 days. Under Section 5(c) for 39 cases

the time of approval was less than 30 days, for 10 cases within 30-60 days and for 8 cases

more than 60 days. Cross tabulation was also conducted between the industry specific

and the nature of decision. The results are shown in table 5.5 and figure 5.4.

116

Table 5.5

Industry and Nature of Decision Cross Tabulation

Industry * Decision Cross Tabulation

Count

Decision

Unconditional

Approval

Order Approved Notice not

valid

Industry

Insurance 1 0 4 0

Media 3 0 4 0

Bio-Products 1 0 1 0

Chemicals 3 0 0 0

Power 1 0 2 0

Automotives 2 0 2 0

Infrastructure 1 1 5 0

Steel 2 0 1 0

Banking & Finance 11 2 8 0

Manufacturers &

Exporters

1 1 1 0

Holding Company 0 0 1 0

Manufacturing 1 1 14 1

Telecom 0 0 3 1

Mining 0 1 2 0

Business Service 0 0 1 0

IT 3 1 3 0

Real Estate 0 0 1 0

Distillery 0 0 1 0

Engineering 0 1 1 0

Jewellery 0 0 1 0

Shipping 0 0 2 0

Travel 0 0 1 0

Consultancy 0 0 1 0

Drilling 1 0 0 0

Gas 0 0 1 0

R&D 0 0 1 0

Total 31 8 62 2

117

Figure 5.4

Industry and Nature of Decision Cross Tabulation

The result of table 5.5 and figure 5.4 indicate that out of the total 51 cases in

which an unconditional approval was given by CCI, 11 cases were from the Banking and

Finance industry, 3 cases each were reported from Media, Chemical and IT industry 2

cases from Automotive and Steel industry whereas for Insurance, Bio-product, Power,

Infrastructure, Manufacturing or exporters, and drilling industry, 1 case was reported and

given an unconditional approval.

Similarly out of the 8 cases in which an order was passed by CCI, only for the

Banking and Finance industry, 2 cases were found but for the industry of infrastructure,

Manufacturers and exporters, manufacturing, mining, IT and engineering only 1 case was

reported.

Out of the 62 cases in which CCI gave the approval of the combination, 14 cases

related to the manufacturing industry, 8 were found to be of Banking and Finance, 5 for

infrastructure, 4 cases for Insurance and Media each 3 cases for Telecom and IT industry

each, 2 for Power, Automotive, Mining and Shipping industry whereas for the industry of

bio—products, steel, manufacturers and exporters, Holding Company, Business Services,

118

Real Estate, Distillery, Engineering, Jewellery, Travel, Consultancy, Drilling and Gas,

only 1 case for each industry was reported. For the manufacturing and Telecom industry

in 1 case, the notice was found to be invalid.

A cross tabulation was carried on between the specific industry filing the

combination and the time of approval. The results are shown in table 5.6 and figure 5.5.

Table 5.6

Industry and Time of Approval

Industry * Time of Approval Cross Tabulation

Count

Time of Approval Total

less than 30

days

30-60 days more tha 60

days

Industry

Insurance 3 2 0 5

Media 5 1 1 7

Bio-Products 1 0 1 2

Chemicals 3 0 0 3

Power 3 0 0 3

Automotives 2 2 0 4

Infrastructure 4 2 1 7

Steel 2 0 1 3

Banking&Finance 14 6 1 21

Manufacturers&EXpor

ters

0 1 2 3

Holding Company 1 0 0 1

Manufacturing 7 7 3 17

Telecom 3 1 0 4

Mining 2 0 1 3

Business Service 1 0 0 1

IT 6 0 1 7

Rael estate 1 0 0 1

Distellary 1 0 0 1

Engineering 1 1 0 2

Jewellery 1 0 0 1

Shipping 0 2 0 2

Travel 1 0 0 1

Consultancy 0 1 0 1

Drilling 1 0 0 1

Gas 0 0 1 1

R&D 1 0 0 1

Total 64 26 13 103

119

Figure 5.5

Industry and Time of Approval

Table 5.6 and figure 5.5 depicts that out of the total 103 cases for 64 (62.13 %)

the decision time was less than 30 days, for 26 cases 25.24 %) the time of approval was

within the range of 30-60 days and for 13 cases (12.63 %) the time taken for approval

was a little longer i.e. it extended beyond 60 days. It is also worth mentioning that as per

industry wise for the 21 cases related to the banking and finance for 14 cases the time of

approval was less than 30 days. Similarly for the 17 cases relating to manufacturing

industry ( i.e. the industry in which second most of the cases are filed after the banking

and finance sector) for 14 cases the time of approval was less than 60 days.

