Executive summary:

The following article Trends in Merger Control analyses the principles and trends enunciated by the Competition Commission of India (“CCI”) in the merger control orders passed to date.

Introduction: Legal Framework

The merger control regime in India is governed by the provisions of the Competition Act, 2002 (“Act”) along with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”), which came into effect on 1 June 2011. Further, the Competition Commission of India (“CCI”), on 23 February 2012, introduced the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012 (“Amendment Regulations”), bringing about significant substantive and procedural changes to the merger control regime in India.

Sections 5 and 6 of the Act are the operative provisions dealing with combinations. Section 5 prescribes asset and turnover thresholds for transactions requiring mandatory prior notification to, and approval of the CCI. Section 6 prohibits transactions which cause or are likely to cause an appreciable adverse effect on competition (“AAEC”) within the relevant market in India and treats such transactions as void. The three types of transactions that require prior approval of the CCI (“Combinations”) are:

• transactions relating to an acquisition of control, shares, voting rights or assets;
• transactions between two competitors where one is acquiring ‘control’ over   another enterprise; and
• merger or amalgamation of enterprises.

Jurisdictional Thresholds

The Act mandates notification of Combinations which meet the prescribed assets and turnover thresholds, determined by reference to the audited financial statements of the enterprises immediately preceding the year in which the Combination takes place:

1. Target Test – The Government of India, by way of a notification[1], introduced a de minimis target based threshold, whereby if the target enterprise (including its divisions, units and subsidiaries) has either assets of the value of not more than Rs. 250 crores (approximately USD 50 million) in India or turnover of not more than Rs. 750 crores (approximately USD 150 million) in India, it is exempt from merger notification for a period of five years (“Target Exemption”).

   If the target enterprise cannot avail of the Target Exemption, then the jurisdictional thresholds based on the parties and the group test, (provided below) need to be evaluated.

   A new sub-regulation has been introduced to the Combination Regulations, which provides that if, as part of a series of steps in a proposed transaction, particular assets of an enterprise (i.e. a business or a division) are moved to another enterprise (i.e. a separate legal entity), which is then acquired by a third party, the entire assets and turnover of the selling enterprise (from which these assets and turnover were hived off) will also be considered when calculating thresholds for the purposes of Section 5 of the Act. This effectively narrows the scope of the de minimis target based threshold under the Target Exemption, and is not in consonance with international best practices. The CCI adopted this view prior to introducing the Amendment Regulations in two recent merger control orders, i.e. Mitsui/Sanyo/Mahindra Ugine/Navyug (C-2011/12/14) and Saint Gobain/Shri Ram Electro Cast/Electrotherm India (C-2012/01/19), whereby the assets and turnover of the entity transferring assets to its subsidiary i.e. the target enterprise for the proposed acquisitions was aggregated with the assets and turnover of the target enterprise for the purposes of computing the jurisdictional thresholds.  While the amendment ensures that transacting parties do not structure around the Target Exemption by transferring assets to a newly incorporated special purpose vehicle, an unintended consequence of the amendment is that transactions involving greenfield joint ventures (previously exempt as the prescribed turnover threshold under the Target Exemption would not be met) could require a merger control filing.

2. Parties test – The thresholds prescribed under the Parties test apply to:

   (a)          Acquisitions – combined value of the acquirer (on a stand-alone basis) and target enterprise (including its subsidiaries, units, or divisions) in case of an acquisition;

   (b)         Merger – enterprise remaining after the merger; and

   (c)          Amalgamation – enterprise created as a result of the amalgamation.

   Where the parties to the Combination derive turnover in India only – Combinations must be notified if: (1) the value of the assets of the enterprises involved in the transaction exceed Rs. 1,500 crores (approximately USD 300 million); or (2) the turnover of the enterprises involved in the transaction exceed Rs. 4,500 crores (approximately USD 900 million).

   Where the parties to the Combination derive turnover in India and outside India – Combinations must be notified if: (1) the value of the assets of the enterprises involved in the transaction exceed USD 750 million, including at least Rs. 750 crores (approximately USD 150 million) in India; or (2) the turnover of the enterprises involved in the transaction exceed USD 2,250 million, including at least Rs. 2,250 crores (approximately USD 450 million) in India.

3. Group Test: the Group[2] test applies to the group to which the target or the resultant entity will belong post acquisition or merger or amalgamation:

   Where the group derives its turnover from India only – Combinations must be notified if: (1) the value of the assets of the “group” to which the acquired enterprise will belong post-acquisition exceed Rs. 6,000 crores (approximately USD 1,200 million); or (2) the turnover of the group to which the acquired enterprise will belong post-acquisition exceed Rs.18,000 crores (approximately USD 3,600 million).

   Where the group derives its turnover from India and outside India – Combinations must be notified if: (1) the value of the assets of the “group” to which the acquired enterprise will belong post-acquisition exceed USD 3 billion, including at least Rs. 750 crores (approximately USD 150 million) in India; or (2) the turnover of the group to which the acquired enterprise will belong post-acquisition exceed USD 9 billion, including at least Rs. 2,250 crores (approximately USD 450 million) in India.

