Regulation of Combinations: Sections 5 and 6

Merger control is the only forward-looking part of the Act. Sections 3 and 4 examine conduct that has occurred; Sections 5 and 6 examine a transaction before it takes effect and ask what it is likely to do to competition. The regime is mandatory and suspensory: a transaction crossing the thresholds must be notified, and it cannot be consummated until the Commission has approved it or the statutory period has run. The provisions were notified only on 1 June 2011, and the regime was substantially rebuilt by the amendment of 2023 and the rules and regulations that came into force on 10 September 2024.

1. What Is a Combination

Section 5 defines a combination as the acquisition of one or more enterprises by one or more persons, the acquiring of control by a person over an enterprise where that person already has direct or indirect control of another enterprise engaged in a similar business, or a merger or amalgamation between or amongst enterprises, where the assets or turnover exceed the stated thresholds. Three kinds of transaction are therefore covered.

1. Acquisition. Defined in Section 2(a) as directly or indirectly acquiring or agreeing to acquire shares, voting rights or assets of any enterprise, or control over management or control over assets of any enterprise. The word indirectly brings in acquisitions made through a chain of holding companies and acquisitions of an entity abroad that controls an Indian business.
2. Acquiring control over a competing enterprise. Section 5(b) covers the case where a person who already controls an enterprise in a particular business acquires control of another enterprise engaged in an identical, substitutable or similar business. The threshold figures for this limb are applied to the two enterprises taken together.
3. Merger or amalgamation. Section 5(c) covers the combination of enterprises into one, with the thresholds applied to the enterprise remaining after the merger or created as a result of the amalgamation.

2. The Thresholds

The thresholds are expressed at two levels, the parties to the combination and the group to which they will belong, and each level has an India leg and a worldwide leg. The figures are revised by notification, most recently on 7 March 2024, and any answer or advice should be given on the current notification rather than on a textbook figure.

• Enterprise level, India. Combined assets in India of more than two thousand five hundred crore rupees, or combined turnover in India of more than seven thousand five hundred crore rupees.
• Enterprise level, worldwide. Combined assets or turnover worldwide above the figures expressed in United States dollars in the section, provided that a minimum stated value of assets or turnover is in India. The Indian component is what prevents the section from catching every large global transaction with no Indian connection.
• Group level, India. Assets in India of more than ten thousand crore rupees, or turnover in India of more than thirty thousand crore rupees.
• Group level, worldwide. The corresponding worldwide figures, again with a minimum Indian component. Group is defined in the Explanation to Section 5, and the twenty-six per cent voting rights limb has been relaxed to fifty per cent by notification for these purposes.
• Deal value threshold, Section 5(d). Added by the amendment of 2023 and notified with effect from 10 September 2024: a transaction whose value exceeds two thousand crore rupees must be notified where the target has substantial business operations in India, whatever the assets and turnover.

3. Control and the Material Influence Test

Whether a transaction is a combination often turns on whether control is acquired, and the amendment of 2023 settled the standard. Control now means the ability to exercise material influence, in any manner whatsoever, over the management or affairs or strategic commercial decisions of an enterprise. That is the lowest of the recognised standards, below decisive influence and far below majority ownership, and it writes into the statute the approach the Commission had developed in its decisions on minority acquisitions.

• Sole control: the ability to determine strategic commercial decisions alone.
• Joint control: two or more persons must concur before a strategic decision is taken, so that each can block.
• Negative or veto control: the ability to prevent rather than to determine. Veto rights over the business plan, the budget, or the appointment of senior management go to strategic decisions and confer control; rights protecting an investor's financial position, such as a veto on amendment of the articles or on further issue of shares, ordinarily do not.
• Material influence: established by an accumulation of factors, including shareholding, board representation, special rights, structural or financial arrangements and rights of access to commercially sensitive information.

4. Structuring Questions

1. Direct and indirect acquisition. An acquisition of a foreign parent that holds an Indian subsidiary is an indirect acquisition of that subsidiary and is assessed on the Indian assets and turnover attributable to it.
2. Interconnected and composite transactions. Where a transaction is carried out through a series of steps that are interdependent, the steps are treated as a single composite combination and notified together. Parties cannot escape notification by dividing one transaction into parts each of which falls below a threshold.
3. Creeping acquisition. Successive small acquisitions of shares that cumulatively cross a threshold or result in control. The exemptions for incremental acquisitions apply only within stated bands and only where there is no change of control.
4. Minority acquisitions. Ordinarily exempt where solely as an investment or in the ordinary course of business and below twenty-five per cent, provided no control and no board rights beyond those of an ordinary investor are acquired.
5. Internal restructuring. A transaction within a group, where the ultimate control does not change, is ordinarily exempt, on the footing that no change in the structure of competition occurs.

