INTRODUCTION
The Insolvency and Bankruptcy Code, 2016 (IBC) marked a watershed in the corporate restructuring space in India[1]. The IBC brought a creditor driven resolution model to India aimed at maximizing the value of stress assets in a time bound manner. While IBC provides opportunities for the acquisition of distressed assets, it also brought such acquisitions into the realm of another key regulator, the Competition Commission of India (CCI)[2].The mandate under Section 5 and Section 6 of the Competition Act, 2002 (Act) for the CCI is to ensure that combinations arising from the IBC driven acquisition do not create or enhance dominant position in the market[3].
This blog examines the process and manner in which the CCI approach reviews stress asset acquisitions in light of IBC, analyzes the developing judicial principle from CCI’s most notable cases and ultimately assesses whether this approach has appropriately balanced early resolutions and market competition.
THE LEGAL FRAMEWORK: IBC COMPETITION ACT INTERACTION
The Competition Act, 2002 enables the CCI to monitor combinations, which are defined under Section 5 to be mergers, amalgamations or acquisitions where financial or asset base thresholds[4] is exceeded. Section 6 requires the parties to notify CCI of ante-Merger without delay when the above conditions are satisfied unless exemptions are provided under the law.
Under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a ‘Resolution Plan’ may provide for the acquisition[5], merger or amalgamation of companies or companies.
In 2017, the Ministry of Corporate Affairs (MCA) notified “combinations based on approved resolution plans under section 31 of the IBC” under Section 54 of the Competition Act, 2002 which are exempted from the 210-day waiting period[6]. However, according to this exemption to notify the Competition Commission of India (CCI) before the resolution approved was submitted to India National Company Law Tribunal (NCLT)[7]. This exemption was intended to ensure merchants that the review by the CCI, however reasonable could prolong any process that is surely sensitive to time.
CCI’s APPROACH TO ACQUISITIONS OF STRESSED ASSETS
- EXPEDITIVENESS AND ALIGNMENT TO IBC TIMELINES
With the CCI having embarked upon a new regime of merely investigating IBC led mergers in the interests of expediency, the CCI has exhibited flexibility in processing IBC related combinations by granting expedited approval through its Green Channel or fast-track process[8]. UltraTech Cement Ltd/Binani Cement Ltd (2018 SCC OnLine CCI 32) is a great example where the CCI cleared the acquisition in 22 days, recognizing that speed is of the essence with insolvency resolutions. The CCI noted that a regulatory delay more than a week or two could frustrate the essential objective of the IBC in maximizing value[9].
- THOROUGH EVALUATION OF MARKET IMPACTS
As defined under Sections 2(r), 2(s), and 2(t) of the Competition Act, the CCI reviews combinations using the concept of a ‘relevant market’[10]. For acquisitions of stressed assets, it generally determines relevant product and geographic markets based on what is substitutable, as well as demand-side considerations.
For example, in JSW Steel Coated Products Ltd./Asian Colour Coated Ispat Ltd. (2019)[11], the CCI looked at market shares in the galvanized steel ‘market’ and determined that the acquisition would not confer a dominant position given that combined market shares remained moderate, and sufficient competitive constraints existed.
In Adani Ports and Special Economic Zone Ltd./Dighi Port Ltd. (2020)[12], arising out of an IBC process, the CCI undertook an analysis of competition among port operators in Maharashtra’s coastal area. The Commission found that Adani Ports held a significant market power, but that due to geographic separation and operational distinction there were no AAEC concerns.
- GREEN CHANNEL AND DE MINIMIS EXEMPTIONS
In 2019, the CCI established the Green Channel Route to facilitate review, which allows combinations to be automatically authorized when there are no horizontal or vertical overlaps[13]. While many Chapter 11 transactions encompass overlaps of some type, smaller acquisitions of distressed assets have been able to take advantage of this route.
In addition, the de minimis exemption in the 2017 MCA notification enabled combinations to proceed without creating a need for formal CCI notification when the target’s Indian assets were under ₹350 crore or its turnover was below ₹1,000 crore[14]. As a result, there have been many smaller acquisitions of distressed assets under the IBC process that were able to proceed without CCI notification[15].
JURISPRUDENTIAL THEMES IN CCI’s REVIEW
- BALANCING MARKET EFFICIENCY AND MARKET FAIRNESS IN INSOLVENCY
The jurisprudence of CCI seeks to strike a balance between market efficiency and market fairness in insolvency scenarios. In its public statements following the approval of a merger or takeover under the IBC, CCI acknowledges that acquiring an entity in distress will often foster consumer welfare by restoring productive capacity as a result of merger efficiencies[16].
In Lupin Limited/Ang Lifesciences India Ltd. (2022)[17], the CCI repeated the caveat that the “failing firm” defense should be used sparingly in determining merger cases being simply in insolvency proceedings does not provide immunity from examination. The merging party must demonstrate that the “failing” party would exit the market without the merger, and also that no alternative less anti-competitive applies.
- CHANGING APPROACH TO FAILING FIRMS
Traditionally, competition authorities assess failing firms using a prescribed “failing firm test.” The CCI has also moved toward applying this logic in assessing mergers. The test considers whether:
- The target is unable to service its debts.
- There is no plausible prospect that the target could be successfully restructured without the merger.
- The target’s assets would exit the market if the target was left to be liquidated[18].
In the context of an IBC process where the corporate debtor is already before the NCLT, the first two limbs of the test are typically satisfied. The third limb of the test looks specifically to whether liquidation of the asset will reduce competition, and in transactions like Tata Steel BSL Ltd./Bhushan Steel Ltd. (2018)[19], the CCI held the acquisition to be pro-competitive, as it maintained production capacity and jobs.