Given that India follows a threshold based regime, it is critical that the CCI issue guidance on computation of assets and turnover as there currently exist a number of grey areas.

Therefore, for a Combination to be notifiable under the provisions of the Act, it has to be unable to avail of the Target Exemption and has to fulfil either the Parties test or the Group test. The parties are required to file a notification with the CCI within 30 days of final board approval (in the case of a merger or amalgamation) or the execution of any binding document/agreement (in the case of an acquisition).[3]

The CCI has jurisdiction over Combinations outside India if they cause or are likely to cause an AAEC in India. The CCI has clarified that for Combinations occurring outside India if any of the transacting parties has a presence in India and the jurisdictional thresholds under the Act are met, a notification would be required.

Exemptions

Exemptions from the obligation to notify the CCI have been provided in Schedule I to the Combination Regulations for Combinations which are “ordinarily” not likely to cause an AAEC in India:

• 25% Threshold Acquisitions– The Combination Regulations (as amended) provide an exemption from notification where an acquirer acquires shares or voting rights that do not entitle it to more than 25% of the total shares or voting rights in a target, and the acquisition is made solely for the purpose of investment or in the ordinary course of business and does not result in acquisition of control of the target. The threshold for acquisition was increased from 15% to 25% so as to bring the merger control regime in line with the takeover regulations in India.[4] Further, the use of the word ‘entitle’ in the exemption could encompass options and convertibles within the 25% threshold, which is contrary to the position under the takeover regulations However, this could potentially affect private equity transactions if a less than 25% controlling interest were to be acquired and the transaction meets the prescribed thresholds for notification under the Act. Moreover, the CCI has failed to provide any clarity as to what constitutes “control” under the provisions of the Act. “Control” has been defined under the Act to include controlling the affairs or management of one or more enterprises or group, either jointly or singly. This definition of control is ambiguous and is an inclusive circular definition. However, very limited guidance can be obtained from CCI’s sole precedent in Alok Industries/Grabal Alok Impex (C-2011/01/28) wherein it was held that the existence of common promoters and management between two companies would indicate common control. However, the CCI in informal consultation has stated that it will determine control on a case-by-case basis. Given that the Act is largely based on the EU competition law, there may be a possibility that the CCI interprets control to include positive and negative control as EU competition law considers both positive and negative control, for the purposes of competition law analysis;Acquisitions above 50% – Where the acquirer holds more than 50% of the equity shares of a target, further acquisitions, which do not result in a change from joint to sole control are exempt. This would potentially affect impact exits in joint ventures and pre-emption rights, which meet the prescribed thresholds under the Act. Further, acquisition of shares or voting rights between 25.01% and 49.99% is not addressed by the Combination Regulations and would require notification to the CCI, even if not leading to acquisition of control. This could affect all the private equity transactions and creeping acquisitions, where thresholds are met, irrespective of whether control is being acquired or not;
• Asset Acquisitions – Acquisitions of assets which do not constitute substantial business operations: (i) in a particular location; or (ii) in relation to a particular product or service of the target, which are made solely as an investment or in the ordinary course of business, not leading to control of the target, irrespective of whether such assets are organized as a separate legal entity;
• Amended/renewed tender offers where notice has already been filed by the offeror;
• Routine business acquisitions – acquisitions of stock-in-trade, raw materials stores and spares in the ordinary course of business. This does not have any impact on the competitive landscape;
• Changes to share capital – acquisitions of shares or voting rights, not leading to control, by way of buybacks, bonus issues, stock splits, consolidation of face value of shares and rights issues even beyond the entitlement of the acquirer. However, a renunciation of rights issue which results in control would require a filing;
• Underwriting/stock broking – acquisitions of shares or voting rights in the ordinary course of business not leading to control by a securities underwriter or a stock broker;
• Intra-group acquisitions – acquisition of control, shares, voting rights or assets by a person or enterprise, of another person or enterprise within the same group;
• Intra-group mergers and amalgamations – a partial exemption for mergers or amalgamations between a holding company and a subsidiary wholly owned by enterprises within the same group and between subsidiaries wholly owned by enterprises belonging to the same group, would not require notification to the CCI. As such, there is a distinction made between acquisitions and mergers for intra-group re-organisations, given that for an intra-group exemption by way of a merger, the enterprises involved should be wholly owned within the same group, which is not case in case of intra-group acquisitions, although there is no competitive impact in either case, to raise any competition concerns.
• Acquisition of current assets in the ordinary course of business; and
• Purely offshore transactions – Combinations taking place outside India having insignificant local nexus and effect on markets in India. Thus, cross border transactions are not completely exempt from the provisions of the Act. The Act gives the CCI the jurisdiction to investigate transactions which have local nexus with India (which essentially would entail the Target Exemption) and which have an effect on the markets in India (which could necessitate an economic analysis).

