Combination and its kinds

COMBINATIONS 
In general parlance understood as two or more enterprises combining together to give rise to a new venture. 
Combinations are defined under Sec 5 of the Act and are regulated in light of Sec 6 and 20 and the Combination Regulations. It is essential to understand the difference between mergers, acquisitions and amalgamations before understanding the significance of combinations in Competition Law.  

MERGER ACQUISATION and AMALGAMATION:
The legal definition of a merger states that “a merger requires the consolidation of two companies into a single entity with a new ownership and management structure.”
A merger helps companies to enlarge their reach, obtain increased market shares, and diversify their services 
An acquisition refers to a corporate transaction wherein a company purchases a portion or entire shares/assets of another company. The acquisition is ideally processed to take charge of the target company’s strengths and seize synergies.
An amalgamation is a type of merger in which two or more companies join their businesses to  create an entirely new company/entity. It is an adequate arrangement of two or more companies  that operates the same industry; thus; amalgamation plays a vital role in reducing the operational  cost. 

Historical Evolution of Mergers and Acquisition through ages 

• Sec 23 of the MRTP Act 1969 – Before any merger takes place, a prior  approval is required from the Government if merger leads to concentration  of economic power.  
• DPSP , Art 39(b) and Art.39(c) – whenever government makes an  economic policy, it shall be taken into consideration that it does not lead to  concentration of wealth / economic resources.
• Sec 30(a) to Sec 30(g) MRTP Act – provisions with respect to acquisition  and transfer of shares. 
• Economic Threshold principle employed in the MRTP Act. This  essentially means that if a company reaches an economic threshold, then it  would be discouraged from taking up more acquisitions and mergers.
  • In 2011 Sec 5 came into force 
  • In 1991, the relevant provisions of the MRTP Act with reference to mergers in Chapter III, was transferred to Company Act – Sec 108 A to 108 H.
  • Relevant provisions of MRTP wrt Acquisition, control and transfer of shares was transferred to SEBI regulations (created in 1992) – SEBI take over code 
  • In 2002 –Sec 5 contemplated, 2011 Sec 5 came into picture.
  • Company Act mandates that scheme of amalgamation needs to be sent to SEBI,  Tax Authorities, CCI etc.
    • Deemed Approval as an evolutionary legality.
      Kingfisher Airlines Case
      In 2007, Kingfisher Airlines acquired a 26% equity stake in Air Deccan and became the largest single shareholder in Deccan Aviation Ltd. It was agreed that Kingfisher would continue to serve the corporate and business travel while Air Deccan would focus on serving the low fare segment but with improved financial prospects for both carriers.
      Kingfisher later increased its stake to 46%, and took control of the management of Air Deccan, upgrading it to a value-based airline with higher airfare and repositioned it as ‘Simplify Deccan’. Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity from April, 2008. Following the merger of Deccan with Kingfisher, in August 2008, Kingfisher renamed Deccan as Kingfisher Red. After the merger, the company has a combined fleet of 71 aircrafts, connects 70 destinations and operates 550 flights in a day. The combined entity has a market share  of 33%.
      Benefits
      The key benefits to Kingfisher Airlines and Air Deccan on account of this were as under: 
      Legally, if an airline wants to operate overseas it must have a domestic status of having operated for 5 yrs and therefore in case of kingfisher operating overseas became easier. 
    • Besides, operational synergies (engineering, inventory management and ground handling services, maintenance and overhaul), the management and staff of both the airlines would be integrated. They would be stronger vis-à-vis lessors, aircraft manufacturers, and will also spend less on training and employees. Costs would also reduce which is associated with maintenance of aircraft. The savings in cost would be lower by about 4-5% (Rs 300 crores).
    • The merger would create a more competitive business in scale and there would be scope to  emerge as market leader.
      