120

5.8 Landmark Cases

1. Jet Airways (India) Limited and Etihad Airways PJSC

Parties to the Combination

1. Jet Airways (India) Ltd. (Jet)

2. Etihad Airways PJSC (Etihad) ,wholly owned by the Government of Abu Dhabi

Facts of the Case

In 2013, Etihad, a company incorporated in the United Arab Emirates (UAE), a

national airline of UAE, proposed to acquire 24% in Jet, a listed company incorporated in

India.

Primarily engaged in the business of:-

- International Air Passenger Transportation Services,

- Commercial Holiday Services

- Cargo Services

Figure 5.6

Equity Hold of Etihad

Equity Hold

Air Seychelles

Air Berlin

Virgin Australia

Air Lingus

121

It is clear from figure 5.6 that Etihad holds 29.21 % equity in Air Berlin; 40

percent equity in Air Seychelles; 10 percent equity in Virgin Australia and 2.9 percent

equity in Aer Lingus. Jet on the similar lines, is primarily engaged in the business of

providing low cost and full service scheduled air passenger transport services to/from

India along with cargo, maintenance, repair & overhaul services and ground handling

services.Proposal got approved by the Security Exchange Board of India (SEBI), the

Foreign Investment Promotion Board (FIPB) and Cabinet Committee of Economic

Affairs (CCEA).

Issues Involved

Whether or not such transaction between Jet and Etihad has an Appreciable

Adverse Effect on Competition (AAEC) in India?

Decision of CCI

A relevant market in this case was concluded to be the market of international

passenger air transport based on the point of origin or point of destination (O&D). Thus,

each such O&D constituted a different route, and hence each different route, constituted a

different relevant market. To ascertain relevant market following points were considered:

1. Direct and Indirect flights between O&D being substitutable.

2. Indirect flights by competitor between O&D being substitutable.

3. Different classes of passengers, and inflight services rendered to different classes,

being substitutable.

4. Time and price sensitive passengers (Business/Holidays).

5. Etihad being not operating in domestic (Indian) aviation sector and India‟s open

skies policy in respect of international air cargo transportation.

Appreciable Adverse Effect on Competition (AAEC)

Now that the relevant market was defined, CCI ventured into ascertaining,

whether or not there would be any AAEC pertaining to such routes. CCI stressed upon

the relevancy of trans-boundary competition, as routes were international, while

ascertaining AAEC through this proposed combination. It was observed that there were

38 routes to/from India to other destinations where Etihad and Jet fly and there was at

least one competitor on each of such route. Except 7 destinations, where Jet and Etihad

122

had a combined share of more than 50 percent, rest all destinations had less combined

share. Also of these 7 destinations, on 3 routes, the share of one was more than 50 percent

and of the other less than 5 percent. Thus, post transaction change in the market share

was observed, not to marginally alter the competition dynamics.

Analysis of the Order

As mentioned, this case has been a first by CCI, wherein it examined the

combination arrangement between two airlines. CCI decision has primarily been based

upon the observation that there has been sufficient competition in the relevant market and

therefore it is not likely that there would be AAEC in those markets. This approach has

been said to be inspired from the decision in the merger between British Airways and

Iberia, wherein, European Commission held that the said merger will not affect

competition till the time effective and credible competitors are there in the relevant

market.

