India's New Competition Guidelines Present a Minefield for M&A and Private Equity Globally

Introduction

About this time each year, CNBC raises the adage “Sell in May and go away,” about the U.S. stock market. This year was no different. For the first time, however, this might also apply to Indian M&A and private equity activity. Effective June 1, 2011, the Competition Commission of India (“CCI”) issued a series of regulations entitled “The Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations” under the Indian Competition Act of 2002. Under these regulations, most M&A and private equity transactions in India will be subject to a pre-merger notification process somewhat similar to the Hart-Scott-Rodino (“HSR”) Act process in the United States. Unlike the HSR process, however, under which most transactions are deemed approved within 30 days after filing, the Indian regulations have a waiting period of up to 210 days, which can be extended. The regulations apply to Indian entities (acquirers and targets) and to groups that have Indian operations. As India’s role in the global economy has increased, many global businesses have operations in India that would cause a transaction involving two parties in the Unites States or Europe to be held up for up to 210 days or maybe longer. In addition, the type of information required to be filed with the CCI seems burdensome in comparison to the HSR or EU process, and the onus is on the filing party to show the need to maintain its confidentiality. On its face, these aspects create an untenable situation for transactions involving an entity with any Indian nexus.

Applicable Thresholds and Certain Exemptions

Several publications have provided a detailed analysis of the transactions that are covered by the regulations. Generally speaking, transactions that meet any of the thresholds below are covered.

In addition, acquisition of any target with assets in India of less than $56 million or revenues in India of less than $167 million is exempted for five years (until May 31, 2016). 

There are several categories of transactions that are exempted from the thresholds, including: 

• Acquisitions of less than 15% of the shares or voting power where there is no acquisition of control
• Acquisitions where the buyer already owns 50% or more of the target, unless the acquisition results in a change of control
• Transfers among members of a group
• Acquisitions outside India with an insufficient local nexus

Unanswered Questions

The final regulations, while a major improvement over earlier versions, still leave several questions unanswered and pose significant challenges for transactions. These include: 

• Approval Timeline. The regulations state that the CCI will issue a preliminary indication within 30 days of filing, and will aim to approve transactions within 180 days. It remains to be seen whether the parties to a transaction will rely on a preliminary approval and close a transaction in light of the possibility that the CCI might change its mind and not, in fact, finally approve the transaction. Further, approval within 180 days or 210 days (assuming the period is not extended by the CCI as it requests additional information) is untenable for most transactions, other than highly regulated businesses where the expected approval process is more than nine months.  
• Detailed Information Requested. The level of information required to be submitted is similar to that in the HSR and EU processes. However, in some cases it can be quite a bit more, including all analyses, reports, studies or surveys or any other documents taken into account for the purpose of assessing the impact of the combination, not just those limited to the competitive impact or reviewed by a director or executive officer. In certain cases, the information required to be delivered could include material non-public information, or unpublished price sensitive information, about the target company. If the target is publicly traded, this could have a serious impact on its business and market value and on the desirability of the buyer to engage in the transaction. This is particularly acute if the information does not remain confidential. 
• Confidentiality of Information. Given the sensitive nature of the information provided, confidentiality would seem to be critical. In the HSR and EU processes, information is in fact treated confidentially, and most parties are comfortable with regard to such treatment. However, while the regulations state the information provided is to be treated confidentially, they also state that the filing party will have to justify any request for confidential treatment. In addition, even if the information is supposed to be treated confidentially, off-shore parties might question the ability of the Indian government to abide by that rule. 
• Rights Under Shareholders Agreements. Private equity and venture capital investments, even if for less than 15% of the shares, often include board seats, approval rights on reserved matters and, in some cases, the right to drag along other shareholders in a sale. It is unclear if these would be exempted as being less than 15% despite the various contractual rights (which could constitute control). 
• Private Equity and Venture Capital. The Competition Act states that any acquisition by a public financial institution, foreign institutional investor (FII), bank or venture capital fund is exempt from the approval requirements, but would have to make a short post-closing notification. While sources close to the CCI have told us informally that the CCI intends this exemption to cover all venture capital and private equity investments in Indian companies, the statute that defines “venture capital fund” limits it to domestic registered funds, creating uncertainty for foreign or off-shore venture capital and private equity funds. Accordingly, unless further guidance is received it is possible that private equity and venture capital investors will choose to comply with the filing requirements.
• Creeping Acquisitions. Under the Indian Takeover Code, when an acquirer holding more than 15% but less than 50% of the total shares or voting rights of a target acquires an additional 5% of the target in a year, no open offer is required. Under the CCI regulations, however, there is no such 5% threshold. In theory, the purchase of a single share beyond 15% would trigger the filing requirement.

Conclusion

Given the increased prominence of India in the global economy, it is understandable that India would want a competition statute. However, the new regulations leave several unanswered questions and seem to cause several significant issues. We believe that, at least in the near term, M&A and private equity activity will slow down while people see how the CCI applies the regulations. To that end, the CCI’s willingness to engage in informal consultation is extremely helpful.

*    *    *    *    *

The author would like to thank Zia Mody of AZB Partners in Mumbai for reviewing a draft of this communication.