CCI Does What SEBI Hasn't???

By: Menaka Doshi, Corporate Editor, CNBC TV18

In the CCI Amendment Regulations 2012, dated February 23rd, the Competition Commission of India has made several amendments to the Merger Control Guidelines that came into effect on June 1st, 2011. One of those amendments is (6) in Schedule I,-
(a) in category (1), for the words, brackets and figures "do not exceed fifteen
per cent (15%)" , the following shall be substituted, namely:- "does not entitle the acquirer to hold twenty five per cent (25%) or
more " Now look at the earlier wording in Schedule 1 of the May 2011 notification (1) An acquisition of shares or voting rights, referred to in sub-clause (i) or sub-clause (ii) of clause (a) of section 5 of the Act, solely as an investment or in the ordinary course of business in so far as the total shares or voting rights held by the acquirer directly or indirectly, do not exceed fifteen percent (15%) of the total shares or voting rights of the company, of which shares or voting rights are being acquired, directly or indirectly or in accordance with the execution of any document including a share holders' agreement or articles of association, not leading to acquisition of control of the enterprise whose shares or voting rights are being acquired. Add the line notified in the 2012 amendment to the earlier 2011 category (1) para and the outcome is (1) An acquisition of shares or voting rights, referred to in sub-clause (i) or sub-clause (ii) of clause (a) of section 5 of the Act, solely as an investment or in the ordinary course of business in so far as the total shares or voting rights held by the acquirer directly or indirectly, "does not entitle the acquirer to hold twenty five per cent (25%) or more " of the total shares or voting rights of the company, of which shares or voting rights are being acquired, directly or indirectly or in accordance with the execution of any document including a share holders' agreement or articles of association, not leading to acquisition of control of the enterprise whose shares or voting rights are being acquired. There are two important changes 1. That the CCI  will here onward exempt from filing an direct or indirect acquisition of shares or voting rights less than 25%  (earlier 15%) as long as it does not lead to an acquisition of control. In doing so the CCI's Merger Control Guidelines have aligned themselves with SEBI's new takeover Code (SAST 2011) that came into force last year. The SAST 2011 raises the substantial acquisition trigger to 25% (shares/voting rights).GREAT! 2. The second change was pointed out to me by Amitabh Kumar, Former DG, CCI and now with law firm JSA. The amended category (1) uses the words "does not entitle". According to Mr. Kumar the use of 'entitle' refers to convertibles. Based on that reading the CCI amendment to category (1) implies that a direct or indirect acquisition that entitles an investor to 25% or more shares or voting rights is not exempt from filing. In simpler words: An investor may have acquired 15% share or voting rights in a company and not file with the CCI. But if a warrant allocation means that upon conversion those warrants would increase the investor's stake to more than 25% then the investor must file with the CCI on the day the deal is done (or warrants are allotted?) and not wait till their conversion. This is a big move ahead of SEBI that continues to keep convertibles out while determining a 'substantial acquisition' or 'change in control' trigger breach. Convertibles are counted in only upon conversion into shares/voting rights. In contrast many jurisdictions across the world include convertibles in determining a breach of takeover triggers. So if that is what the CCI intends it's a big change and could net several more transactions even though the threshold has increased from 15% to 25%. BUT... And there's always a BUT. The wording is not as clear as the conclusion I am drawing.  Read category (1) again and you will note it says '...in so far as the total shares or voting rights held by the acquirer directly or indirectly, "does not entitle the acquirer to hold twenty five per cent (25%) or more " of the total shares or voting rights of the company...' It doesn't say 'instruments that entitle' nor 'transaction that entitles'...it says 'shares or voting rights... that entitle'. This clumsy wording makes it difficult to draw a definite conclusion that this amendment includes the acquisition of convertibles as well. To make my point clearer look at how the UK Takeover Panel defines control Control means an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights (as defined below) of a company, irrespective of whether such interest or interests give de facto control Note the use of 'interests in shares'. That includes convertibles, options all kinds of instruments. An Amarchand Mangaldas research note reads that to mean 'If an acquirer has the ability to acquire the underlying shares or to exercise its voting rights by virtue of its holding, for example, through an option or derivative contract or by being party to an agreement permitting it to exercise such voting rights, it will be deemed to be in a position to exercise control.' And hence the BUT! If the CCI has intended to include convertibles in order to measure a filing threshold breach then it is a big change in how an Indian regulator views control. And this move will surely generate much debate, hand wringing and criticism for being out of line with the Takeover Code. And maybe some praise for doing what SEBI has steadfastly refused to do. But the wording of the clause has not done justice to the regulator's intention. If the wording is supreme then we are drawing the wrong conclusion. And the only change to report is that CCI has aligned itself with the Takeover Code 2011. Albeit will some ham-handed drafting! Disclaimer: I am no lawyer so I may have misread all of this. As always my views are open to correction & challenge. And you can poke fun at me for having spent a better part of Friday night writing this. Yes, I need to get a life!