Regulations
M&A regulations: Competition Commission irons out rough edges

Recent amendments in merger regulations will help bring clarity in M&A deals, especially big ticket international mergers, which will need Competition Commission's approval as the parties concerned have businesses in India

Almost three years after issuing the notification that mergers and acquisitions (M&As) above certain thresholds would require the Competition Commission of India’s (CCI) approval, the CCI amended certain provisions relating to combination regulations, effective March 2014. At a cursory glance, these amendments suggest that the clearance process for mergers and acquisitions would become simpler, besides also making it a more consumer friendly set of regulations.

Over 166 combinations have been approved by the CCI since the merger regulations came into effect.  While mergers are intended to create synergy for the companies involved, they can result in reduced competition in the marketplace. The CCI’s mandate is to check a combination that causes “appreciable adverse effect on competition” which may result from the combined economic power of the merging companies.

The changes in merger regulations have come at a time when the corporate and the legal worlds are awaiting amendments to the Competition Act, 2002, which are expected to have larger ramifications on combinations that take place once the amendments are enacted. For instance, under the changed definition of “group” (section 5) in the  proposed amendments to the Act, a 50:50 joint venture will be deemed to fall within the definition of “control” (through voting  rights), which will require notifying the CCI. Currently, the concept of joint ventures is a grey area not explicitly dealt with in the Act.  Also, the time-period required by the CCI to pass an order or issue directions with respect to combinations has been reduced to 180 days from the current 210 days.

However, amendments to the Competition Act, 2002, can only be executed through a Parliamentary ratification.  Meanwhile, amendments to merger regulations (which don’t need to be routed through the cumbersome Parliamentary approval), will help bring clarity in M&A deals, especially big ticket international mergers which will need CCI’s approval as the parties concerned have businesses in India.  

Highlights of the amendments to merger regulations:

Widened Scope

To begin with, the CCI has made it possible for a wider set of deals to come under its purview. Post amendment, the CCI can look into the substance or the intention of a proposed merger and not be limited to the filling of the required forms. Hence, in situations where it is assumed that notifying the CCI is not required because the assets, turnover or local nexus criteria are not being met, the CCI has clarified that it can look into the substance of a deal. This would enable the CCI to fulfil its mandate more effectively, if need be, by taking suo motto cognizance of deals that are deliberately structured with an intention to avoid scrutiny from the CCI. In other words, it has empowered itself to scrutinize deals which would otherwise escape its attention.
Currently, two merging Indian firms or groups with a combined turnover of Rs4,500 crore  and Rs18,000 crore respectively will need CCI’s approval before merging. Similarly, the thresholds for two global firms and global groups with a presence in India are combined global sales of $2.25 billion and $9 billion respectively, with a combined sales of Rs2,250 crore in India.

Clarifying Taxonomy

The CCI, through the amendment, has also deleted item 10 of schedule 1, thus removing ambiguity around the term “insignificant local nexus”. Item 10 referred to the effective exemption available to combinations taking place entirely outside India. So while the overseas merging companies will not have to deal with ambiguties about their transactions in India;  the CCI will save time deciding whether the said deal falls within its purview or not. The CCI has also made filings in Form I, or the simplified form, more unambiguous. It changed the term “vertical arrangement” to “vertical relationship” in Schedule II, which is a more defined business terminology. It is a different matter that some people may think of this as merely a semantic exercise.  

Appeals

The amendments have allowed anybody who feels that the decision of the CCI on a combination has not been fair, to appeal to the Competition Appellate Tribunal (COMPAT), the quasi-judicial body to which an appeal can be made against any order of the CCI. This has been done by deleting regulation 29, which dealt with the provision relating to appeal to the COMPAT. So far, this regulation allowed only certain individuals and entities who were parties to the proceedings in a combination review, and those who were aggrieved by any direction, decision or order of the CCI to file an appeal. Further, this deletion also ensures that the CCI does not inadvertently get into a self made trap. For, any subordinate legislation (in this case the merger regulations brought out through an executive order) cannot override the primary legislation (in this case the Competition Act 2002). Regulation 29, thus could have been challenged in court .     

Financial Reporting

Finally, in the more detailed form- Form II- the CCI has brought in more clarity by asking for the latest available financial documents on assets and sales of companies getting into combinations. The amendment specifies that value of assets/turnovers as per audited annual accounts of the immediately preceding two financial years be provided, as against the earlier regulation which required submitting “current and preceding years” audited annual accounts. This will help the CCI take an informed decision on an application seeking its approval. For the merging parties, this will allow them to furnish the latest financial statements rather than facing uncertainty over CCI’s view on current year’s statement.

NOTE: Views expressed in this article are personal

(KK Sharma is chief executive of KK Sharma Law Offices as well as former former director general of CCI. Sangeeta Singh is director for project operations at Nathan Economic Consulting, India)

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Campa Cola: Supreme Court dismisses residents’ plea against eviction

Dismissing the plea filed by residents of illegal flats at Campa Cola, the Supreme Court said, every case has a humanitarian issue, otherwise there was no need for having courts

The Supreme Court on Tuesday dismissed a plea filed by residents of illegal flats in Mumbai's Campa Cola Housing Society against the earlier order asking them to vacate their premises by 31st May.