- THE EMERGENCE OF SECTORAL TRENDS
Sectoral examinations of CCI orders uncover a concentration of IBC-fueled acquisitions primarily in steel, cement, power, and infrastructure historically sectors with significant barriers to entry and capital intensity, and where the risks of oligopolistic coordination are prevalent[20]
For example, in Vedanta Limited/Electrosteel Steels Ltd (2018)[21], the CCI acknowledged in its review that Vedanta may not have been a significant player in the steel market, but entry through the acquisition had the potential to enhance competition. Similarly, for transactions involving Aditya Birla Group/JP Cement Ltd[22], the CCI scrutinized regional concentration in the cement industry in its review to ensure consumer welfare would be maintained.
COMPARATIVE AND POLICY CONSIDERATIONS
Comparative perspectives from other Asian jurisdictions would indicate a common trend towards pragmatic merger control when legal interests collide against an insolvent debtor[23]. The comparative literature on insolvency law reform in East Asia regards the progressive alignment of insolvency law and competition law[24]. The aim of the alignment is to achieve a balance between rescuing and revitalizing a business and consumer welfare[25]. The CCI would appear to be going down a similar path, combining statutory flexibility with sectoral scrutiny[26].
The CCI has also been working in concert with the Insolvency and Bankruptcy Board of India (IBBI) in information-sharing regarding the nature of market structure and initial discussions prior to formal filing as a creditor[27]. This cooperation adds to regulatory uncertainty for resolution applicants and investor in stressed business assets[28].
CONCLUSION
The CCI’s approach to stressed-asset acquisitions under the IBC has transformed from a largely cautious and supervisory role to one of informed facilitative processes[29]. Through fast tracking procedures, careful assessment of market transactions based or related to distressed firms, and establishing new jurisprudence, the CCI has balanced two competing outcomes, i.e., ensuring timely resolution of distressed firms and preserving competition in structured industries[30].The overlap of insolvency and competition law exhibits the overall maturity of regulatory framework currently existing in India[31]. The role of the CCI will become pivotal in ensuring a wave of consolidation arising from the IBC will not turn out to be anticompetitive but, instead result in sustainable industrial revival[32].
Ultimately, at its core, acquiring bankruptcy in India is not simply a financial expedient it is an economic act governed by regulation subject the dual guardianship of efficiency and fairness[33].
Author(s) Name: Author(s) Name: Lavanya (UILS, Chandigarh University , Mohali(Punjab))
References:
[1] Insolvency and Bankruptcy Code 2016 (No 31 of 2016).
[2] Competition Act 2002 (No 12 of 2003).
[3] ibid ss 5–6.
[4] ibid s 5.
[5] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, reg 37.
[6] Ministry of Corporate Affairs, Notification S.O. 988(E), 29 March 2017.
[7] ibid.
[8] Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (as amended in 2019), reg 5A.
[9] UltraTech Cement Ltd/Binani Cement Ltd (2018) SCC OnLine CCI 32.
[10] Competition Act 2002, ss 2(r), 2(s), and 2(t).
[11] JSW Steel Coated Products Ltd/Asian Colour Coated Ispat Ltd (2019) SCC OnLine CCI 61.
[12] Adani Ports and Special Economic Zone Ltd/Dighi Port Ltd (2020) SCC OnLine CCI 5.
[13] Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations 2019, reg 5A.
[14] Ministry of Corporate Affairs, Notification S.O. 988(E) (n 6).
[15] Ranjeet Singh, Nemiraja Jadiyappa and Garima Sisodia, ‘Bankruptcy law, creditors’ rights and financing choices: Evidence from a quasi-natural experiment in India’ (2021) Applied Economics https://discovery.researcher.life/article/bankruptcy-law-creditors-rights-and-financing-choices-evidence-from-a-quasinatural-experiment-in-india/31381bce72f73fb2ade551bebf4b045a
[16] Competition Act 2002, s 20(4).
[17] Lupin Ltd/Ang Lifesciences India Ltd (2022) SCC OnLine CCI 11.
[18] OECD, ‘Failing Firm Defence in Merger Control’ (2020).
[19] Tata Steel BSL Ltd/Bhushan Steel Ltd (2018) SCC OnLine CCI 31.
[20] Competition Commission of India, ‘Annual Report 2020–21’.
[21] Vedanta Ltd/Electrosteel Steels Ltd (2018) SCC OnLine CCI 33.
[22] Aditya Birla Group/JP Cement Ltd (unreported, CCI Case File No C-2016/10/438).
[23] OECD, Failing Firm Defence in Merger Control (Organisation for Economic Co-operation and Development 2020).
[24] Roman Tomasic (ed), Insolvency Law in East Asia (Routledge 2016) https://discovery.researcher.life/article/insolvency-law-in-east-asia/42518cf65c8c3c71bc4034597fb1f581
[25] ibid.
[26] Competition Commission of India, Handbook on Merger Review (2021).
[27] Memorandum of Understanding between the Competition Commission of India and the Insolvency and Bankruptcy Board of India (2020).
[28] Competition Commission of India, Annual Report 2020–21 (CCI, New Delhi).
[29] UltraTech Cement Ltd/Binani Cement Ltd (2018) SCC OnLine CCI 32.
[30] Tata Steel BSL Ltd/Bhushan Steel Ltd (2018) SCC OnLine CCI 31.
[31] Ministry of Corporate Affairs, Notification S.O. 988(E), 29 March 2017.
[32] Competition Commission of India, Order in ArcelorMittal India Pvt Ltd/Essar Steel India Ltd (2018) SCC OnLine CCI 42.
[33] Author’s conclusion based on review of Competition Act 2002 and IBC 2016 jurisprudence.
