Introduction
Navigating the competitive landscape in India requires a clear understanding of regulatory thresholds, particularly when it comes to significant corporate combinations. In India, Section 5 of the Competition Act 2002 (“the Act”) sets the thresholds for asset and turnover levels that require notification for combinations, such as mergers, acquisitions, and amalgamations. These thresholds serve to identify transactions that may significantly impact competition in relevant markets, thereby facilitating the approval process and minimizing the burden on smaller transactions. Section 6(2) of the Act mandates the submission of notices to the Competition Commission of India (“CCI”) upon obtaining board approval for a combination, while Section 6(2A) prohibits the implementation of combinations until the lapse of 150 days or until the CCI issues orders. Failure to comply with notification requirements can result in penalties under Section 43A.
Threshold Values for Combinations under Section 5
Section 5 of the Act outlines specific asset and turnover thresholds that trigger the requirement for notification to the CCI. These thresholds are designed to capture significant transactions that may have a substantial impact on market competition. The CCI uses these benchmarks to ensure that only those combinations likely to affect market dynamics are reviewed, allowing for a more focused regulatory approach. By periodically revising these thresholds, the CCI adapts to evolving economic conditions and maintains effective oversight. Understanding these thresholds is crucial for businesses to ensure compliance and avoid potential penalties. The relevance of the National Thermal Power Corporation Limited (“NTPC”) proceedings lies in illustrating how the CCI assesses combinations under these regulations.
Regulatory Implications of the NTPC Acquisition
Background
In the proceedings against NTPC under Section 43A of the Act, NTPC acquired 35.47 percent of the equity share capital of Ratnagiri Gas and Power Private Limited (“RGPPL”) without notifying the CCI. In a letter to NTPC, the CCI requested information in order to determine whether additional proceedings were required pursuant to Section 20(1) and/or Section 43A of the Act. NTPC disclosed information pertaining to the acquisition and demerger of the Liquefied natural gas (“LNG”) Undertaking, the acquisition of an equity stake in Konkan LNG Limited by Gas Authority of India Limited (“GAIL”), and the acquisition of an equity stake in RGPPL by NTPC from GAIL. The acquisition was a component of NTPC's resolution plan to re-establish RGPPL and rectify its non-performing asset classification, according to the company.
NTPC's acquisition of a 35.47% equity interest in RGPPL increased its shareholding to 60.98%, surpassing the 50% threshold, as noted by the CCI in its meeting on October 20, 2022. This acquisition was significant as it involved increasing NTPC's control over RGPPL, a key player in the power and energy sector, which operates a combined cycle gas turbine power plant in Maharashtra. The CCI observed that this substantial change in control necessitated prior notification, which NTPC failed to provide before completing the transaction.
Arguments of NTPC
NTPC argued that the intent and purpose of the transaction was to pay off debt and revitalise a national asset rather than to get more equity shares or control. Neither the influence on the market nor the level of competition has changed, nor has control.
Moreover, NTPC's rights in RGPPL stayed the same despite their equity shareholding rising from 25.51% to 60.98%. In RGPPL, NTPC shared joint control with GAIL and MSEB, who remained represented on the board.
CCI has already examined and given its permission to a number of power sector transactions, including one that NTPC submitted for the purchase of Jhabua Power Limited and has previously taken into account the activities that overlap between RGPPL and NTPC.
Findings of the Commission
The CCI determined that NTPC has contravened the provisions of Section 6(2) and Section 6(2A) of the Act since it did not qualify for the exemption under Item 1A of Schedule I which applies “when the acquirer or its group already holds 25% or more shares or voting rights in the enterprise before the acquisition, but does not hold 50% or more of the shares or voting rights, either before or after the transaction.” The exemption is contingent upon the acquisition not leading to the acquirer or its group obtaining exclusive or joint control over the enterprise. Since NTPC did not file a notice when it already held 25.51% equity shareholding in RGPPL prior to the acquisition, after the transaction, NTPC's shareholding increased to 60.98%, exceeding the 50% threshold. CCI imposed a penalty of INR 40,00,000 (INR Forty Lakh only) on NTPC for the violation.
