Competition law & foreign investors

The start of 2008 sees India’s long-awaited competition regime finally taking shape. Under the Competition Act 2002 as amended by the Competition (Amendment) Act 2007 (the Act), India now has a competition regime which governs mergers, cartels and abuse of a dominant position.

The Act applies equally to foreign and Indian companies. For the first time, certain “combinations” (i.e., mergers, acquisitions and amalgamations), including foreign-to-foreign transactions, will have to be notified to the Competition Commission of India (CCI) for scrutiny and clearance. Failure to notify can result in a penalty of up to 1% of turnover or assets.

The CCI’s aim is to ensure that the combination does not cause an “appreciable adverse effect on competition” in the relevant market in India. This article addresses some of the ways in which the Act will impact foreign investors in India, as compared to merger control regimes in the EU and US.


   
   
Also Read

   
à
   
FIIs may face tougher entry norms

   
à
   
Clarity on FIIs can lead to higher inflows

   
à
   
Foreign investors find domestic markets potential

   
à
   
Many foreign investors eye Indian market: SEBI


It is well known that the rules on combinations have provoked serious criticism from the international and domestic business and legal communities. To summarise the new law, certain combinations must be notified to the CCI within 30 days of signing an agreement. Pending clearance, the parties cannot close the deal (this is known as a “suspensory” system). Until recently, the CCI had a maximum of 210 days to reach a decision; much longer than most, if not all, other jurisdictions worldwide. Not surprisingly, the criticism focused on the excessively long waiting period, the 30-day filing deadline and the inappropriate thresholds which would have captured even foreign-to-foreign mergers where the acquired company had no assets or sales in India.

Such stringent rules have even caused the American Bar Association to comment that the Act “may be so burdensome as to discourage competitive conduct and investment in India”. Whilst it is important that India has a competition regime on par with international standards, such onerous rules may be detrimental to investors. However, the CCI has clearly been listening to these complaints and, on January 18, published new regulations on combinations which address many of these concerns. Nevertheless, whilst the new regulations reduce the burden of notification, challenges and uncertainties still remain.

 A fundamental concern for foreign investors was the lack of domestic nexus in the Act. Effectively, deals which had little or nothing to do
with India could trigger a requirement to notify. This issue has now partly been resolved by the new regulations which stipulate that at least two companies to a transaction must each have a minimum of Rs 200 crore of assets (approximately $50 million) or Rs 600 crore of turnover (approximately $150 million) in India.

However, whilst deals that fall below this threshold would not raise competition concerns, it is not clear whether they would still require notification. It is hoped that this is simply a matter of drafting and that the CCI will clarify this point in the final regulations.

In the EU, at least two parties to the transaction must each generate turnover of e100 million (or e250 million depending on the threshold) before a filing is required. In the US, acquisitions of foreign companies do not require notification if the target has less than $59.8 million of assets or turnover in the US. The position under Indian law is different from the EU (and elsewhere) in that a deal can be caught even if the companies do not generate any sales in India — owning assets in India is enough. It remains to be seen how important this will be for foreign investors in India, especially as many of them will, for example, own manufacturing facilities but not generate any sales in India.

For M&As, timing is crucial. Merging companies are keen to obtain clearance quickly, especially when the deal has little or no impact in the jurisdiction. A long waiting period means that the deal is in limbo until clearance which, for many deals, can be detrimental and even fatal. The 210-day rule was unusual as mandatory and suspensory regimes do not usually have long waiting periods (although there are exceptions such as Slovakia (60 working days). In the EU, a deal must be cleared within 25 working days (extendable to 35) or within a further 90 working days (extendable to 105). In the US, a deal will be cleared within 30 days if there are no issues or within a further 30 days.


The new regulations change the position from the 210-day rule. The CCI must now reach a decision within 30 days (or 60 depending on the form of
notification). If there are no competition concerns, clearance can be obtained within 30 days. However, at present, if the deal does raise issues, it seems that the CCI can still use the full 210 days, which could still potentially kill a deal. Whilst this is more likely to impact purely domestic mergers the potential of a notification being considered for 210 days could disencourage investors from investing in India and seek other countries for their capital which allow for more speed and hence certainty in acquisitions. And despite the current stock market volatility, there are no shortages of places to invest capital.

Problems also arise from the 30-day filing deadline. A filing deadline is an unnecessary burden — businesses are well aware of the need to make timely merger notifications in mandatory and suspensory regimes. Although even shorter deadlines exist in countries such as Brazil and Portugal, in the EU and US, there is no deadline — the deal must simply be notified pre-completion.

Despite the challenges, foreign and local businesses should take advantage of their experience in other jurisdictions to tackle the new Indian merger control regime with some confidence. More generally, although there is much speculation and scepticism of how the Act will work, uncertainty remains as to how the CCI will actually enforce the law. Does it have both the appetite and the resources to implement a truly effective competition regime? Or will it adopt a more liberal and flexible system? Will cartel enforcement be a priority, as it is in the EU? Will the leniency regime, that offers discounts on fines to companies that admit to participating in a cartel, really incentivise businesses to come forward? Against the backdrop of a thriving Indian economy, it remains to be seen how foreign and local businesses, as well as the CCI, will rise to the challenges of a new and potentially rigorous competition regime.

(Vyavaharkar is associate, Baker & McKenzie, London and Jacobs is Asia-Pacific regional chairman, Baker & McKenzie, Sydney)