Forms for Pre-Merger Notification

The Combination Regulations provide for three types of forms to be filed by the parties, depending on the nature of the Combination:

• Form I:  This is the default option, requiring basic details of the Combination and transacting parties. All the Combinations thus far notified have been Form I filings. The Combination Regulations previously listed transactions for which Form I would “ordinarily” be filed, and permitted the filing of only Part I of Form I (i.e. truncated form) for certain transactions which did not have a real competition impact (for e.g., acquisitions through gifts or inheritances, acquisitions by export oriented units, etc.). However, Form I is now required to be filed in its entirety in all Combinations, with the option of filing only a part of Form I (for transactions with no real competition impact) being dispensed with by way of the Amendment Regulations. The filing fee has been significantly increased from Rs. 50,000 (USD 1,000) to Rs. 10,00,000 (USD 20,000).
• Form II: Parties may also file Form II which is fairly extensive and requires minute details regarding the proposed Combination, the parties to the Combination, their group, all products manufactured by the group, the relevant market, pricing, distribution networks, etc. The Amendment Regulations recommend that Form II should “preferably” be filed for transactions where:

  (a)                parties are competing enterprises and have a combined market share in the same relevant market of more than 15%; or

  (b)               parties are operating in vertically linked markets and the individual or combined market share in any of those relevant markets is greater than 25%.

  The Form II filing fee has been substantially increased from Rs. 10,00,000 (USD 20,000) to Rs. 40,00,000 (USD 80,000).

• Form III: This post-facto intimation form is required to be filed in case of any acquisition of shares or voting rights by public financial institutions, foreign institutional investors, banks and venture capital funds, pursuant to a loan agreement or investment agreement.[5] There is no filing fee.

Even though the Amendment Regulations have provided some clarity by indicating the CCI’s “preference” as to when Form II is required to be filed, ultimately the transacting parties are required to self-assess and opt for Form I or Form II. Given that the CCI’s pre-merger consultation process is non-binding and informal and limited to procedural issues, transacting parties would have to await precedent in the form of CCI orders for greater clarity on this issue. The risk of filing the incorrect form (i.e. Form I when Form II should have been filed) is that  no time credit is given for filing the incorrect Form and the clock re-starts from the date of filing Form II. This would result in an increase in transaction time and financing costs.

Timelines

The Act requires mandatory notification to the CCI providing for a 210-day suspensory regime. Notifying parties cannot complete the transaction prior to receiving approval from the CCI or until the 210 day period lapses.

However, the CCI is required to form a prima facie opinion on whether a Combination is likely to cause an AAEC within the relevant market in India, within a period of 30 days from receipt of the notification. If the CCI forms a prima facie opinion that a combination is likely to cause an AAEC, a detailed investigation will follow and the standstill obligation shall continue until a final decision is reached by the CCI or 210 days lapse from the date of filing the notification.

Further, the CCI can ‘stop the clock’ during its review period seeking additional information until such time as any information requested from the parties remain outstanding. This effectively means that the review periods provided under the Act are not absolute.

As discussed earlier, in cases where Form I is filed and the CCI requires a Form II filing, the preliminary 30-day review period would re-start from the date of filing Form II. This increased time period effectively pushes back the timelines for completion of transaction by parties in cases where incorrect notifications have been made.

Penalties

If a notifiable Combination has not been notified, the CCI can impose a penalty of up to 1% of the combined assets or turnover of the parties to the Combination, whichever is higher. Further, the Act empowers the CCI to “look back” and inquire into a Combination that has not been notified (suo motu or on the basis of information received by it) for up to one year from the date of consummation of such Combination and if the Combination causes an AAEC, it can be held to be void. A penalty of between Rs. 50,00,000 (USD 100,000) to Rs. 1,00,00,000 (USD 200,000) can also be levied for making false statements or omitting material information in the merger control filing.

The CCI may also impose penalties of up to Rs. 1,00,000 per day (USD 2,000), up to a maximum of Rs 1,00,00,000 (USD 200,000) on parties for contraventions of its orders, as well as order imprisonment for up to three years, or a fine  of up to Rs. 250,00,00,000 (USD 150 million)  or both. Officers in charge of a company’s business would attract liability for contraventions by companies of provisions of the Act, unless they can demonstrate lack of knowledge despite due diligence.

Even in the case of belated merger control filings (i.e. made beyond the statutory time period of 30 days after the trigger event), the CCI has initiated parallel proceedings to determine penalty, despite granting approval to the Combination. There have been five instances of belated filings, to date. However, it is notable that the CCI has chosen not to impose any penalty in its first order on penalty proceedings in the EAPL/BBTCL order (C-2012/12/16) on account of the fact that the transaction was an intra-group re-organization by way of an amalgamation, and the fact that the merger control regime is in its first year of implementation.[6] It remains to be seen as to how the CCI would treat belated filings in more complex cases with horizontal/vertical overlaps, change in control, etc.

Recent Trends in Merger Control

The CCI has reviewed 36 filings to date, and approved all the Combinations, within the initial review period of 30 days. However, in more than half of the cases, the clock has been stopped, and the total time for review has effectively exceeded the 30-day statutory period.