 

A bench comprising justices JS Khehar and C Nagappan said, "We are of the view that the present petition is misconceived and hence, dismissed".

 

The bench also rejected the submission that at least the illegal flats be left intact till the time Supreme Court decides on the curative petition of residents association in the case.

 

"It is a big humanitarian problem. 140 families have been asked to vacate the premises with no other place to go," senior advocate Raju Ramachandran, appearing for the residents association, said, adding that, he was not advancing any arguments on legal grounds as it is nearly a mercy plea.

 

"Every case has a humanitarian issue. Otherwise there was no need for having courts," the bench said.

 

The residents association said the illegal flats' owners may vacate the premises but they (flats) should not be demolished till the disposal of the curative petition in the case.

 

The association, in its plea, had sought a direction to the Maharashtra government and the Municipal Corporation of Greater Bombay that they be asked not to demolish the illegal flats in the buildings till the apex court decides the petition.

 

"Allow the present writ petition filed by the petitioner association before this court and issue writ of Mandamus or Certiorari or any other appropriate writ or directions, directing the respondents not to demolish the building or take any other coercive steps till the outcome of the present writ petition" the plea had said.

 

It had said that the association has come across certain facts, which never came out, under the Right to Information Act and they (facts) warrant fresh hearing of the case.

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What went wrong with Innoventive Industries?

A well-sold story during IPO generated lots of interest in Innoventive among institutional investors. One fine day, the profitable company's liabilities surged and its net loss widened. What went wrong?

Innoventive Industries Ltd (Innoventive) a Pune-based iron and steel product maufacturer, is struggling to survive. Its share price is languishing at about one-fifth of its listing price, its liabilities have skyrocketed, so has its loss. Before entering the capital markets, Innoventive had total revenues of Rs425.2 crore. Today, its annual loss is more than that. The company's misfortune has left several investors, including institutional investors, who were lured by the 'growth story' of Innoventive, in jeopardy.

Chandu Laxman Chavan is the chief promoter of Innoventive- formerly known as Arihant Domestic Appliances Ltd- and holds 21.84% stake in the company as of March 2014. Earlier, on 14 February 2011, Standard Chartered Mid-Market Mid-Cap Fund invested $10 million in Innoventive, says a report from VCCircle.com. As of March 2014, Kavos Capital Ltd with its 11.23% stake is the largest public shareholder in Innoventive, followed by StanChart Pvt Equity (Mauritius) Ltd with 7.05% share. Even Reliance Regular Savings Fund-Equity Option holds 5.03% stake in Innoventive.

Innoventive came out with its initial public offering (IPO) to raise Rs219.6 crore. It got listed at Rs110 on the BSE on 13 May 2011. For the next two years, its share price moved between Rs136 to Rs76.05. However, 2013 proved to be most volatile year for Innoventive. Its share price hit an all time high of Rs147.9. Then, in October 2013 it fell to a life-time low of Rs9.80. This followed the corporate debt restructring (CDR) approved by the company in September 2013.

“Innoventive is negotiating with lenders to restructure borrowings and repayment schedule, addressing cash flow pressure through liquidation of inventories, incentivizing debtors and doing rehabilitation of financial position envisaged through sale of nonā€core assets and potential divestment of one or more subsidiaries,” the company had said in a regulatory filing at that time.

For FY14, Innoventive Industries reported a net loss of Rs434.66 crore compared with a net profit of Rs56.54 crore in FY13. During FY14, Innoventive's current liabilities surged 125% to Rs707.75 crore from Rs314.24 crore, while its non-current liablities increased 16% to Rs316.89 crore from Rs 273.79 crore, a year ago period. During the year to end-March, its finance costs increased 61% to Rs97.10 crore from Rs60.34 crore, a year ago period.
 
The Ministry of Corporate Affiars (MCA) website shows the following 'Index of Charges'. It includes many banks and financial institutions, which have filed and secured charges against Innoventive Industries. Apart from Axis Bank, Intec Capital, Bajaj Finance and ICICI Bank all other banks are either co-operative banks or public sector (PSU) banks, with United Bank of India as the lead bank.
 