5. Exempt Combinations

Exemptions come from three sources. Section 6(9), as it stands after the amendment of 2023, provides that the provisions of the section do not apply to a share subscription, financing facility or any acquisition by a public financial institution, foreign portfolio investor, bank or Category I alternative investment fund pursuant to a covenant of a loan or investment agreement, and Section 6A exempts an open offer or an acquisition on a stock exchange from the standstill obligation subject to notice and to the acquirer not exercising rights in the shares until approval. The Central Government exempts categories of combinations by rules, now the Competition (Criteria for Exemption of Combinations) Rules, 2024, which continue the list formerly in Schedule I to the Combination Regulations. And the small target exemption operates under the Competition (Minimum Value of Assets or Turnover) Rules, 2024.

• Acquisition of shares or voting rights solely as an investment or in the ordinary course of business, not exceeding twenty-five per cent and not resulting in control.
• Acquisition of additional shares by a person already holding at least twenty-five per cent and less than fifty per cent, where it does not result in a change of control.
• Acquisition of shares by a person already holding fifty per cent or more, unless it results in a change of control.
• Acquisition of assets in the ordinary course of business, not related to the business activity of the acquirer and not leading to control.
• Acquisition pursuant to a bonus issue, stock split, buyback or rights issue, to the extent it does not increase the shareholding beyond the pre-existing proportion.
• Intra-group acquisitions and mergers where the ultimate control does not change.

6. Notification and the Green Channel

Section 6(2) requires the parties to give notice to the Commission, in the prescribed form and with the prescribed fee, disclosing the details of the proposed combination. The procedure is governed by the Competition Commission of India (Combinations) Regulations, 2024.

1. Form I is the short form and is used for the great majority of transactions, including those with no or limited overlap.
2. Form II is the long form and is used where the overlaps are significant, the Regulations and the guidance indicating the combined market share levels at which it is appropriate.
3. Fees are prescribed by the Regulations and were revised upward in 2024; the fee for Form II is ninety lakh rupees, and the Form I fee is lower. As with the thresholds, the current figure should be checked against the Regulations.
4. Pre-filing consultation with the Commission is available and is voluntary, informal and not binding; it is used to settle questions of notifiability and of the appropriate form.
5. Confidentiality may be claimed under the Regulations for commercially sensitive information in the notice, and the Commission maintains a confidentiality ring in appropriate cases.

The green channel is the automatic route. Where there is no horizontal overlap, no vertical relationship and no complementary relationship between the parties and their group entities, the notice may be filed under the green channel and is deemed approved on the date of filing. The declaration is the parties' own, and if it is found to be incorrect the filing is void ab initio and the transaction is treated as having been consummated without approval.

7. The Standstill Obligation and Gun Jumping

Section 6(2A) provides that no combination shall come into effect until the Commission has passed an order or the statutory period has expired. Breach of that obligation is called gun jumping, and it takes three forms.

• Failure to notify. Consummating a notifiable transaction without filing at all. Section 43A permits a penalty of up to one per cent of the total turnover or assets or the value of the transaction, whichever is higher.
• Consummation before approval. Filing but closing before the order, whether wholly or in part.
• Partial consummation and integration. Steps taken before approval which transfer control or integrate the businesses in substance: appointing directors, exercising veto rights, integrating sales forces, exchanging commercially sensitive information beyond what due diligence requires, or transferring part of the business. Interim covenants that protect the value of the target are legitimate; covenants that give the acquirer operational control before approval are not.

Section 44 provides a penalty for making a false statement or omitting to state a material particular in a notice, and Section 45 for furnishing false information generally. The consequence of a false green channel declaration is the invalidity of the filing itself.

8. Review by the Commission

The procedure is in Sections 29 to 31 and in the Regulations, with the timelines shortened by the amendment of 2023.

1. Prima facie opinion. The Commission must form a prima facie opinion on whether the combination is likely to cause an appreciable adverse effect on competition within thirty days of the notice. This is the first phase.
2. Phase one clearance. Where no such opinion is formed, the combination is approved.
3. Detailed investigation. Where the Commission is of the prima facie opinion that the combination is likely to cause an appreciable adverse effect, it issues a show cause notice under Section 29, may require a report from the parties, publishes details of the combination for public comment, and invites objections from affected persons.
4. The outer limit. The overall period within which the Commission must pass an order was reduced from two hundred and ten days to one hundred and fifty days, and on its expiry the combination is deemed to have been approved.
5. The orders available. Under Section 31 the Commission may approve the combination, approve it subject to modifications accepted by the parties, or direct that it shall not take effect.