Given the importance of time and costs involved in concluding transactions as soon as possible, an economist’s report defining and analysing the relevant market and the impact of the proposed transaction on competition would be useful to incorporate as an additional submission along with the merger notification, even though it is not a mandatory requirement. Further, the Amendment Regulations now mandatorily require the submission of the documents that trigger a merger filing (i.e. a binding agreement or final board approval) along with the merger notification. Given that confidentiality over documents submitted to the CCI needs to be specifically claimed along with the requisite justification, parties should submit confidential and non-confidential versions of such documents, in order to protect information relating to proprietary business, trade secrets and price sensitive information.

Further, the CCI’s initial literal interpretation of the intra-group exemption (being only available to acquisitions and not to mergers or amalgamations) led to 22 notifications being filed relating to intra-group re-organizations through mergers or amalgamations. While the Combination Regulations provide for an exemption from notification of intra-group re-organizations by way of acquisitions, the CCI held in Alstom Holdings/Alstom Projects (C-2011/10/06) that intra-group re-organizations through mergers or amalgamations cannot avail of the exemption, despite the fact that intra-group re-organizations of any kind do not cause any change in control or affect the market structure and existing competition in any manner. In response to the widespread criticism of this pedantic position, the Amendment Regulations have now introduced a partial exemption to intra-group re-organizations by way of mergers or amalgamations of a parent and its subsidiary wholly-owned within the same group or subsidiaries wholly owned by enterprises within the same group. This essentially still necessitates a filing for intra-group mergers and amalgamations where entities are not wholly owned within the same group.

Nevertheless, ambiguity persists in several other areas such as the treatment of joint ventures under Section 5 (given that there is no distinction between full function joint ventures and non-full function joint ventures), the insignificant local nexus exemption and the treatment of routine asset acquisitions. In regard to acquisitions through slump sales, the CCI has taken the view, in Wockhardt/Danone (C-2011/08/03), and subsequently in Aica/BBTCL (C-2011/09/04) and NHK Automotive/BBTCL (C-2011/10/05) (all of which were advised by Amarchand Mangaldas Suresh A. Shroff&Co.) that the target for the purpose of the Target Exemption and the jurisdictional thresholds under the Act would be the vendor enterprise (in its entirety), and not merely the assets and turnover of the division/business unit being sold. As a result of this interpretation, given that the CCI is effectively taking into account the size of the parties and not the thresholds of the actual target (i.e. the business division), a merger notification would be required if a conglomerate transfers a business division or unit of insignificant value to another enterprise, as the assets and turnover of the vendor would be considered the “target enterprise” for the purpose of the Act.

An area of concern is possible jurisdictional overlaps between the CCI and other sectoral regulators. For instance, the Ministry of Corporate Affairs is currently formulating regulations for the pharmaceutical sector as it is proposed that the CCI mandatorily review all foreign direct investment into the sector even if the jurisdictional thresholds have not been crossed and operate as a check on foreign investment through brownfield joint ventures in the pharmaceutical sector in public interest. Other sectoral regulators (such as the Reserve Bank of India) are trying to exclude mergers and acquisitions in the banking sector from the purview of the CCI. Similarly, the Department of Telecommunications has reportedly sought an exemption for the telecommunications sector in India, in order to facilitate consolidation in that sector.[7] It is vital that the CCI co-ordinate with other sectoral regulators to ensure that M&A activity in India is not hampered.

Amendments to the Act have been proposed and will hopefully address some of the ambiguities to facilitate a more efficient and effective merger control regime.

Conclusion

The merger control regime in India is relatively nascent and has been in force since 1 June 2012. During this 10 month period, the CCI has been successful in sending positive signals to the business community by approving all the 36 notifications filed to date (much before the stipulated 30 day review period, if clock stops are excluded) and by introducing Amendment Regulations which clarified some of the prevailing ambiguities and inconsistencies in the merger control regime.

Whilst the CCI has addressed some of the concerns of industry, its approach towards the implementation of the provisions of the Act has been quite literal and pedantic. Nevertheless, the CCI has been receptive and has shown its willingness to be more industry friendly. It remains to be seen how the CCI develops a body of jurisprudence in line with the international best practices, addressing prevailing ambiguities and lingering interpretational issues.

Executive Summary/Highlights:

• New regulations overhaul the Indian takeover regime, increase transparency, and represent a significant improvement.
• One of the key changes is the new principle-based treatment accorded to “indirect” acquisitions, where a substantial acquisition of shares, voting rights or control of a target company occurs indirectly through the acquisition of shares or control of an intermediate holding company or other entity, either to accomplish a global acquisition or for other reasons.
• The 2011 Regulations provide clear and specific guidance on the fact that both direct and indirect acquisitions of voting rights and/or control in a target company will trigger mandatory tender offer obligations.
• It is expected that the new regime will create a transparent framework for takeover activity involving indirect acquisitions and mitigate uncertainty.

MAIN ARTICLE

The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011 Regulations”), which will come into effect on October 23, 2011, has overhauled the Indian takeover regime. One of the key distinctions between the incumbent regime manifested under the SEBI Takeover Regulations, 1997 (“1997 Regulations”) and the 2011 Regulations is the detailed, principle-based treatment accorded to “indirect” acquisitions, where a substantial acquisition of shares, voting rights or control of a target company occurs through the acquisition of shares or control of an intermediate holding company or other entity, either on account of a global acquisition or otherwise.

