Interplay of Competition Law and Hostile Takeovers in India

[Ayush is a student at National Law School of India University.]

Hostile takeovers are the transactions where a company tries to acquire or gain control of a company without seeking approval from the management of that company. Such an acquisition plays a strategic function in capital markets by unlocking shareholder value and enhancing corporate governance. The hostile takeovers in India are primarily governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (SEBI regulations). However, the takeover regime in India has historically acted as a barrier and favoured promoters through complex disclosure obligations, creeping acquisition caps, etc. which warns the promoters of any potential hostile takeover.

A crucial aspect of the SEBI regulations is the mandatory open offer mechanism which gets triggered when acquirer crosses the 25% threshold of shares or voting rights in the target company. Moreover, it mandates the compliance of all the applicable statutes before the implementation of open offers. This entails obtaining necessary approval from the Competition Commission of India (CCI). Thus, the merger regulation scheme under the Competition Act 2002 (Act) plays a significant role in the hostile acquisition framework in India.

This article examines the role of competition law in regulating the hostile acquisitions. In doing so, it initially examines the suspensory merger regime and its problems prior to the 2023 amendment. Post that, it presents how the amendments solve the previous existing hurdles for hostile takeovers. Finally, it looks at how the amendment is fraught with certain ambiguities which require addressal.

Suspensory Merger Regime: Prior to the Amendment

Prior to the amendment, India’s merger regulation regime posed significant hurdles to hostile takeovers. Under Section 6(2) of the Act, for any combination, such as mergers, acquisitions or amalgamation, to come into effect, the parties to the combination need to seek approval of the CCI. Furthermore, Section 6(2A) imposes a standstill obligation, which prevented any combination to be implemented prior to the CCI’s approval or until 150 days (210 days before amendment) passed from the date of notice.

Over the years, this standstill obligation has been rigidly imposed by the CCI. Several instances have been noted in the past when even transactions having no effect on the control of the target company were considered as violations, thereby attracting penalties for gun-jumping under Section 43A of the Act.

For instance, in SCM Soilfert–Mangalore Fertilizers, even though shares were bought prior to filing of notice with the CCI, the acquirer argued that they had been put in an escrow account and voting or economic rights were not used. However, the CCI rejected the reasoning and imposed a penalty for violation of the standstill obligation.

This was reiterated in SABIC International Holdings BV v. CCI. In this case, the shares purchased through open market by SABIC were deposited in the escrow account and no voting rights or influence in the management was exercised. However, the CCI held that the transaction was not entitled to any exemption and levied a gun-jumping penalty. 

All these lines of cases show the strict imposition of the standstill obligation by CCI over the years. Hostile takeovers require swift and speedy actions to acquire the strategic interests. Although these cases may not be instances of hostile takeover, the abovementioned rigidity of CCI affects any time-sensitive acquisition. Even the Competition Law Review Committee pointed out the challenges posed by standstill obligation to time-sensitive acquisitions. 

To deal with this problem, an amendment was made to the Act and regulations dealing with mergers.

Insertion of Section 6A

The recent addition of Section 6A in the Act has marked a pivotal shift in the interplay of competition law and hostile takeovers, especially with matters related to the timing and permissibility of open offers. The new section allows the making of open offers by the acquirer even prior to the approval if these two conditions are met: (i) notice is given to CCI as prescribed by the regulations; and (ii) the acquirer does not exercise any ownership or beneficial rights prior to the approval of combination.

This amendment creates a perfect balance between the concerns of CCI and the acquirers trying to take over any company without the approval of the target company’s management. The objective of CCI, as laid down in the Act, is to prevent any combination which has an appreciable adverse effect on the competition of the market. Introduction of Section 6A allows the CCI to regulate the combinations without the acquirer intervening by exercising any ownership or beneficial rights. At the same time, it addresses the time-sensitivity in a hostile takeover and allows the acquirer to take preparatory measures. It also offsets the standstill obligation time-period which earlier was a mechanism used by the target company to defend the hostile takeovers. 

The flexibility for hostile takeovers in terms of time and open offers provided by the amendment allows competition law to become compatible with the market for takeover and corporate control.