As already mentioned the proposal was approved by SEBI, FIPB and CCEA and

different approval was sought under FEMA. The case involved many regulators,

including CCI, looking in to various aspects of this deal. Furthermore, this particular case

has been the case where, CCI decided upon AAEC without getting into investigation and

basing its conclusion majorly upon the information/details provided by the parties. And

therefore re-emphasizing the idea that where the material available is sufficient to form

opinion for the purpose to ascertain the issue in a combination case, investigation is not

necessary. However, the dissenting ruling asserted the need for investigation for giving

approval to the proposed combination. It should be noted that the decision has been clear,

that in case of any incorrect information or in case of any modification in the proposed

combination, fresh approval would be sought by the parties.

Having said that, post its decision, CCI has imposed Rs.1 crore penalty under

section 43 of the Act on Etihad for consummating parts of the deal without getting its

approval. Etihad in February this year purchased three Heathrow airport slots of Jet

Airways for $70 million and leased it back to the Indian airline ahead of the deal. Despite

the matter being pending for approval, the two parties entered into an agreement which

was not disclosed to CCI.

123

However, the said penalty will have no bearing on previous approval of the Jet-

Etihad deal by CCI. Meanwhile, Competition Appellate Tribunal has admitted a plea

challenging CCI‟s approval for the said deal.

2. Tesco Overseas Investment Limited (“TOIL”) and Trent Hypermarket

Limited (“THL”)

Parties to the Combination

Tesco Overseas Investment Limited (“TOIL”)

Trent Hypermarket Limited (“THL”)

Facts of the Case

The Competition Commission of India (“CCI”) in its recent order dated May 22,

2014 in the matter of Tesco Overseas Investment Limited (“TOIL”) and Trent

Hypermarket Limited (“THL”) approved the combination under Section 31(1) of the

Competition Act, 2002 (“Competition Act”). In the same matter the CCI in its order

dated May 27, 2014 levied a penalty of INR 30 million (USD 0.5 million) on TOIL under

Section 43A of the Competition Act for its failure to notify the combination within 30

days of the trigger event. On March 31, 2014, TOIL had filed a notice under sub-section

(2) of Section 6 of the Competition Act. The notice was given pursuant to the execution

of a Share Purchase Agreement (“SPA”) and a Joint Venture Agreement (“JV

Agreement”) between TOIL, THL and Trent Limited (“Trent”). The proposed

combination (“Proposed Combination”) relates to TOIL‟s acquisition of 50 percent of

the issued and paid-up equity share capital of THL.

TOIL is a company incorporated in England and is a subsidiary of Tesco Plc, UK

(“Tesco”). Tesco is also incorporated in England and is the parent entity of the Tesco

group of companies (“Tesco Group”). TOIL is the holding company for several Tesco

Group‟s overseas retail businesses in various countries6, primarily engaged in the retail

trading of grocery and general merchandise through various formats including

hypermarkets, supermarkets, convenience stores and franchised stores. However, the

Tesco Group was not engaged in retail business in India.

Trent is engaged in the business of retail of ready-made garments and accessories,

footwear, cosmetics, gift items and household items in India along with retail operations

124

through its subsidiaries. THL is a wholly owned subsidiary of Trent and is engaged in the

business of multi-format retail trading in India including hypermarkets, supermarkets and

smaller convenience stores for various merchandise including food and grocery, personal,

home care and kitchen products, apparels, consumer durables and general merchandise.

THL currently operates through 16 retail stores at various locations in India.

Issues Involved

Issue 1: Failure to notify the combination within stipulated time

Decision of CCI

In order to ascertain the overall size of the retail market, CCI referred to the

Indian retail industry report prepared by the Indian Brand equity Foundation (“IBEF”).

Based on IBEF report, the retail market size in India was estimated to be around USD

450-500 billion in the year 2012 with organized retail sector comprising a miniscule 8%

share of the overall retail industry. CCI also took note of the fact that THL operated only

through sixteen (16) of its retail stores across various locations in India and its total

revenue for the year 2012-2013 being INR 78.5 billion (USD 130.5 million) only, the

CCI observed that it was an insignificant amount considering the overall size of the retail

market as well as the organized retail market in India.

CCI further observed that while THL was engaged in the business of multi-format

retail trading in India including hypermarkets, supermarkets and smaller convenience

stores, TOIL was not present in the retail market in India. Therefore, there were no

horizontal overlaps between the business activities of THL and TOIL in the retail market

in India.