This article provides an overview of the evolution of indirect acquisitions and briefly examines the timing and pricing requirements for tender offers triggered on account of indirect acquisitions. Key differences in approach between the earlier 1997 Regulations and the new regulatory framework have also been highlighted, together with illustrations on market practice and the regulatory treatment of indirect acquisitions.

Legislative History of Indirect Acquisitions

The concept of indirect acquisitions was not covered by the SEBI Takeover Regulations, 1994 and was only introduced in the 1997 Regulations pursuant to the recommendation of the Bhagwati Committee in 1997. Accordingly, at the time of its introduction, sub-paragraph (b) of the Explanation to Regulations 10 and 11 of the 1997 Regulations provided for: “(b) indirect acquisition by virtue of acquisition of holding companies, whether listed or unlisted, whether in India or abroad.” Although the Bhagwati Committee (Reconvened) did not make a recommendation in this regard, by an amendment in 2002, SEBI deleted the word “holding”, presumably to widen the scope of the Explanation to cover indirect acquisitions through all companies whether holding companies or otherwise.

The concept of indirect acquisitions appeared to have been introduced into the regulatory framework almost as an afterthought and this lack of clarity led to much debate and differing regulatory viewpoints on account of varying case law.

Triggers for Indirect Acquisitions Under the 1997 Regulations

Under the 1997 Regulations, voting rights triggers[1] and the control triggers[2] applied equally to indirect acquisitions of companies listed in India. Voting rights triggers were applied either through the “proportionate” test or the “effectuality” test, subject to the “chain principle”:

(i)                 Proportionate test: a pure mathematical test wherein the indirect shareholding of the acquirer is determined on the basis of a pro rata calculation of the shareholding of the intermediate company in the target company and the acquirer’s shareholding in the intermediate company; and

(ii)               Effectuality test: which depends on whether the acquisition of shares/voting rights/control in or over the intermediate company by the acquirer has had any effect on how all or part of the shares of the target company held by the intermediate company are voted, where the voting rights held by the intermediate company in the target company are in excess of the voting rights triggers.

The control rights trigger in an indirect acquisition was tested by the Supreme Court of India in the landmark Technip case,[3] wherein the effectuality test was given preference over the proportionality test and the “chain principle” (which was first propounded by the Bhagwati Committee in 1997[4]) was declared law. Under the chain principle an open offer would become necessary only if the intermediate company’s shareholding in the subsidiary amounted to a substantial part of its total assets or if the purchaser’s primary objective for acquiring the intermediate company was to gain control of the subsidiary.

The 1997 Regulations also permitted an acquirer a leeway of up to 3 months after consummation of the parent acquisition for a public announcement of an open offer for the indirectly-acquired target company.

Treatment of Indirect Acquisitions by the TRAC

Rejecting the chain principle recommended by the Bhagwati Committee in 1997 and endorsed subsequently by the Supreme Court in 2005[5], the Takeover Regulations Advisory Committee (“TRAC”) constituted by the SEBI in its 2010 report recommended that all indirect acquisitions which resulted in the ability to exercise voting rights in excess of the existing voting rights, triggers or control over a target company would trigger a mandatory open offer. Accordingly, open offer obligations would be triggered irrespective of whether the target company represented a material or substantial component of, or the raison d’etre of the primary acquisition.

Moreover, with a view to prevent direct acquisitions from being disguised as indirect transactions, the TRAC recommended that where the target company was a “predominant part of the business” of the entity being acquired, such indirect acquisition would be treated on par with a direct acquisition for all purposes under the proposed new takeover regulations. An objective test in this regard was established with a view to determining what would constitute a “predominant part of the business”. The TRAC recommendations on indirect acquisitions were accepted by the SEBI and finalized in terms of the 2011 Regulations, which have been described in greater detail below.

What constitutes an Indirect Acquisition Under the 2011 Regulations?

The 2011 Regulations provide clear and specific guidance on the fact that both direct and indirect acquisitions of voting rights and/or control in a target company will trigger mandatory tender offer obligations. Accordingly, an indirect acquisition under the 2011 Regulations is one where the acquirer acquires the ability to exercise or direct the exercise of such percentage of voting rights in or control over the target company that would trigger the initial, consolidation or control triggers.

The initial threshold trigger for a tender offer is the acquisition of 25% or more of the shares or voting rights of the target (as opposed to 15% or more earlier) or the acquisition of more than 5% shares or voting rights in any financial year where the acquirer already holds between 25% and 75% of the shares or voting rights. A schematic representation of these thresholds is set out below:

What constitutes an Indirect Acquisition Under the 2011 Regulations?

Further, as before, any acquisition of “control” over the target gives rise to a tender offer obligation irrespective of whether or not the same is accompanied with an acquisition of shares or voting rights.

