[By Vrinda Gaur]
The author is a student of Dr Ram Manohar Lohiya National Law University Lucknow.
INTRODUCTION
The Competition Commission of India (CCI) has recently issued a warning to those using the Green Channel Route (GCR) for mergers and acquisitions. The Green Channel Route was created to make the merger process more efficient and faster and facilitate ease of doing business after Regulation 5A was added to the Combination Regulations, 2011 by the Competition Commission of India (Procedure regarding the Transaction of Business relating to Combinations) Amendment Regulations, 2019 (Combination Regulations). However, in light of the recent warning raised by the CCI with regard to its possible misuse and transparency concerns, it becomes imperative to delve into the plight of the parties opting for this route and evaluate the circumstances that challenge the ease of doing business landscape.
The aim of this article is to delve into the intricacies of the present mechanism and provide solutions henceforth.
UNDERSTANDING THE NORM
GCR is a means by which parties opting for mergers will be granted automatic approval of the CCI subject to the condition that the transaction does not adversely affect the competition landscape. This principle was first put to deliberation by the Competition Law Review Committee. It was given effect by the insertion of a new Regulation 5A under the Combination Regulations vide an amendment dated 13 August 2019 (Amendment).
Schedule III of the Amendment lays down certain qualifying conditions which require the parties to the transaction, their respective group entities and/or any entity in which they, directly or indirectly, hold shares and/or control to (a) not produce/provide similar or identical or substitutable product(s) or service(s) (Horizontal Overlaps) (b) not engaged in any activity relating to production, supply, distribution, storage, sale and service or trade-in product(s) or provision of service(s) which are at different stage or level of the production chain (Vertical Overlaps) and (c) are not engaged in any activity relating to production, supply, distribution, storage, sale and service or trade-in product(s) or provision of service(s) which are complementary to each other (Complementary Overlaps).
The provisions give the parties the liberty to conduct a self-assessment regarding the fulfilment of the above criteria and on the satisfaction of the same, file form I along with the declaration form in Schedule IV that the transaction in question will not cause any adverse impact on competition.
If, to the satisfaction of the CCI, the transaction complies with all the pre-requirements for making a party eligible under Section 5A, it may pass an order deeming approval of the same under section 31(1) of the Competition Act, 2002.
On the contrary, if the CCI is satisfied that the application made under section 5A fails to meet any of the qualifying conditions, it may retract the approval granted and direct the combination to be dealt as per the old route.
IS IT REALLY EASE OF DOING BUSINESS?
Previously, parties had to go through a tedious application process under the competition regime, which took a total of 210 days before the transaction could be finalized and deemed approved. However, this mechanism was introduced to speed up economic transactions by relieving the parties from this lengthy process.
However, progress in this direction has been unsustainable, and there are mainly two contentions. The Competition Act initially upheld a two-tier mechanism in sharp contrast to a three-tier qualification under Section 5A.
The additional complementary overlap under section 5A has diluted the speed of application disposal as parties are imposed with an increased burden to assess their complementary patterns with each other and this so-called self-assessment is a mind-wrecking and resource-draining process.
Further, there is a lack of consensus amongst experts on the connotation of the term “complementary” and interpretations, explicit or implicit, are absent in statutes and case laws.
Though a clarification has been issued by the CCI regarding complementary overlaps, it does not adequately address the complexity of the matter. The clarification gave the example of ink and cartridge as goods that would fall within the transaction of Complementary overlaps. However, such an example is too simplistic for parties to understand as most corporations function in complex areas of operation and diversified investments.
This would lead to subjective conclusions on the part of the parties opting to avail this route and authorities enforcing the same and it is likely that applications may get rejected due to this duality in the application of mind in interpreting the true connotation of the term. If the application is rejected due to non-compliance with the complimentary requirements, the parties involved will have to spend additional time filing under the previous system, in addition to the time already invested under the new mechanism. This goes against the original purpose of the GCR, which was to expedite the processing of applications.
Subsequently, the provision fails to impose any strict time limitation on the CCI while disposing of the application. As a result, applications may languish in limbo and authorities may take more than reasonable time to dispose of the same leading to parties holding off on investments or other strategic operations while awaiting regulatory approvals.
This would not only compromise the integrity of the review and approval process but also hinder economic growth and the ability of businesses to adapt to changing market conditions to their advantage.
Moving forward, the scope of corporations likely to fall within the purview of this mechanism has been outlined in an extremely narrow sense. The Combination Rules give no regard to the fact that all large corporations and enterprises engage in maintaining a heterogeneous investment portfolio which caters to the long-term needs of risk mitigation, capital preservation and ensuring stability at times of market fluctuations. Due to such diversification of investments, they are more likely to fall within the complementary overlap category. Hence, though it might be easier for small-scale enterprises to effectuate under such compact combinations, the same is unlikely for larger corporations, depriving them of the benefits of this route.
Additionally, the overlaps are not restricted to the particularity of the combination but the entirety of it, hence rendering transactions even with the minute overlaps, that wouldn’t really lead to any competitive disadvantage, void ab initio.
Hence, combination criteria make the approval rate under the scheme undesirable and blemishes the ease of doing business landscape for these large corporations.
Another aspect which the enterprises view with apprehension is the imposition of penalties under Section 43A for Gun-Jumping. If, during the pendency of the application, the transaction is consummated and afterwards, the CCI discovers the combination to violate any of the above three conditions and disallows the transaction, the transaction would have been deemed to be effectuated before the appropriate time, without the prior approval of the CCI, thereby violating standstill obligations.
Due to the agitation stemming from the imposition of such a penalty that can be as high as per cent of the total turnover or 1 per cent of the assets, whichever is higher of the combination, parties are more likely to be disincentivised in approaching this route.
It should be noted that the advice provided at Pre-filing Consultations is strictly recommendatory and non-binding. Parties to the combination bear the responsibility for self-assessment to satisfy the conditions of Regulation 5A, and CCI won’t take accountability in case the approval of the transaction fails under the scheme.
THE WAY FORWARD
The recent alarm raised by the CCI points fingers towards the corporations for misusing the mechanism and urges them to scrutinise their behaviour. However, it must conduct a comprehensive re-evaluation of its apparatus before playing the blame game.
Firstly, the Gun Jumping provision must be relaxed in cases where transactions are consummated despite the rejection of an application under the GCR due to non-compliance with any of the three criteria.
It is important for the CCI to understand that assessing combinations based on market standards, particularly with regard to complementary overlaps, can be a tedious task. This becomes even more challenging due to the lack of any judicial or statutory interpretations of the same. It is unfair for parties who want to benefit from automatic approval to be penalised for liabilities arising due to statutory ambiguity.
In case the application fails and the transaction is consummated, the CCI can offer some solace to the parties by allowing them to approach the conventional mechanism, while only partially halting operations if necessary, to scrutinize their transaction. This would provide an opportunity for the parties to seek CCI’s scrutiny even after the completion of the transaction.
Next, it is imperative that CCI enforces a time limit on its officials, requiring them to dispose of applications within a specified period as a corporation, who may choose to observe caution and halt strategic operations until approval of their transaction, will undergo massive economic constraints and operational inefficiencies until approval.
It is noteworthy that since the inception of the channel in 2019, a whopping 25% of all filings with the CCI are channelled through GCR. However, this percentage remains stagnant due to interpretational ambiguities and apprehensions of facing monetary fines.
It is time that CCI takes an active initiative to uphold its initial promise of balancing ease of doing business and preserving the market competition from foul tactics.