Complexity in Threshold Calculation
Originally, there was ambiguity regarding how companies should calculate their turnover for M&A transactions, leaving parties uncertain about whether their deal needed notification. The CCI provided initial guidance through the Combination FAQs, offering clarity on turnover calculation methods, drawing from European jurisprudence.
The Combination FAQs categorized information based on enterprise and group-level thresholds, detailing turnover and assets considerations for various transaction types like acquisitions, mergers, and control acquisitions in competitive markets. While these FAQs and accompanying regulations shed some light on turnover calculation, recent cases demonstrate the need for further clarification.
In response, the CCI issued a draft of the CCI (Determination of Turnover or Income) Regulations 2023 (“Draft Turnover Regulations”), on 22 December. These regulations outline how enterprise turnover should be determined and also address individual income calculation. While a step forward, more scrutiny is required, particularly regarding relevant turnover concepts and associated penalties.
The Draft Turnover Regulations lay down how to calculate the value of turnover and income for the purposes of the Competition Act. However, even these draft regulations do not refer to Section 5 of the Act directly, although they do mention Sections 27 and 48. As a result, there still remains no clarity on how to approach the calculation of the turnover and assets, enabling the parties to decide on when to notify the CCI and when not to.
Global Standards
With the implementation of transaction value thresholds in both Germany and Austria, the aim is to extend the reach of their merger control regulations to transactions that might not otherwise trigger notification requirements due to the target's lack of significant revenues at the time of the transaction.
Section 35(1) (a) of the German Competition Act and Section 9(4) of the Austrian Cartel Act aim to address a gap in the merger control system, enabling it to function effectively in an increasingly dynamic economic landscape, particularly with the advent of digitalization and the deepening integration of economy and society.
These provisions introduce the criterion of merger considerations as an additional, subsidiary threshold for the notification requirement. This means that mergers involving companies or assets that currently generate little or no turnover but are acquired at a substantial price can now be subject to scrutiny under competition law. This adjustment ensures that the merger control system can adequately assess transactions that might have a significant impact on competition, even if traditional turnover-based thresholds are not met.
These thresholds address concerns, particularly in the digital economy, where transactions with substantial competitive implications might escape regulatory review because they fail to meet revenue-based jurisdictional criteria. In such cases, a notably high purchase price can indicate the target's competitive potential and thus serve as a suitable notification threshold.
In Germany, transactions meeting the criteria for a "concentration" under merger control law necessitate notification if certain conditions are fulfilled, including a transaction consideration exceeding €400 million. This transaction value threshold supplements existing revenue-based thresholds.
Similarly, in Austria, transactions qualifying as concentrations require notification if specific conditions are met, including a transaction consideration surpassing €200 million. Again, this transaction value threshold complements existing revenue-based thresholds.
Reviewing the Law
There is a need to periodically review and adjust the thresholds outlined in Section 5 of the Competition Act to ensure they accurately capture transactions that may significantly impact competition. This review should take into account changing market conditions, economic factors, and international best practices. Taking inspiration from global standards, India could consider incorporating transaction value thresholds alongside traditional turnover and asset-based thresholds. Transaction value thresholds can help capture transactions with substantial competitive implications, even if they do not meet revenue-based jurisdictional criteria. The CCI should provide clear guidelines and methodologies for calculating turnover and assets for M&A transactions. This clarity will help parties determine when notification to the CCI is necessary and prevent inadvertent non-compliance.
Conclusion
The case study of NTPC Limited has underscored the importance of adherence to the Competition Act's provisions and the potential consequences of non-compliance. This cases serve as valuable lessons for businesses and stakeholders, highlighting the need for careful consideration of thresholds, exemptions, and notification requirements when engaging in combinations.
Furthermore, the discussion surrounding draft regulations proposed by the CCI has revealed areas where clarity and consistency are required to enhance the effectiveness and efficiency of competition law enforcement. Addressing these challenges will be essential for promoting fair competition, preventing anti-competitive practices, and fostering innovation and consumer welfare in the Indian market.
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