Categories of Indirect Acquisitions

Transactions that trigger one or more of the thresholds described above would be subject to tender offer obligations under the 2011 Regulations, and may be categorized into one of the following categories:

(i)                 If the proportionate net asset value, sales turnover or the market capitalization of the target as a percentage of the consolidated net asset value, sales turnover or market capitalization of the entity or business being acquired is in excess of 80% on the basis of the most recent audited annual financial statements, then the indirect acquisition is treated as a direct acquisition under the 2011 Regulations for all intents and purposes and the provisions in relation to direct acquisitions (including without limitation timing, pricing and other process) apply to such acquisition (“Deemed Direct Acquisitions”); and

(ii)               If the 80% threshold is not met, the acquisition is treated as an indirect acquisition under the 2011 Regulations and certain distinct provisions in relation to inter alia timing and pricing apply (“True Indirect Acquisitions”).

The TRAC noted this issue in its deliberations[6] and recommended a two-tiered categorization based on the materiality criterion with a view to avoid the risk of transactions being structured as indirect acquisitions merely to avoid the price computation methodology and the open offer process prescribed for direct acquisitions.

Timing of the Public Announcement for Indirect Acquisitions

The 2011 Regulations envisage an initial public announcement followed by a more detailed public statement of the tender offer. For True Indirect Acquisitions, the 2011 Regulations provide that a public announcement (which is to be summary document) may be made within 4 working days of the “Relevant Date”, being the earlier of the date on which the primary (direct) acquisition is contracted and the date on which the intention or decision to make the primary acquisition is publicly announced. The detailed public statement however, need only follow not later than 5 working days of the completion of the primary acquisition. Given that global acquisitions may run on a different track subject to varying commercial considerations and regulatory provision, this timescale provides for flexibility in the event of non-completion of the primary acquisition on account of commercial or other considerations.

Deemed Direct Acquisitions are however not provided this benefit with the public announcement required to be made on the Relevant Date, and the detailed public statement required to be made not later than 5 working days of the public announcement. Deemed Direct Acquisitions are therefore likely to proceed au parallel with the primary acquisition.

Despite the fact that the 1997 Regulations also permitted the acquirer a leeway of up to 3 months after consummation of the parent acquisition for a public announcement of an open offer for the indirectly-acquired target company to be made, the biggest commercial driver for an early open offer was the lack of price protection. In such a scenario, the acquirer would not typically be in a position to launch the open offer until the primary acquisition had been consummated, and the market price of the target company could potentially witness a significant upturn before the open offer could be eventually announced. Moreover, the acquisitions between the two dates (date of announcement of the primary acquisition and the eventual date of public announcement) might have fallen outside the relevant look-back period, which would result in even an actual acquisition not getting factored into the computation of the minimum offer price[7].

Pricing of the Tender Offer

(i)                 General Determination of Tender Offer Price

In terms of Regulation 8 of the 2011 Regulations, the tender offer price for a True Indirect Acquisition is to be the highest of:

(a)                The highest negotiated price for the shares of the target (subject to the price attribution rules described below);

(b)               The volume-weighted average price paid or payable for any acquisition by the acquirer in the 52 weeks immediately preceding the Relevant Date;

(c)                The highest price paid or payable for any acquisition by the acquirer in the 26 weeks immediately preceding the Relevant Date;

(d)               The highest price paid or payable for any acquisition by the acquirer between the Relevant Date and the date of the public announcement in respect of the target;

(e)                The volume-weighted average market price of the target’s shares for the 60 day period immediately preceding the Relevant Date on the stock exchange where the maximum trading occurs during such period (only where such shares are frequently traded); and

(f)                The price determined after taking into account Price Attribution (see point (ii) below).

Further, in the event the offer price is incapable of being determined under any of above parameters, then the offer price is to be the fair price of shares of the target to be determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.

In the author’s view, with respect to the parameters outlined in (b) and (c) above, the principles detailed by the Supreme Court in the Zenotech[8] case (as outlined below) would continue to hold true even under the 2011 Regulations, given the lack of anything to the contrary in the 2011 Regulations.

In the Zenotech case, the shareholders of Zenotech Laboratories Limited (“Zenotech”) were aggrieved with the open offer price offered to them by Daiichi Sankyo Company (“Daiichi”), which had indirectly acquired control of Zenotech vide its acquisition of Ranbaxy Laboratories Limited (“Ranbaxy”). The SAT examined whether when determining the offer price payable as on January 19, 2009, Daiichi was obligated under Regulation 20 of the 1997 Regulations to find out whether it, or any “persons acting in concert” with it on that date, had paid any price for acquisition to the shareholders of Zenotech during the 26 week period prior to June 16, 2008. Given that Ranbaxy had become a subsidiary of Daiichi on October 20, 2008, the SAT ruled that it was “deemed to be acting in concert” with Daiichi from such date. Accordingly, Ranbaxy, which had paid Rs. 160/- per share to the shareholders of Zenotech during January 16 and January 28, 2008 (i.e., the 26 weeks prior to June 16, 2008), was held to be acting in concert with the Daiichi, as on the material date on which the offer price for indirect acquisition was to be calculated (i.e., January 19, 2009). Daiichi was thus directed by the SAT to revise its offer price to the shareholders of Zenotech from Rs. 113.62/- per share to Rs. 160/- per share.