Keeping the facts on record in mind, the CCI was of the opinion that the Proposed

Combination was not likely to have any appreciable adverse effect on competition in

India and approved it under sub-section (1) of section 31 of the Competition Act.

It is pertinent to note here that this order was issued without any prejudice to the

proceeding under Section 43A of the Competition Act.

125

Imposition of Penalty Under Section 43A

The proceedings under section 43A of the Competition Act are independent of the

CCI‟s evaluation of the pre-combination filing made by TOIL under Section 6 of the

Competition Act. Following the CCI‟s order dated May 22, 2014 which approved the

combination, the CCI through an order dated May 27, 2014, imposed a penalty of INR 30

million (USD 0.5 million) on TOIL for not notifying it about the Proposed Combination

within 30 days of the trigger event. Interestingly, this has been the highest amount of

penalty ever levied on any party by the CCI under Section 43A of the Competition Act.

Although the CCI approved the Proposed Combination stating that it is not likely to cause

any appreciable adverse effect on competition in India, it observed that TOIL had applied

to the Department of Industrial Policy and Promotion and Foreign Investment Promotion

Board on December 17, 2013 to seek a requisite approval with regard to the Proposed

Combination. The CCI opined that the merger control provisions related to the Proposed

Combination are triggered within 30 days of filing such an application with a government

body communicating its intention to acquire. Thus, according to CCI, TOIL should have

filed merger notification within thirty (30) days of filing such an application i.e. by

January 16, 2014 and not within thirty (30) days of execution of the binding documents.

Considering that the merger notification was filed on March 31, 2014, the CCI further

concluded that there was a delay of seventy-three days in filing the merger notification

resulting in TOIL to be penalized under Section 43A of the Competition Act. It is

important to mention that the CCI noted that maximum permissible pecuniary penalty

prescribed under Section 43A (i.e. 1 per cent. of the transaction value) would amount to

INR 6 billion (USD 100 million). However, in light of TOIL‟s subsequent voluntary

filing, CCI took a relatively lenient view and imposed a nominal penalty of INR 30

million only.

Further, TOIL specifically relied on the orders of the CCI in the cases of Aditya

Birla Nuvo Limited/ Pantaloon Retail (India) Limited/ Peter England Fashion and Retail

Limited and Exide/ING Vyasya Life in order to substantiate its arguments and prove to the

CCI that the application to DIPP and FIPB was merely an interim arrangement and a step

towards negotiation of the proposed transaction. However, the CCI also rejected the

arguments stating that TOIL had given adequate information about the proposed

126

transaction in its application to FIPB and DIPP for it to qualify as a communication of

„intention to acquire‟. Hence, the CCI while interpreting Section 6(2) of the Competition

Act took note of Regulation 5(8) of the Competition Commission (Procedure in regard to

the transaction of business relating to combinations) Regulations, 2011 (“Combination

Regulations”), and considered the following to be the spark event in case of an

acquisition: (a) execution of any agreement; (b) any binding document, by whatever

name called, conveying an agreement or decision to acquire (not being a binding term

sheet/memorandum of understanding); or (c) any communication made to the central

government or state government or any statutory authority conveying its intention to

acquire.

Further, the CCI observed that TOIL‟s reliance on Aditya Birla Nuvo Limited/

Pantaloon Retail (India) Limited/ Peter England Fashion and Retail

Limited and Exide/ING Vyasya Life was also misplaced. The CCI re-iterated its position

taken in the Exide case wherein it had held that the date of filing of the application with

IRDA for approval of the combination would qualify as the trigger event for the purpose

of filing the combination notification. Therefore, CCI was of the opinion that TOIL

should have filed its combination notification within 30 days of filing its application with

the DIPP and FIPB.

Analysis of the Order

One of the significant consequences of this order will be that henceforth parties

would have to exercise greater caution while making combination notification. A

potential acquirer will have to ensure that it files combination notification within 30 days

of communicating its intention to acquire an enterprise to any statutory authority or the

Central or the State Government.

While CCI has strictly interpreted and enforced Regulation 5(8) of the

Combination Regulations, by holding that the spark event in case of an acquisition is the

date on which the enterprise communicates its intention to acquire to any statutory body,

this position is likely to add to the price of evaluating and making acquisitions for an

acquirer whose acquisition requires a pre-combination notification under Section 6 of the

Act.

