Under the Combination Regulations, 2011, CCI review of mergers is compulsory. Does this mean that the High Court will have to wait for the CCI’s clearance before sanctioning a scheme for amalgamation? Can the CCI overrule a sanction by the court? Find out…

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Background 

The terms merger and amalgamation have not been defined in the Companies Act, 1956. Halsbury defines ‘amalgamation’ as “a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders of the company which is to carry on the blended undertakings.”

Presently, the High Court enjoys powers of sanctioning amalgamation matters under section 394 of the Companies Act though it is only a matter of time when this power will be exercised by National Company Law Tribunal, a forum where Chartered Accountants shall be authorized to appear, and whose constitutionality has been upheld by the Supreme Court. For the court to exercise its power to pass the scheme of amalgamation, an application under Section 391 has to be made by the shareholders of the company seeking amalgamation, after fulfilling the requisite conditions therein.

Sections 5 and 6 of the Competition Act regulate 'combinations', requiring prior notification and approval where such provisions are applicable. These provisions and the Combination Regulations have come into effect on June 1, 2011. The result is that with the enforcement of the combination provisions and the notification of the Combination Regulations, all mergers, amalgamations and/or acquisitions within the thresholds postulated in section 5 of the Competition Act will require prior approval of the CCI. An enterprise which meets the threshold is required to give a notice to the CCI regarding the combination it proposes to enter into., under the Combination Regulations, 2011.

Hence, pursuant to the Combination Regulations coming into effect, a scheme for amalgamation requires sanction from the CCI to approve that the scheme does not cause an “appreciable adverse effect on competition”. Similarly, it would also require sanction from the court under provisions of the Companies Act.

In this blogpost, I shall discuss whether there is an overlap in the CCI and High Court’s jurisdictions, and whether the Court’s sanction of a scheme in spite of the CCI’s lack of approval can be deemed to be valid. I shall further analyse the repercussions of multi-sectoral regulations and conclude that, while sectoral regulations lead to greater efficiency and transparency, there would be significant transaction losses in the absence of clearly demarcated boundaries of areas of operation.

Analysis of Powers of the National Company Law Tribunal and the Competition Commission of India

The duty of the CCI is to “prevent practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India”. This mandate overlaps with sector-specific regulators like the Securities Exchange Board of India (“SEBI”), the Telecom Regulatory Authority of India (“TRAI”), the Central Electricity Regulatory Commission (“CERC”), the Insurance Regulatory Development Authority (“IRDA”), and the Petroleum and Natural Gas Regulatory Board (“PNGRB”). See here for an extensive discussion on the same.

Undoubtedly, enforcing the legal regime of competition law through a competition authority creates predictability and certainty for business entities, and it is inefficient to rely on the specialized knowledge of various sectoral regulators to enforce competition law effectively.

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Under Section 394, the court has the power to refuse sanction of a proposed scheme of merger provided the affairs of the company have been conducted in a manner prejudicial to the interests of its members or to ‘public interest’. While shareholders’ interests do not pose a problem with respect to competition law, the term ‘public interest’ is of wide connotation. Arguably, public interest could encompass competition policies, which when flouted lead to adverse results for a wide gamut of consumers.

What Constitutes ‘Public Interest’: Jurisdictional Overlaps

Thus, we need to look into the meaning of the term “public interest” to determine whether the Tribunal would also have the power to look into the anti-competitive aspect of mergers. It has been held by the court that ‘public interest’ would permit the court to look into why the transferor company came into existence, for what purposes it was set up, and other analogous conditions leading up to why the company seeks to be dissolved by merging into another company (In Re: Wood Polymer Limited (1977) 47 Comp Cas 597).  

In this analysis, it would be imperative to recall Section 23 of the now repealed Monopolies and Restrictive Trade Practices Act. Section 23 explicitly stated that no merger shall be sanctioned by any Court unless the scheme has received prior approval under the Section from the Central Government. Even prior to the repeal of the Act, this particular section was deleted by the legislature. Hence, post-deletion, the situation under the MRPTPA would have been similar to what it is today under the Competition Act which does not lay down any express prior approval clause for mergers, even though the Combination regulations, mandate that without such approval, the scheme would not be passed. The analogous position under the MRTPA came up for consideration in Hindustan Lever Employees Union v Hindustan Lever Limited & ors (1995) 83 CompLJ 30(SC), where it was contended that a conjoint readings of the other provisions of the Act render it necessary to have prior sanction of the Central Government or MRTP Commission before a Scheme of Amalgamation or merger can be sanctioned. But the court rejected this argument by holding that if this were to be accepted, it has to be held that the provisions of Section 23 were wholly unnecessary and otiose, because even otherwise sanction or clearance of the Central Government was a condition precedent for effecting a scheme of amalgamation or merger. Thus the Court upheld the right of the Company Court to sanction a scheme of amalgamation without prior approval from the Commission under the MRTPA or the Central Government. It also held that a company may, on its own, grow up to capture a large share of the market. But unless it is shown there is some illegality or fraud involved in the scheme, the Court cannot decline to sanction a scheme of amalgamation.

Conclusion

Thus what is material in the present controversy is that the Court, while exercising its powers under Section 391 and 394 of the Act would not need to wait for prior approval of the Competition Commission. Another issue of significance is whether even if a proposed amalgamation is sanctioned by the Court (or Tribunal), the same would be subject to the final decision of the Commission. The above-mentioned judgment seems to indicate this in the affirmative when it held that if it is found that the working of the Company is being conducted in a way which brings it within the mischief of the (now repealed) Monopolies & Restrictive Trade Practices Act, it would be open to the authority under the Monopolies & Restrictive Trade Practices Act to go into it and decide the controversy as it thinks fit.

Having thus delineated the functions of the Commission and the Court/Tribunal, it is essential however to remember the legislature’s prerogative to enact law that is “certain, clear and predictable” (Fuller’s Morality of Law). Thus while the legislature, in its wisdom, has enacted the Competition Act and the Combination Regulations leaving the issue of the power of the Court/Tribunal to sanction a scheme under the Companies Act open, this leaves ambiguities and doubts with regards to the powers of the respective enforcement authorities which should be clarified by the legislature.

 With that, let the competition begin…!

(Image taken from gapnap.com) 

[This post has been authored by Sreerupa Chowdhury, B.A./B.Sc. LL.B., 4th Year, The W.B. National University of Juridicial Sciences]