The Supreme Court on appeal[9] however overruled the decision of the SAT and held that the tribunal had erred in proceeding on the basis that the material date for Ranbaxy and Daiichi to be acting in concert was the date of the public announcement for the Zenotech shares (i.e., January 19, 2009). The Supreme Court was of the view that for the purposes of the application of the pricing norms under the 1997 Regulations, it would not be material for the acquirer and the other person, who had acquired the shares of the target company on an earlier date, to be acting in concert at the time of the public announcement for the target company. The relevant time in this behalf would be the time of purchase of shares of the target company and accordingly, the only material aspect for determination was whether the other person was acting in concert with the acquirer at the time of purchase of shares of the target company.

(ii)               Price Attribution

An interesting issue that was hitherto part of the regulatory haze in the case of a negotiated price of an indirect acquisition pertained to the quantum of the price at the primary acquisition level which would have to be included in the open offer price with respect to the Target. This resulted in acquirers disclosing the basis (or the lack thereof) on which the open offer price had been arrived at in a roundabout manner. For instance, in the India Carbon[10] and the Tata Teleservices (Maharashtra) Limited[11] open offers in 2009, the acquirers stated that the underlying transaction documents which triggered the primary acquisition contemplated composite consideration with no specific value or consideration being allocated or ascribed for the indirect interest held in the Indian target company. However, in the Thomas Cook[12] open offer in 2008, the acquirer chose to mention, “by way of abundant caution”, that the consideration paid for 100% of TCIM (an intermediate entity) would amount to the acquirer indirectly paying Rs.107/- per equity share (also the offer price) of the target company. The disclosure for the Williamson Tea[13] open offer in 2005 also contained similar language with the acquirer stating that the price paid for the intermediate entity would ultimately amount to indirectly paying Rs. 140/- per equity share (the offer price was Rs. 145/- per equity share) for the Indian target company if all the other assets of the intermediate company were not taken into account. The acquirer further maintained that this price would have been lower if the assets of the intermediate company had been taken into account.

The SEBI was concerned about whether the tender offer price for the target was artificially suppressed and this often led to regulatory second guessing of the value attributed to the Target’s shares and had, in some instances, called for an independent valuation. On the other hand, Acquirers were wary that they might be overcharged for what could have been an unintended or incidental acquisition resulting from a primary (often global) acquisition. This issue has now largely been laid to rest by the 2011 Regulations which adopt the recommendations of the TRAC and provide objective guidelines to tackle such a situation.

Thus, Regulation 8(5) provides that where the proportionate net asset value, sales turnover or the market capitalization of the target as a percentage of the consolidated net asset value, sales turnover or market capitalization of the entity or business being acquired is in excess of 15% on the basis of the most recent audited annual financial statements, then the acquirer shall mandatorily be required to compute and disclose the per value share of the target taken into account for the primary acquisition in the tender offer letter together with a detailed description of the computation methodology adopted.

In any event, such a description has been included in open offer documents for a number of years. For instance, in the Insilco[14] open offer in 2002, the percentage proportion of the revenues, assets and net profit of the target company in the business of the entity being acquired was considered. Information based on similar parameters was also disclosed in the Ciba India[15] open offer in 2009 and the Rhodia Speciality[16] open offer in 2011. Whilst the percentage attributed to the Indian operations in each of these scenarios was fairly low, there have also been instances where the Indian operations constituted a substantial proportion of the business being acquired. For instance, in the Widia[17] open offer in 2003, the proportion of the revenues, assets and net profit of the target company in the businesses being acquired was 19%, 29% and 42%, respectively. The Disa India[18] open offer in 2005 is also noteworthy insofar as it contained a disclosure stating that the income from operations of the target company constituted “less than 10.0% of the total income from operations” on a consolidated basis of the entity being acquired. Separately, in both Ciba India and Rhodia Speciality, no specific due diligence was carried out on the target company. However, in Widia, a “limited due diligence” was conducted on the target company though this process did not include a financial diligence.

(iii)              Price Protection

Under the 1997 Regulations, the tender offer price for an indirect acquisition was determined with reference to the price determined as of the date of the public announcement for the primary acquisition and as of the date of the public announcement for the target (whichever was higher). Since the regulations provided for a time period of 3 months from the date of consummation of the primary acquisition for making the public announcement for the target, and because the determination of the tender offer price involves a historical “look-back” of the price of the shares of the target from the date of the public announcement (or the date of the original trigger, whichever is higher), this often resulted in the acquirer having to bear a significant price risk inasmuch as the stock price usually rose significantly during this period. A classic instance of this price imbalance occurred in the Rhodia Speciality open offer, where the highest price payable based on applicable parameters prior to the “global” public announcement was Rs. 211.39, whereas the highest price payable prior to the “Indian” public announcement was Rs. 386.72. Similar price distortions were also witnessed in the Hindustan Oil[19] and the Hughes Software[20] open offers where the difference between the highest price payable prior to the global and Indian public announcements was in excess of 22% and 18%, respectively.  This may be contrasted with a situation where price protection was afforded to the acquirer by virtue of simultaneous public announcements for the “global” and “Indian” legs of the transaction, as was the case in the Sparsh[21], Tata Teleservices (Maharashtra) Limited, and Thomas Cook open offers.

