Significance of Structuring a Transaction from a Competition Law Perspective: Learnings from the Telenor Order
[Rajat Sharma & Manav Gupta]

 

Rajat and Manav are 4th year students of NLU, Jodhpur.

Introduction:

A “merger” or “amalgamation” or “acquisition” [referred to as “Combination” in the Competition Act] involving an enterprise can, inter alia, result in a reduction in the number of competitors, or in the ability of the existing competitors to compete effectively, and therefore raises several competition concerns. In India, the competition law aspect of such combinations is majorly governed by Sections 5 and 6 of the Competition Act, 2002[1] (the Act), read alongside the Competition Commission of India (Procedure in regard to the transaction of business related to combinations) Regulations, 2011[2] (Combination Regulations). The Act empowers the Competition Commission of India (CCI) to exercise adjudicatory authority while deciding whether a certain proposed combination could have an appreciable adverse effect on competition (AAEC) in India. In this regard, section 6(2) of the Act requires the parties involved in such a proposed combination to notify the CCI and seek mandatory approval, before effecting or “consummating” the said combination [if the proposed transaction falls within the thresholds prescribed under section 5 of the Act].  In cases where the parties fail to notify the CCI and ‘consummate’ the transaction without getting prior CCI approval, appropriate penalties are imposed by the CCI under Section 43A of the Act. Such cases constitute a violative action termed as ‘gun-jumping’.

In one such recent Order (Telenor ASA, Telenor [India] Communications Private Limited & Telenor South Asia Investments Pte Limited)[3] passed by the CCI in proceedings under Section 43A, the role of structuring a transaction in order to avoid potential conflicts with competition law were highlighted. The Order also re-established jurisprudence on what constitutes ‘control’ within the meaning of the Act, especially in cases of highly complex structured transactions.

Relevant provisions:

The initial notice was filed by the parties under Regulation 9(4) of the Combination Regulations. Regulation 9(4) pertains to filing of one notice for a series of interconnected transactions, by means of which the ultimate intended effect of the primary transaction is achieved. Other relevant provision attracted in these proceedings was Regulation 4, read with Item 8 of Schedule I of the Combination Regulations, which exempts intra-group asset transfer and intra-group acquisition of shares.

The Transaction & Initial Observations:

The initial notice under Section 6(2) of the Act was filed in 2012 by Lakshdeep Investments & Finance Private Limited (Lakshdeep). The notice was filed to notify the CCI regarding acquisition of shares of Telewings Communications Services Private Limited (Telewings/Telenor India) by Lakshdeep pursuant to a Share Subscription & Shareholders’ Agreement (SSHA). The SSHA was entered into between Telenor South Asia Investment Pte Limited (Telenor South Asia), an indirect wholly owned subsidiary of Telenor ASA (Telenor Global), Lakshdeep and Telewings.

There were a series of steps to be undertaken to complete the intended primary transaction and the combination envisaged Lakshdeep to initially acquire 51% shares in Telewings and ultimately hold 26% shares in Telewings. As a first step, the transaction was contingent on acquisition of spectrum for carrying telecom operations as part of the 2G spectrum auction by Telewings. Once this was done, Lakshdeep would acquire 51% shares of Telewings (Lakshdeep Share Transaction). Next, Telewings would acquire business of Unitech Wireless Private Limited (Uninor Business Transaction) and finally, once approval of the erstwhile Foreign Investment Promotion Board (FIPB) was received, Telenor shall increase its shareholding to 74%, such that Lakshdeep shall hold 26% in Telewings (Telenor Share Transaction- Tranche I). The parties contended that Step-III and Step-IV of the series of transactions are exempted and need not be filed with the CCI, however, the CCI may assess them in the alternative. The CCI, however, while approving the Lakshdeep transaction noted that since Lakshdeep would hold 51% shares in Telewings, the transfer of business from Uninor to Telewings and consequent increase in stake of Telenor in Telewings from 49% to 74% is not an intra-group transaction and therefore, not exempted.

In an appeal to the erstwhile Competition Appellate Tribunal (COMPAT), it was noted that Steps III & IV are entirely separate and were diabolically mixed up. The COMPAT also observed that the CCI’s observations on the last two steps were premature in nature. Now, fast forward to 2017 when a separate notice was filed by Bharti Airtel Limited and Telenor India for a proposed transfer of 100% shares of Telenor India to Airtel. Interestingly, when CCI perused this notice, it found out that Telenor consummated the last two steps of the proposed 2012 transaction and even increased its shareholding in Telenor India from 74% to 100% without notifying the CCI of the same. The CCI was irked as it denied the exemption in its earlier notice and since Lakshdeep exercised joint control over Telenor India, the increase of shareholding from 74% to 100% by Telenor meant a change of control from joint to sole and hence, notifiable. On the basis of these, the CCI started proceedings under Section 43A of the Act.

Submissions:

With respect to the applicability of exemption on Steps III & IV, Telenor submitted that interpretation of the term ‘group’ in accordance with Explanation (b) to Section 5 of the Act becomes relevant while applying the intra-group acquisition exemption, as it stood pre-amendment in 2012 (Old Item-8 exemption).

The term ‘group’ under Explanation (b) to Section 5 of the Act states:

“two or more enterprises which are, directly or indirectly, in a position to:

(a) exercise 26% or more of the voting rights in the other enterprise; or

(b) appoint more than 50% of the members of the board of directors in the other enterprise; or

(c) control the management or affairs of the other enterprise.”