The merger control regime is relatively new in the India as compared to its other counterparts globally. The merger control regime varies greatly in different countries. On one hand, the EU allows the making of public bids under Article 7(2) of the European Union Merger Regulation in a manner similar to that of Section 6A of the Act. Moreover, Article 7(3) also empowers the Commissioner to grant a derogation from the obligation of notice required to make an open offer. The US does not provide any such exemption, however, it aims for an expedited process for the approval of the proposed combination. Despite the differences, the global consensus is that merger regulation must be adaptable and should not become a hurdle to time-sensitive transactions, such as hostile takeovers.

India’s policy aligns with the EUMR and tries to create a balanced approach. However, this amendment is fraught with certain ambiguities. The Act does not specify the creation of an escrow account for the safekeeping of securities pending approval, as suggested by CLRC. Thus, there exists a gap in the scenario where the CCI rejects the combination. Furthermore, there is a problem in the language used in the combination regulations, which will be discussed in the next section. 

Interplay of Section 6A and the Combination Regulations

Section 6A(b) states that any benefits cannot be exercised by the acquirer “except as may be specified by the regulations, till the Commission approves such acquisition…” In the exercise of this power, Regulation 6 of the Competition Commission of India (Combination) Regulations 2024 (Combination Regulations) allows the availing of several economic benefits such as receiving dividends, buy-back of securities, participating in bonus or rights issues, etc. Furthermore, it also allows exercising of voting rights in case of insolvency proceedings. However, these benefits are subjected to a very broad proviso which states that the “acquirer….shall not directly or indirectly, influence the enterprise…in any manner whatsoever.” 

The problem that arises from this is that the term ‘influence’ is not defined and the phrase ‘in any manner whatsoever’ risks rendering the entitlements under the regulation 6 to come under scrutiny. If the CCI chooses to interpret the term broadly, even passive economic benefits risk being construed as control proxies.

However, it is possible to have a harmonized interpretation of the act and the regulations together. The Act itself acknowledges “material influence” as the lowest threshold of control. The ambit of ‘material influence’ has been outlined by the CCI in UltraTech/Jaiprakash Associates Limited (JAL) case. In this case, the CCI opined that all the acts having the ability to affect the affairs and management of the target company, such as shareholding, board representation, structural/financial arrangements, etc., would come under the term ‘material influence.’ Based on this reasoning, use of the term influence under the proviso to Regulation 6 should be interpreted narrowly to refer to acts that satisfy the threshold of material influence and should not include any passive benefits.

This interpretation is also bolstered when Regulation 6 is read along with the declaration specified under Schedule II.  Under Schedule II, a declaration form is given which requires the acquirer to declare that they have not influenced the affairs of the enterprise. The word ‘affairs’ of the enterprise suggests that the term ‘influence’ must be interpreted narrowly focusing on strategic interventions and not the basic economic benefits or participation.

However, the past instances of strict interpretation by the CCI and the overall rarity of hostile takeovers in India risk a broad interpretation of the phrase ‘influence in any manner whatsoever,’ in the absence of an explicit definition. Thus, clear guidance is required on this particular issue. An inspiration from European Union can be taken in this matter where the European Court of Justice tried (ECJ) to interpret the boundaries of the standstill obligation, in the absence of any clear guidelines. The ECJ held instead of all preparatory transactions, only those actions which contribute to a change of control shall come under the ambit of standstill obligation. 

Conclusion

Hostile takeovers have historically been a sight of rarity in India. The SEBI regulations primarily deal with the concept of hostile takeovers in India. Competition law is one of the subsets of this takeover regime. Prior to the amendment of the Act, hostile takeovers and other time sensitive acquisitions were difficult to implement due to the existence of a standstill obligation. The insertion of Section 6A is a step towards facilitating hostile takeovers in the future. The flexibility for hostile takeovers in terms of time and open offers provided by the amendment allows the enhancement of corporate governance and unlocking of shareholder value. Despite this, the amendment is fraught with certain ambiguities which require addressal to prevent any broad interpretation of the amended provisions by the CCI.