The great economist and US ambassador to India during the Kennedy administration John Kenneth Galbraith once said that “the great dialectic in our time… is between economic enterprise and the state.” The concept of ‘enterprise’ is fundamental to every economy, including India’s. However, the word ‘enterprise’ also has a very specific meaning in the Competition Act, 2002 (Competition Act), a meaning which is basically analogous to a current or former business. Among other things, the Competition Commission of India’s (CCIs) merger control powers, which require all qualifying transactions to be notified to and receive clearance from it, essentially prescribe that a transaction to acquire an enterprise cannot be completed unless the CCI approves the transaction. The key issue for Indian merger control, which went live in June 2011, concerns the specific limits to the CCI’s merger control jurisdiction. The answer to that question has significant ramifications for India’s push to ease of doing business to spur foreign and domestic investments in the country.
Merger control jurisdiction
To give some background to the issue, Section 5 of the Competition Act covers “the acquisition of one or more enterprises.” To the extent that an M&A transaction meets the financial thresholds in the Competition Act, as modified by subsequent delegated legislation and determined by looking at worldwide and Indian turnover of groups/parties involved in the transaction, the transaction must be notified to the CCI for its approval. Critically, the transaction cannot be consummated without the CCI’s approval.
Just prior to the effective time of the CCI’s merger control, one of us wrote a newspaper article in Spring 2011 where we opined that the CCI’s draft merger control regulations clearly took the view that any acquisition, however big or small, was notifiable so long as the financial thresholds were met. This was problematic because it meant that even small transactions, where there was no “acquisition of one or more enterprises” could not proceed unless the CCI gave its OK. Taken to an extreme, even the acquisition of a single share of a company would have to be submitted to the CCI for its approval.
As we wrote back then, that clearly cannot be the case. The phrase in the Competition Act giving the CCI merger control powers clearly limits its jurisdiction to the ‘acquisition of an enterprise’. Not ‘in an enterprise’. Not ‘from an enterprise’. The word used by the Competition Act is ‘of”, and the plain meaning of the phrase, which sets the jurisdictional limits of the CCI, is an acquisition of control or all of an enterprise. Nothing less.
While the CCI’s initial merger regulations purported to solve this issue by exempting transactions that were less than the acquisition of all of an enterprise, it sidestepped the issue as to whether the CCI had merger control jurisdiction over, for example, non-controlling share acquisitions, which is an issue that lingers even today. For example, just last year, the CCI proposed additional regulations which were, once again, implicitly premised on the view that it had merger control jurisdiction over non-controlling minority acquisitions. We wrote about this again in the international competition press, stating that these regulations begged the question as to the jurisdictional extent of the CCI over M&A transactions. Fortunately, these regulations were not adopted.
The dhaba paradox
The concept of an ‘enterprise’ also came into play for acquisitions of small companies with little turnover or assets in India. The Ministry of Corporate Affairs issued a 2011 notification exempting these types of transactions from the CCI’s merger control powers, often referred to as the ‘small target exemption’. However, rather than applying these financial targets to the ‘true’ target, merger notification filings were made to the CCI applying these financial targets to the vendor instead of the true target. We first wrote about this in 2013, calling it the ‘dhaba paradox’. Assume, if you will, that Conglomerate X wants to sell Conglomerate Y a dhaba with assets worth Rs 1,000 and an annual turnover of Rs 20,000. By applying the small target exemption to Conglomerate X rather than the dhaba, the transaction would have to be notified to the CCI. Our article became a seminal piece pointing out the anomaly: The change in competition dynamic would be for Conglomerate Y and the dhaba: it made no sense to look at Conglomerate X as it was losing the dhaba. Many filings were made to the CCI on this basic premise, and we were gratified when the Ministry of Corporate Affairs effectively adopted our long-held view that the small target exemption should be applied to the true target, and not the vendor, in March 2017. The view was adopted because far too many false positive transactions were being notified to the CCI.
Why is this important? Prime Minister Narendra Modi and the Government of India have made huge inroads into making India an easier place to do business. Laudable efforts have been made to deregulate impediments to both foreign and domestic investments in India, to increase, for example, investments in the manufacturing sector. Some of those changes have involved the Indian competition regime, with the government taking several steps over the last two-and-a-half years to streamline this area of law, given its impact on foreign and domestic commerce in India.
To paraphrase Professor Galbraith, we believe that the time for the government and the private sector to engage in a dialectic as to the meaning of the words ‘acquisition of one or more enterprises’ has arisen once again. If India wants to give merger control powers over non-controlling minority acquisitions, it will need to amend Section 5 of the Competition Act to do so. However, the plain wording of the current provision clearly indicates that a notifiable transaction must involve the acquisition of all/control of a business.
As India Inc. rises up the ranks as a global economic superpower, it will be important to settle this issue permanently. India will likely see increased levels of M&A activity, both foreign and domestic. An ambiguous view on what is clearly meant by ‘acquisition of one or more enterprises’ will unnecessarily slow down transactions not amounting to taking control of a company. Our view is that there is no other meaning to the key merger control phrase in Competition Act other than the one plainly in sight.
Arshad (Paku) Khan is Executive Director and Manas Kumar Chaudhuri is Partner at Khaitan & Co.