It was asserted that since ‘Uninor’ was already a part of the Telenor Group by virtue of the latter’s 67.25% shareholding in the former, thereby meeting criteria (a) & (c) of the abovementioned definition. Further, irrespective of ,Lakshdeep’s shareholding, Telenor possessed 49% shares in Telewings and had the authority to solely exercise decisive influence over the management and thus, had ‘control’ over Telewings, thereby meeting criteria (c).

The second submission was not substantive in nature, but pertained to full and complete disclosure being made by Lakshdeep to the CCI. The argument was buttressed by stating that the entire transaction was structured in such a way in order to avoid FDI policy concerns, which permitted a foreign entity to hold only upto 49% shares in an Indian telecom company under automatic route and upto 74% with FIPB approval. In effect, the transaction was to allow permission under the automatic route, thereby providing flexibility to later raise equity percentage. Additionally, it was also asserted that since the CCI attributed Uninor’s assets to Telewings, while approving the first transaction, it acknowledged the inter-connected nature.

Finally, with respect to the increase in shareholding from 74% to 100%, Telenor submitted that Telenor South Asia exercised sole control over Telewings, whereas Lakshdeep did not. Thus, there was no change in control at all and exemption under Item 2 & amended Item 8, Schedule I of Combination Regulations is applicable.

CCI Analysis & Decision:

In order to reiterate the jurisprudence on what constitutes ‘control’, the CCI referred to its Order in the Ultratech Cement Limited.[4] The CCI noted that there are varying degrees of control and ‘material influence’ is the lowest form of control. A distinction was made between de-facto control, controlling interest/de-jure control and negative control. The CCI observed that since Lakshdeep had a minimum of 26%, in case Telenor received the FIPB approval or 49% in case FIPB approval was not given, is sufficient enough to block special resolutions and exert negative control. Thus, there was no sole control lying with Telenor to this extent. A reliance was also made on the FDI policy and various FDI caps,[5] wherein it was noted that more than 25% shareholding is enough to constitute negative control. Thus, it was held that Steps III & IV are not intra-group acquisition and were not exempted under Old Item 8 exemption. Significantly, the CCI noted that the amended Item 8 Exemption (which noted that the transaction should not lead to change in control from joint to sole) was only a clarification to the already existing exemption. While noting that Steps III & IV were entirely independent from Step II, the CCI held that the initial notice must have been filed by the parties together and not Lakshdeep alone. Lastly, the CCI held that the increase in shareholding is change from joint to sole control and therefore, not exempted. In effect, all 3 transactions were notifiable, but were not notified and thereby amounted to gun-jumping. The CCI took into consideration disclosure as a mitigating factor and imposed a penalty of merely INR 5,00,000.

Takeaways:

The CCI’s decision, in the opinion of the authors, is correct in as much as it sets out a clear approach of the CCI with regards to such complex transactions involving multiple steps and follows its decisional practice on the scope of “control” under the Act. The case is another example of strict scrutiny by the CCI in cases involving multiple steps and same may deter companies from deliberately complicating transactions in order to avoid scrutiny by the CCI. In fact, the COMPAT had noted that the transaction was “diabolically mixed up”. Interestingly, the CCI had noted (in its earlier order in 2012), in very clear terms, that steps III and IV would require a separate CCI approval as they would not fall under the exemption given to intra-group acquisitions. Therefore it is difficult to understand Telenor’s decision to again claim the exemption in the present case.

With regards to the interpretation of “control”, the CCI has continued with its decisional practice by including “negative control” within the ambit of the “control” as envisaged by the Act and therefore recognising the concept of “joint control”. The CCI had first recognised negative control in its 2012 order in MSM India/SPE Holdings/SPE Mauritius.[6] The CCI had effectively concluded that the right to block special resolutions (by way of a more than 26% equity stake) amounts to ‘negative control’, which is ‘control’ for the purposes of the Act. More recently, in Jet/Etihad,[7] the CCI had raised eyebrows by setting an extremely low threshold for the acquisition of “control” under the Act. The CCI had concluded Etihad’s joint control over jet airways even when only 24% stake (and right to appoint 2 directors out of a board of 12 directors) was being acquired. Interestingly, in the same case, the SEBI had contradicted CCI’s stand, and had held that Etihad could not be said to be in control of Jet Airways, under the Takeover Code.[8] Therefore, even if the definition of “control” may be similar under the Act and the Takeover Code, the CCI’s interpretation has resulted in a comparatively lower threshold. The CCI’s decision in the present case, therefore, was on expected lines. However, it is delightful to see CCI taking a uniform approach and following precedents, which is something the commission has sometimes failed to do, and has been regularly criticised upon.

 

 

[1]https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf.

[2]https://www.cci.gov.in/sites/default/files/regulation_pdf/Combination%20Regulations%202016%20-%20FINAL_0.pdf.

[3] https://www.cci.gov.in/sites/default/files/Notice_order_document/43A_Public_Telenor.pdf.

[4]https://www.cci.gov.in/sites/default/files/246_44_PublicV.pdf.

[5]http://dipp nic.in/sites/default/files/DiscussionPaper relevance 23June2011%20%205.pdf.

[6] https://www.cci.gov.in/sites/default/files/faq/C-2012-06-63.pdf.

[7]https://www.cci.gov.in/sites/default/files/C-2013-05-122%20Order%20121113.pdf; https://www.cci.gov.in/sites/default/files/faq/Order%20191213.pdf.

[8] http://www.sebi.gov.in/cms/sebi_data/attachdocs /1399545948533.pdf

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