127

A potential acquirer would now be required to make combination notification

even when it is in pre-merger negotiations but has communicated its intention to make an

acquisition to a regulator or statutory body due to the requirement for pre-transaction

regulatory clearance. Thus, a CCI pre-merger investigation would be conducted even if

the parties are unable to get the regulatory clearance to proceed with the transaction.

This is also likely to lead to commercially absurd circumstances when such an

acquirer is in negotiations with multiple sellers where each of them requires a pre-sale

clearance from its regulator or another statutory body. In such a condition, the potential

acquirer will be required to make a notification in respect of each of the potential

transactions when it is fully aware that it will proceed with only of the transactions in

question. The CCI‟s order while being an example of good law enforcement has resulted

in creating a footing that may lead to poor market economics. The potentially higher

costs of acquiring an Indian enterprise when compared to similarly placed targets in other

jurisdictions may well create a dissatisfier for a potential acquirer to consider Indian

targets.

5.9 The Highlights and Lowlights of the Procedure Followed by CCI in

Regulations of Combinations

5.9.1 Highlights

1. By and large, the Draft Regulations are fine and in line with the Competition Act,

2002 (as amended in 2007)

2. The effective date for Sections (5) and (6) of the Act to be brought into force is 1

June, 2011. This provides a preparatory period of three months for enterprises to

get ready.

3. The expression “Appreciable Adverse Effect on Competition” (AAEC) within

India has not been clearly defined in the Act but Section 20 (4) thereof lists the

different factors to be reckoned by the CCI for the purpose of determining

whether a combination would have these effects of or is likely to have AAEC in

the relevant market. It is hoped that despite the said listed factors being very

general in semantic description, the CCI will, over a period of time, accord

128

constructive interpretations and lay down parameters and criteria for objective

determination of AAEC.

4. The pre-merger consultation provisions in Regulation (12) is a step in the right

direction Very correctly, Regulations 12 (4) and 12 (5) declare that the

consultation opinion is confidential and not binding on the CCI.

5. Regulation 25 (6) provides that the CCI shall endeavor to pass an order on

combinations within 180 days of the filing of the notice under Section 6 (2) of the

Competition Act. This clips 30 days from the 210 days provided in Section 31

(11) of the Act. This will be welcomed by the industry and the enterprises.

6. Regulation 18 (1) enjoins the CCI to form a prima facie opinion on a combination

within 30 days of receiving notice as to whether a combination is likely to cause

an AAEC on competition within the relevant market in India. This is a welcome

provision, as it will quicken up the procedure, particularly in the case of simple or

routine combinations.

5.9.2 Lowlights

1. Regulations require of all initial filings the equivalent of what one would ask for

on a second request. Asking for too much information at the outset, prior to a

sorting out process, will heavily waste resources and time of filing companies and

also CCI. This needs a revision.

2. Regulation (28) declares that the Regulations shall not apply to a combination, if

it has taken effect prior to the effective date. The expression “has taken effect”

needs to be clarified further, as it could be interpreted differently by different

parties. An illustration of possible ambiguity in this regard is when combination

transactions are covered by more than one financial step. It is possible that one

financial step has concluded and the second is yet to take place after the effective

date. It requires a clarification whether such transactions where one part falls after

the effective date will fall under the exemption or will have to be notified.

3. Notwithstanding Regulation 28 (granting exemption), Section 20 of the

Competition Act permits the CCI to inquire into whether such a combination has

caused or is likely to cause an AAEC in India within one year from the date on

129

which it has taken effect. Regulations cannot override the provisions of the Act

and this should also be addressed while framing the Regulations.

4. Regulation 19 (1) requires the parties to the combination to publish the details

within 10 working days. This is after the CCI arrives at a prima facie opinion that

the combination is likely to cause AAEC. But if we looks at Sections 29 (1),

29(1)A and 29(2) of the Act, the CCI has also to issue a notice to the parties and

secure their opinion and also receive the report from the Director General, before

asking the parties to publish details of the combination under Section 29 (2). Thus

Regulation 19 (1) is not in line with Sections 29 (1), 29(1) A and 29 (2) of the

Act. In other words, the opportunity to be given to the parties under Section 29 (1)

is extinguished in Regulation 19 (1).