Further, the determination of the “relevant date” under the 1997 Regulations with reference to which a tender offer price was to be calculated proved nebulous, and could potentially result in regulatory intervention causing the acquirer to revise the minimum offer price, often to its detriment. For instance, in the B.P. Amoco-Foseco[22] case, the acquirer was directed by the SAT to make a public announcement to acquire shares from the shareholders of the target company at an offer price which had to be computed by taking the higher of the price arrived on the deemed date of the primary acquisition and the actual date of the public announcement as reference dates. Given that (a) the SAT had denied an open offer exemption to the acquirer and determined the primary acquisition reference date to be March 14, 2000; and (b) the public announcement would be made over a year after March 14, 2000, the acquirer would be forced to make an offer price of around Rs. 226/-, considerably higher than the Rs. 144.02/- it would have otherwise paid under its claimed reference date.

With a view to avoid such a scenario, acquirers had generally chosen to launch their public announcements simultaneously, which was commercially unfeasible since the non- satisfaction of conditions (including the need for regulatory approvals) not relevant for the consummation of the indirect acquisition would not have permitted a withdrawal of the open offer. The TRAC noted this issue in its deliberations and had accordingly recommended “price protection” for the Acquirer, which the 2011 Regulations have put into effect.

Thus, pursuant to Regulation 8(12) of the 2011 Regulations, in the case of all True Indirect Acquisitions (but not in case of Deemed Direct Acquisitions), the acquirer is provided with price protection subject to enhancement of the tender offer price by 10% per annum for the period intervening the Relevant Date and the date of the detailed public statement (provided such period is more than 5 working days).

Other Offer Provisions Applicable to Indirect Acquisitions Under the 2011 Regulations

With the exception of the specific provisions in the 2011 Regulations pertaining to trigger thresholds, timing and pricing requirements for tender offers triggered on account of indirect acquisitions, the rest of the open offer process for indirect acquisitions would follow the same process that is applicable to other types of offers:

(i)                 Offer Size

Investors who trigger mandatory tender offer obligations as described above would have to make an offer for at least 26% of the fully diluted share capital of the target company.

(ii)               Escrow

The provision of escrow for the open offer is to be 25% for the first Rs. 500 crores and 10% for the balance open offer consideration. In some situations, the acquirer would need to provide a higher escrow amount (which may extend up to 100% of the offer price).

(iii)             Mode of Payment

The consideration offered in an open offer may be all or part cash, or stock or secured debt instruments listed on a stock exchange in India (not available to global acquirers who are not listed in India). While the 1997 Takeover Regulations also contemplated the option of a cash or kind mode of consideration, the kind option was rarely availed of. The 2011 Takeover Regulations provide greater clarity for structuring stock for stock and, therefore, may make it more commercially appealing.

A differential price for acceptance of payment in cash or stock is permissible. Where the underlying agreement to acquire shares provides for payment in cash, or acquisitions made in the 52 weeks preceding the date of the public announcement have been paid for in cash, and such shares constitute more than 10% of the voting rights in the target company, a cash option is required to be provided to the shareholders. However, if the requisite corporate approvals for a stock for stock offer are not received prior to the commencement of the tendering period, the acquirer will have to pay the consideration in cash.

(iv)             Withdrawal of Open Offer

In addition to the grounds currently existing under the 1997 Regulations for withdrawal of an open offer (i.e., non-receipt of statutory approvals and death of sole acquirer), the 2011 Regulations provides that an open offer may be withdrawn where the underlying triggering transaction fails for reasons outside the reasonable control of the acquirer and such agreement is rescinded, subject to full disclosure in the open offer documents.

(v)               Timelines

Under the 2011 Regulations, an open offer may be completed within 57 business days from the date of the public announcement (as opposed to the 95 calendar days under the 1997 Regulations). A snapshot of a typical open offer timeline under the 2011 Takeover Regulations is enclosed at the end of this article.

Conclusion

Unlike the earlier 1997 Regulations, the 2011 Regulations provide for a detailed and clear framework for indirect regulations by (i) categorizing such acquisitions on the basis of the proportionate net asset values, sales turnover and market capitalization of the target to the consolidated net asset values, sales turnover and market capitalization of the business being acquired; and (ii) providing a separate framework for dealing with each such category. The events giving rise to the creation of a legal tender offer obligation in the context of an indirect acquisition have been clearly spelt out. It is also expected that the comprehensive norms surrounding pricing and price attribution will create a transparent framework for takeover activity involving indirect acquisitions and mitigate uncertainty.  In light of the above, in the author’s view, the 2011 Regulations represent a significant improvement over the 1997 Regulations in the area of indirect acquisitions.