Date of Charge Creation/ Modification*

Charges Secured

(In Rs crore)

Charge Holder/

Financial Institution

28/05/13

50 crore

Ratnakar Bank

10/05/13

7.50 crore

Saraswat Co-Operative Bank

15/03/13

20 crore

SBI - Industrial Finance Branch

01/03/13

25 crore

Bajaj Finance

28/02/13

15 crore

Bajaj Finance

16/01/13

40 crore

IDBI Bank

30/10/12

45 crore

Bank of Maharashtra

12/10/12

70 crore

Central Bank Of India

27/07/12

297 crore

Axis Trustee Services

16/03/12

45 crore

SBI Industrial Finance Branch

07/03/12

25 crore

State Bank of Bikaner & Jaipur

13/02/12

42.20 crore

ICICI Bank

13/02/12

47.80 crore

ICICI Bank

25/07/13*

500 crore

Axis Trustee Services

19/01/12

25 crore

Export Import Bank of India

26/09/11

35 crore

State Bank of Bikaner & Jaipur

06/09/11

30 crore

Axis Bank

23/08/11

30 crore

Indian Overseas Bank

17/08/11

60 crore

Saraswat Co-Operative Bank

12/08/11

30 crore

Bank of Baroda

30/11/10

2.01 crore

Intec Capital

24/06/11*

100 crore

Axis Bank

23/07/10

25 crore

Allahabad Bank

12/04/10

70 crore

Axis Bank

26/03/10

30 crore

Central Bank of India

27/01/10

20 crore

State Bank of Mysore

07/06/08

10 crore

Axis Bank

03/04/13*

100 crore

United Bank of India

31/07/12*

147.50 crore

United Bank of India - (Lead Bank)

Source:www.mca.gov.in

While entering the capital markets, Innoventive had said, it would use the proceeds from its IPO to expand its production facilities at Pune, for repayment of loans (worth Rs163 crore) and general expenditure (around Rs50 crore). But from the MCA's index of charges, it appears that Innoventive did not repay any of its loans. In fact, it again borrowed funds from lenders.  

Even on 10 January 2013, IDFC Mutual Fund bought 5.11 lakh shares of Innoventive at Rs135 on BSE due to which its shares surged to Rs144.45 on the same day. However its share prices are falling since the last one year and on 25 October 2013 it hit a 52-week low at Rs9.80 on BSE, below its facevalue of Rs10.

As on 31 March 2014, promoter holding in Innoventive stood at 45.40% and public holding stood at 25.87%, while institutional investors hold a total of 30% stake in Innoventive, including 14.23% with foreign institutional investors (FII) and 14.50% with domestic institution investors (DII). The Institutions which holds more than 5% stake as on 31st March 2014 are Kavos Capital Ltd (11.23%), Standard Chartered Pvt Equity (Mauritius) Ltd (7.05%) and Reliance Capital Trustee Co Ltd (5.03%).

The company, which was making profits in every quarter suddenly made a net loss of Rs41.39 crore in its June 2013 quarter and since then its losses increased every quarter to as much as Rs272.12 crore net loss in March 2014 quarter. Its March quarter net loss was 3.69 times its total turnover of Rs75.70crore during the quarter.

Hence the company which came out with an IPO three years ago and genrated lots of interest among the institutional investors, lost around Rs400 crore (80%) of net worth over the last year, its liabilities increased significantly and opted for CDR plans. Financial institutions are waiting to recover debts from Innoventive. Shareholders, who invested in the IPO have already lost value, as Innoventive has been hitting lower circuits and is now trading around Rs16 on BSE. The Exchange too has now shifted the Innoventive scrip to 'T' group (Trade-to-trade) as a surveillance measure.

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COMMENTS

Hemant Kumar Gupta

3 years ago

Many many companies resort to bogus billing to inflate financial nos. As far as FIIs are concerned, lesser said better it is. It is well known in market circles that managers of many FIIs/Private equity funds collude with fraudulent promoters/operators who take stake in suspect companies by taking taking kickbacks which go as high as 20%.
When promoter ends up selling his benami holdings thru open markets at high price, he stops bogus billing accounting. But he has to revert those entries in subsequent years which lead to reporting huge losses as earlier reported huge profits were bogus.

Mitranand Financial Services Pvt Ltd

3 years ago

You can check out Ankur Drugs.. same thing fund diversion and thereafter declare insolvency ... SEBI is sleeping and retail investors burning figures and never come back again

REPLY

Hemant Kumar Gupta

In Reply to Mitranand Financial Services Pvt Ltd 3 years ago

Reg Ankur Drugs, promoter siphoned off hundreds of crores while setting up new production facility through over- invoicing of plant & machinery. Some big investors like K R Bharat helped promoter in building up fancy stories about hugely profitable product pipeline.

sreenath

In Reply to Mitranand Financial Services Pvt Ltd 3 years ago

sreenath
its common for sebi nse bse to induce such unscrupulous industrialist to go for IPO without any norms and there these institution get their share is our surmise because an common man like me is able to assess the real credit worthiness of the common while the institutions like sebi nse bse why cannot they curb we should blame the ICAI because with the help of the statutory auditors the company accounts are fudged and as such instead of charge sheet the company MD and promoter its better if we tighten the statutory auditors if any of the company who after IPO comes and then goes red then the statutory auditor would lose his ICAI membership and he should be kept as auditor and his membership should be cancelled if such rule is framed then many company would not go in red its the statuory auditors who hook up the figures is my surmise

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