5. The independent agencies to oversee amendment in a proposed combination are

appointed as per Regulation (24). This is a right step in the right direction but this

should not lead to unnecessary delays. There should be a time line prescribed

within which the independent party would need to submit their report to CCI. The

regulation should also state that the fees payable to the independent agency will

be determined by the CCI.

6. Confidentiality of information is provided in Regulation (27). In the event such

information is shared with a regulatory or sectoral authority under various

statutes, it could lead to objections from the parties to the combination. This

should be clarified.

7. Lack of Third Party Involvement in Merger Proceedings: Even though the Draft

Regulation is an important improvement over the earlier versions, one of the

essential arenas that it leaves unheeded relates to the involvement of third parties,

including consumer groups, in merger proceedings. Third party interventions are

significant in merger review processes mainly for two reasons: knowledge of

information is important for all parties; and studies have revealed that in general,

when the stakeholder participation is uncertain, inefficiencies are seen to arise.

The role of customers and competitors in the merger control and regulations has

been growing increasingly. Two models that rely significantly on the importance

of third party interventions and have introduced third party intervention in their

130

merger reviews are that of the EU and the United States. The European

Community Merger Regulation (ECMR) and the review practice of the

Commission specifically requires the involvement of third parties. Besides the

statutory rules on the involvement of third parties in the merger process, the

Commission's Best Practices on the conduct of EC merger control proceedings

contain informal guidance as to how the Commission will deal with third parties

in concrete cases. Third parties have a double role in the procedure: they are

valuable sources of information for the CCI and they can become 'quasi-parties' in

the proceedings with their own procedural rights if they can exhibit a 'sufficient

interest' as to the outcome of the proposed transaction.

In addition to this, sometimes interested third parties have the ability to influence

which authority will review the case. Similarly, antitrust authorities in the US rely

significantly on input from third parties in analyzing the potential competitive effect of

mergers. Third party evidence is often an important aspect of the agency's evaluation of

the potential competitive effect of a transaction. The role of third parties in merger

investigations is discussed by several recent actions in the US and the EU and great

lessons can be derived from decisions even if the customer evidences were not binding.

For instance, in the US, the recent Oracle or PeopleSoft and Arch Coal decisions as well

as the EU GE or Honeywell case emphasize on the significance of intensive and

successful third party involvement in merger proceedings. Such instances bring to light

yet another glaring limitation in the Draft Merger Regulations.

131

5.10 References

Cuts Institute of Regulation and

Combinationwww.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/

C-2013-05-122%20Order%20121113.pdf December 2013

http://cci.gov.in/images/media/presentations/34-

jims_comp_policy_17jan08f_20080710122229.pdf

http://cci.gov.in/images/media/presentations/bhatia_20090305092308.pdf

http://cci.gov.in/images/media/presentations/combination_amitabh_may15_20080

522152706.pdf

http://cci.gov.in/images/media/presentations/combination_august_200903050912

18.pdf

http://cci.gov.in/images/media/presentations/combination_august_200903041653

47.pdf

http://cci.gov.in/images/media/presentations/CombPresByKKSharma100811.pdf

http://cci.gov.in/images/media/presentations/comp_kk_20090305091400.pdf

http://cci.gov.in/images/media/presentations/InternationalConfrerenceof-IBA-

15Mar2008.pdf

http://www.cci.gov.in/

http://www.cci.gov.in/May2011/Advocacy/AR2012-13E.pdf

http://www.cci.gov.in/May2011/Advocacy/ar2014.pdf

http://www.cci.gov.in/May2011/Advocacy/CCIANNUALREPORT201112ENGL

ISH.pdf

http://www.cci.gov.in/May2011/Advocacy/EnglishAnnualReport201011.pdf

http://www.cci.gov.in/May2011/Advocacy/PubAnnRep0910-060911.pdf

http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-

2014-03-

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Co

mpetition_Law_in_India.pdf