9. The Substantive Test and the Section 20(4) Factors

The question is whether the combination causes or is likely to cause an appreciable adverse effect on competition in the relevant market in India. Section 20(4) lists the factors: the actual and potential level of competition through imports; the extent of barriers to entry; the level of combination in the market; the degree of countervailing power; the likelihood that the combination would result in the parties being able to significantly and sustainably increase prices or profit margins; the extent of effective competition likely to sustain in the market; the extent to which substitutes are available; the market share of the parties individually and as a combination; the likelihood that the combination would result in the removal of a vigorous and effective competitor; the nature and extent of vertical integration in the market; the possibility of a failing business; the nature and extent of innovation; the relative advantage by way of contribution to economic development; and whether the benefits of the combination outweigh the adverse impact, if any.

9.1 The three kinds of merger

• Horizontal. Between competitors in the same market. The concern is the direct loss of rivalry, and it is the category most often examined.
• Vertical. Between parties at different levels of the chain. The concern is foreclosure: the merged firm may deny rivals access to an input or to a route to market, or raise their costs.
• Conglomerate. Between parties in unrelated markets. Ordinarily benign, the concerns being portfolio effects, where the ability to offer a bundle of products marginalises single-product rivals, and the loss of potential competition where one party would otherwise have entered the other's market.

9.2 Theories of harm in merger analysis

1. Unilateral effects. The merged firm alone can raise price or reduce output, because the competitive constraint the target exercised has been removed. The closer the substitutes the two firms offered, the stronger the effect.
2. Coordinated effects. The merger makes tacit coordination among the remaining firms easier, by reducing their number, making them more symmetric, or removing a maverick that disrupted the market.
3. Loss of potential competition. The target was not yet a competitor but would have become one, or its presence at the edge of the market disciplined the acquirer.
4. Killer acquisitions. The acquisition of a nascent rival whose product would have competed with the acquirer's, made in order to discontinue it. The asset and turnover thresholds missed such transactions entirely, which is the principal reason for the deal value threshold.
5. Innovation competition. The merger removes one of a small number of firms capable of developing the next generation of a product, so the harm is to the pipeline rather than to current prices.

9.3 The countervailing considerations

• Entry. A merger is unlikely to harm competition where entry is timely, likely and sufficient to defeat a price increase.
• Countervailing buyer power. Large buyers able to switch, sponsor entry or integrate backwards constrain the merged firm.
• Efficiencies. Cost savings, improved distribution and the elimination of double marginalisation in a vertical merger, subject to the usual requirements that they be verifiable, specific to the merger and likely to be passed on.
• The failing firm consideration. Section 20(4)(k) permits the possibility of a failing business to be considered. The argument is that the target would exit in any event, so the merger does not reduce competition compared with what would otherwise happen; it requires that the firm be unable to meet its obligations, that there be no less anti-competitive purchaser, and that the assets would otherwise leave the market.

10. Remedies

Section 31(3) permits the Commission to propose modifications, and Section 31(4) to (6) provide for the parties to accept them or to submit amendments. Remedies are of two kinds, and the preference is for the first.

• Structural remedies. Divestiture of a business, a plant, a brand or a set of contracts to a suitable purchaser, so that the competitive structure is restored. They are preferred because they are one-time, do not require monitoring, and do not leave the Commission regulating a market.
• Behavioural remedies. Commitments as to future conduct: to supply on non-discriminatory terms, to license intellectual property, to maintain access to a network, to refrain from bundling, or to hold businesses separate. They are used where structural relief is impossible or disproportionate, and their weakness is that they require continuing supervision.
• Hybrid arrangements combine the two, as where a divestiture is supported by transitional supply obligations.

11. Foreign Transactions

A combination taking place outside India is notifiable where the thresholds are met, because Section 5 is drafted by reference to assets and turnover including those in India rather than by reference to where the transaction occurs, and Section 32 permits the Commission to inquire into a combination outside India having an appreciable adverse effect on competition in India and to pass orders. The Indian component of the threshold figures is what confines the reach, and the deal value threshold adds the requirement of substantial business operations in India. The practical consequence is that a global transaction is frequently notified in India alongside several other jurisdictions, with the parties coordinating timing and offering waivers so that the authorities can discuss the case.

12. Related Topics and Provisions