      Critical Analysis: Kingfisher Airlines-Deccan
      The Kingfisher Airlines acquisition of Air Deccan is another case of underestimating the  challenges of merging two carriers. It is a venture that has proved to be costly. Removing Air  Deccan as an independent operator took out the airline that was most responsible for the irrational  fares in the market place and, to this extent, it restored some pricing discipline which advantaged  the entire industry.
      However, integrating such different carriers (one, a classic low-cost airline and the other a 5 star carrier), has proven to be extremely difficult. The huge combined network and distinct inflight products of the two carriers, has created duplication and confusion about the brand. This has been damaging to Kingfisher, with repercussions for its financial performance. The combined entity today has a large network and diverse operations that are proving to be hard to manage.

Combinations – Kinds: 

Three main kinds of combinations (refer the threshold from sec 5) 

• Acquisitions (Sec 5(a))- When a company is trying to acquire a target company. It occurs when one company acquires another with the permission of its board to do  so. Companies pursue acquisitions for several purposes. First, the acquisition may result in the company increasing its market share. The acquired company may also provide additional needed facilities to the acquiring company. For purpose of the Act, acquisition is defined under Sec 2(a) of the Act, which talks about two types of acquisition, direct (having direct involvement in the process, eg. Owing shares) and indirect (eg. Owning shares through a subsidiary company). In India, the process of acquisition is guided by SEBI and SEBI Regulations. 
• Control (Sec 5(b))- It is considered as controlling the affairs or management by one or more enterprises, either jointly or singly, over another group or enterprise.  It is regulated by the Take Over Regulations, the SAST Regulations and SEBI Regulations.  
• Mergers or Amalgamation (Sec 5(c)) – A merger occurs when two separate entities combine forces to create a new, joint organization. A merger involves the mutual decision of two companies to combine and become one entity. The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. An amalgamation is distinct from a merger because neither of the combining companies survives as a legal entity. Rather, a completely new entity is formed to house the combined assets and liabilities of both companies. These are regulated by Sec 230-240 of the Companies Act.  

When acquisition, Mergers or Amalgamation would constitute a Combination :

When in individual :

• If the parties to that process have an asset of more than 1000 Cr or turnover of more than 3000Cr inside India or
• If it is an entity having operation inside & Outside India ,
  • it has an asset of more than 500 million $ including at least 500 crore in India or a turnover of 1500 Million USD of which at least 1500 crore in India The Value of Asset & Turnover is based on Book Value.

When in Group, If one of the parties of Combination belongs to a Group which control it,

• The Threshold limits is 4,000 Cr in terms of asset & 12,000 Cr in terms of Turnover. If the group has asset or turnover inside & outside india then the threshold limit is 2 billion $ of assets or 6 billion $ of turnover.

Procedure to be followed for the combination :

Any person or enterprise proposes to enter into combination shall give notice to competition commission in prescribed form within 30 days to

• Approval of the Board of Directors of proposal relating to merger or amalgamation
• Execution of any agreement relating to acquisition or acquiring control
• No combination shall come into effect until 210 days from the day on which notice has been given to commission or order has been passed

Procedure for Investigation into Combination by CCI

Step 1

• The CCI will issue a notice to the parties to the combination to reply within 30days of such combination for not declaring it as Void .
• The CCI will direct the Director General to submit a report on combination, on receipt of such report, If the CCI is satisfied that the combination has an Adverse effect on competition, it can pass the following order

Step 2 (Section 31)

• It can direct the combination shall not be in effect
• If the Adverse effect can be rectified by suitable modification the CCI will order such modification should be performed by the parties. ( In this case the parties shall submit the modified combination with in 30 Working days if the CCI agrees with the modification, It can accept the Combination)

Step 3

 If the CCI is not satisfied by the modification effected by the parties, It can grant 30 Days further to the party to accept that modification proposed by the commission.

Step 4

 If the part still falls to accept the modification the commission can declare the combination as void as well as it can impose such penalties mentioned in the Act ( 1 % of Turnover)