INTRODUCTION
To determine which combinations are supposed to be regulated Section 5 of the Competition Act, 2002 states the different types of combinations and their value threshold. The determining factors under Section 5 are the assets’ value and the parties’ turnover. The term ‘turnover’ under Section 2(y) of the Competition Act includes the “value of sale of goods or services”. All Mergers and Acquisition (M&A) transactions that cross the threshold given under Section 5 must be notified to the Competition Commission of India (CCI) as given under Section 6 of the Act. Failure to provide a notification under Section 6(2) to the Commission invites an order under Section 43A of the Act for gun jumping. After this, regardless of whether the combination results in any appreciable adverse effect on competition, the party can have a penalty imposed upon them which can be one per cent of either the total turnover or the assets, whichever is higher. Therefore, parties in an M&A transaction must be very careful in calculating the value of their assets and their turnover to align with the law and avoid any penalty from the CCI.
EXEMPTIONS AND THEIR CONSEQUENCES
All combination transactions are not supposed to be notified to the CCI. The onus of determining whether the parties are bound to notify the CCI of their combination transaction is on the parties. Parties must determine whether they come under the various exemptions under the Act and the combination regulations. One of the exemptions particularly relevant to the calculation of turnovers is the de-minimis exemption.
The de-minimis exemption is an exemption that was notified by the Ministry of Corporate Affairs[1] under which a transaction that normally comes under Section 5 of the act does not have an asset value of more than rupees three hundred and fifty crores in India or turnover of more than rupees one thousand crores in India is exempt from the provisions of Section 5 of the Act. Such an exemption is usually used to ensure that there is a lesser burden on the judicial or quasi-judicial authority and more attention is given to the more relevant cases.
However, this has not been working according to plan as due to a lack of guidance parties have been miscalculating the value of their assets and turnovers and mistakenly believing themselves to be covered under this exemption. In an order for proceedings under section 43A against Massachusetts Life Insurance Company,[2] the transaction was not notified as the parties believed it qualified for the De Minimis exemption. However, the CCI stated that the wrong method was used and clarified the method of calculation for assets as well as turnover.
Further in an order for proceedings against Axis Bank Limited under Section 43A, the transaction was not notified and so the Commission initiated proceedings against Axis Bank. Axis Bank argued that its decision not to notify was the result of a bona fide error in calculating its turnover which made the De Minimis exemption inapplicable. The CCI held that bona fide error cannot be an excuse to not report a transaction as S.43A uses the word ‘failure’ and does not account for such justifications.[3]
Therefore, we see that contemporarily there is still confusion as to how the calculation for assets and turnovers is supposed to be done.
INADEQUATE GUIDANCE FOR CALCULATION
Initially, there was no guidance on how companies should calculate their turnover. The CCI gave the first guidance through the Combination FAQs[4] which provided a lot of clarity to the parties when they were trying to determine whether their M&A transaction was to be notified. While the act specified the amount of the value of the assets and turnover that needed to be considered to come under its ambit, the act never specified how this calculation was to be done.[5] The combination FAQs that were based on European jurisprudence[6] guided how the calculation of turnover and assets was to be made.
The Combination FAQs present the information divided by the enterprise-level threshold and the group-level threshold. Each category describes assets and turnovers based on whether there is an acquisition, a merger, or amalgamation, and in case a person acquires control over an enterprise when that person already has control over another enterprise which may be in the same competitive market. The Combination FAQs along with the Combination Regulations have given some clarity as to how turnovers are to be calculated but as we can see from recent cases discussed above, they are not enough and the competition regime would benefit from a clear-cut definition of how they must be calculated.
The CCI recently on 22 December 2023, issued a draft of the CCI (Determination of Turnover or Income) Regulations, 2023.[7] These draft Regulations describe how the turnover for an enterprise is supposed to be determined, it further also provides how the income for an individual is supposed to be calculated. These draft regulations are a step in the right direction as there is a clear need for clarification on how calculation for turnovers must be done but there are many aspects of calculation of turnovers that have to be examined, like the concept of relevant turnover and penalties imposed thereof.
CONCLUSION
Although there seem to be efforts being made to ensure that there are no miscalculations of assets or turnovers under Section 5 of the Act, there are still cases that show that clarity is still needed. The new draft regulations provide guidance, with the exclusion of indirect taxes, trade discounts, and intra-group sales from turnover for enterprises under Section 27(b) of the Act. Along with clarifications on the law the CCI may have to advocate for companies to use the services of a pre-filing consultation as this will reduce the violations of the Competition Act, 2002. The draft Regulations are not in force and are currently open to comments from the public so they are subject to change. Hopefully after receiving comments from the public, there will be more detailed regulations for calculation of turnovers with more clarification of total turnover and relevant turnover.
Author(s) Name: Kunal Mehta (University School of Law and Legal Studies,GGSIPU)
Reference(s):
[1] Ministry of Corporate Affairs, S.O. 988(E).
[2] See, in re: Proceedings under Section 43A of the Competition Act, 2002 against Massachusetts Mutual Life Insurance Company, Ref. No. M&A – 2021/01/810 (CCI)
[3] See, in re Proceedings Against Axis Bank Limited under Section 43 A, (CCI).
[4] Combination FAQs, Competition Commission of India, <https://www.cci.gov.in/combination/faqs> accessed 24th December, 2023.
[5] Section 5, Competition Act, 2002.
[6] Council Regulation (EEC) No 4064.
[7] Draft CCI (Determination of Turnover or Income) Regulations, 2023.
