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Is It Frying Pan Or Fire?
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But here's the first big concern: will the questions surrounding the interpretation of the regulation delay the completion of merger and acquisition (M&A) processes? "It's a new regulator, and may take time to find its feet," says the head of an investment banking firm. "People in corporate India are curious about who the other members of the CCI will be."
The regulations come ahead of the new takeover code that the Securities and Exchange Board of India (Sebi) will make public soon. "For acquisitions of listed companies which trigger mandatory open offers to public investors, how the CCI's regulation will interact with Sebi's takeover code will be a key consideration," says Somashekar Sundaresan, partner at J Sagar and Associates, a leading Mumbai-based corporate law firm.
Here's one example: if the promoters of a firm want to increase their stake in the company from, say, 46 to 51 per cent by way of a creeping acquisition over a year, they do not have to make an open offer, so approval is almost automatic. But such an acquisition falls within the definition of ‘change of control'; will they have to seek the CCI's approval?
Most mid-size companies that want to make acquisitions, even small ones, fall within the ambit of the CCI, based on the criteria laid out in the turnover, net worth and profitability criteria. Given India Inc.'s growth and the rising amount of M&A activity, does the CCI have the bandwidth to approve every transaction? Delays could be deal-killers.
"It should take four to six weeks for approvals, as in most other countries," says Ranu Vohra, managing director, Avendus Capital, whose firm has a flourishing M&A business. "There should be a way of fast-tracking some of these deals — a sort of tatkal window that companies can use to get approval earlier." In other words, growth through consolidation cannot be derailed; investment bankers worry that the CCI could become another layer of bureaucracy.
"Coordination between Sebi and the CCI becomes important," says Sundaresan. "Ideally, they should have discussed this prior to notification and announced a coordinated framework with simultaneous amendments." The problem of coordination become attenuated when the mergers involve banks or insurance companies — other regulators, like the Reserve Bank of India and the Insurance Regulation and Development Authority have their own sets of rules.
There are different issues for listed and unlisted companies. For listed companies, market prices move widely on M&A news and activity; the level of price shifts can sometimes be phenomenal. If the CCI asks an acquirer to shed part of the acquired company or a division for competitive reasons, share prices could undergo a dramatic change, enough to render the deal uneconomical.
"For unlisted companies, control could shift from investors like private equity firms to the promoters," points out Vohra. "How will the CCI deal with that?" So far, unlisted companies have been out of the ambit of regulators especially when it comes to M&A. But that could change now. Promoters planning to buy out other shareholders, not necessarily strategic ones, may also have to go to the CCI for approval.
It is early days yet, and it may be unfair to the CCI to ask questions about situations the competition regulator has yet to face. But most agree that a pragmatic view is crucial to its effectiveness. Most say that such an approach will likely prevail; others are keeping their fingers crossed.
(This story was published in Businessworld Issue Dated 23-05-2011)