Introduction
In India, a notification[1] in respect of a combination under green channel route is filed by the parties in accordance with Section 6(4) of the Competition Act, 2002 (“Act”). As green channel route aims to ensure a speedy, transparent, and accountable review of combinations, the parties are instantly granted deemed approval of the Competition Commission of India (“CCI/Commission”) upon filing of the notice and are not required to observe any standstill obligations[2].
On September 09, 2024, the Ministry of Corporate Affairs, Government of India (“MCA”) issued the Competition (Criteria of Combination) Rules, 2024 (“Green Channel Rules”) to give effect to the provisions relating to green channel notification under the Competition (Amendment) Act, 2023. The MCA vide Green Channel Rules codified the criteria for a combination to avail the benefits of green channel route in India and introduced notable changes in the definition of an ‘Affiliate’ of the parties to the combination. An ‘Affiliate’ now also includes all those entities where a party may have a right to access the commercially sensitive information of such entities. Essentially, an exercise of determining whether a combination qualifies for a green channel route or not will now also encompass all such entities wherein the parties have a right to access the commercially sensitive information.
Criteria for accessing green channel route
In terms of Section 6(4) of the Act, a green channel notification is filed by the parties only if the combination satisfies the criteria stipulated under Rule 3 of the Green Channel Rules and is not otherwise exempted[3] under the Act. As per Rule 3(1) of the Green Channel Rules, a combination under green channel route may be filed, if the parties to the combination, their group entities, and their affiliates:
i. do not produce or provide similar or identical or substitutable product or service (“Horizontal Linkage”); or
ii. they are not engaged in any activity relating to production, supply, distribution, storage, sale and service or trade in product or provision of service:
a) which are at different stage or level of production (“Vertical Linkage”); or
b) which are complementary to each other (“Complementary Linkage”).
Prior to Green Channel Rules, the aforesaid criteria were stipulated at Schedule III to the erstwhile Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (“Old Regulations”)[4] and were required to be analyzed “considering all plausible alternative market definition”. However, Rule 3(1) of the Green Channel Rules does not stipulate such requirement. Thus, if the parties, their group entities, or their affiliates exhibit any degree of Horizontal, Vertical and Complementary Linkages (as stated above), irrespective of the market definition(s), then accessibility to a Green Channel route may not be availed.
Assessment under Green Channel Rules
Accessing green channel route in India for combinations, the parties to the combination are required to ensure that the criteria stipulated at Rule 3 of the Green Channel Rules are met. The first step involves identification of all the group entities and affiliates of all the parties (acquirer as well as target) in accordance with Rule 3(2)(a) and Rule 3(2)(b) of the Green Channel Rules, respectively. The second step involves determining if there exists any Horizontal, Vertical and Complementary Linkages between the parties, their group entities, and their affiliates.
As per Rule 3(2)(b) of Green Channel Rules, the parties to the combination and their group entities would include – i) the ultimate controlling person of the acquirer and other entities forming part of the same group; ii) the target entity and its downstream entities forming part of its group; and iii) the enterprises being merged or amalgamated, and their controlling persons, and entities forming part of their group.
Whereas as per Rule 3(2)(b) of the Green Channel Rules, an affiliate of a party would include all those enterprises wherein the party has – i) 10% or more of the shareholding or voting rights; or ii) right or ability to have a representation on the board of directors either as a director or as an observer; or iii) right or ability to access commercially sensitive information of the enterprise.
Shift in the status of an ‘Affiliate’ under Green Channel Rules
Prior to Green Channel Rules, affiliates were determined in view of the ‘materiality thresholds’ provided at Item 6.6 of the Notes to Form – I. The tests included – i) direct or indirect shareholding of 10% or more; or ii) right to nominate a director or observer to the board; or iii) right or ability to exercise any special right (including any advantage of commercial nature with any of the party or its affiliates) that is not available to an ordinary shareholder. Now, under the Green Channel Rules, the third criteria regarding any special rights not available to an ordinary shareholder has been replaced with a right or ability to access commercially sensitive information. However, what entails ‘commercially sensitive information’ has not been defined under the Green Channel Rules, the Act, or any other related regulations. This shift in the definition of an affiliate has broadened the scope of the assessment undertaken by the parties to map the Horizontal, Vertical and Complimentary Linkages for availing the benefit under the green channel route. Besides, the absence of any yardsticks or reference point for interpreting what would constitute a ‘commercially sensitively information’, may also have the potential of making the accessibility of a green channel route more distant.
Conclusion: Implications of filing incorrect form
A deemed approval under green channel route is not absolute and is subject to scrutiny of the CCI/Commission. An inquiry thereto may be initiated within a period of one year from the date of filing the notice but not beyond that.[5] Thus, parties to the combination before filing a notice under green channel route need to ensure that the proposed combination qualifies all the criteria mentioned at Rule 3 of the Green Channel Rules. In case of default, the CCI/Commission has powers to declare such notice void ab initio and to pass any order as it may deem fit.[6] The decisional practice of CCI/Commission, in this regard, has seen imposition of penalty upon acquirers under Section 43A and/or Section 44 of the Act for filing incorrect notice(s) under green channel route.[7] Therefore, to avoid hefty penalties under the Act, it is imperative for the parties to file proper notice under green channel route with the CCI/Commission.
The shift in status of an ‘Affiliate’ under the Green Channel Rules would now require parties to closely analyze what may or may not constitute as a right or ability to access commercially sensitive information. Any strategic investments by the parties and rights acquired as minority investor would also have to be carefully analyzed as the likelihood of the term ‘commercially sensitive information’ being interpreted broadly may not be ruled out. Be that as it may, the parties in any case will have an option of pre-filing consultation with the CCI/Commission before filing a notice.
Authors:
Aditya Bhardwaj, Partner
Rinki Singh, Senior Associate
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[1] In terms of Regulation 5(5) of the Competition Commission of India (Combinations) Regulations, 2024, a Form I notice is to be filed under the green channel route.
[2] In terms of Section 6(2A) of the Act, the parties after filing the notice under a non-green channel route are required to observe the standstill period of 150 days and/or approval of the CCI/Commission before consummating the combination.
[3] Exemptions are provided under – i) Notifications issued by the MCA under Section 54 of the Act; ii) Competition (Criteria for Exemption of Combinations) Rules, 2024; iii) the Competition (Minimum Value of Assets or Turnover) Rules, 2024 (De Minimis Exemption); and iv) Section 6(9) of the Act.
[4] ‘Green Channel’ route was introduced by the CCI/Commission vide Notification dated 13.08.2019. Regulation 5A and Schedule III were inserted in the Old Regulations.
[5] Section 20(1) of the Act
[6] Section 6(6) of the Act
[7] C-2023/04/1021 and C-2022/12/995