The Competition Appellate Tribunal (COMPAT), in an order dated 26 August, set aside the penalty order of the Competition Commission of India (CCI) under section 43A of the Competition Act, 2002, against Thomas Cook (India) Limited (TCIL), Thomas Cook Insurance Services (India) Limited (TCISIL) and Sterling Holiday Resorts (India) Limited (Sterling).
TCIL, TCISIL and Sterling had notified the CCI seeking its approval for a proposed two-stage scheme of arrangement and amalgamation whereby the resort and timeshare business of Sterling would be demerged and transferred to TCISIL in the first step, and in the second step, Sterling with its residual business would amalgamate into TCIL. Separately, TCISIL acquired some 9 million equity shares of Sterling representing 9.93% of its equity share capital through open market purchases on the Bombay Stock Exchange (market purchases).
The parties did not notify the CCI regarding the market purchases, on the understanding that on a standalone basis, they did not qualify as a combination in view of a target exemption notification which exempts the acquisition of shares or voting rights of an enterprise having assets of not more than ₹2.5 billion (US$38 million) in India or turnover of not more than ₹7.5 billion in India.
Penalty by CCI
While the CCI approved the notified transaction, it imposed a penalty of ₹10 million based on its finding that the market purchases by TCISL were inherently related to the other steps of the overall transaction and could not be viewed as an independent exempted transaction.
The CCI held that under regulation 9(4) of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (combination regulations), it was envisaged that a business transaction could be achieved by way of a series of steps which are either interconnected or interdependent, and by implementing the market purchases, the parties had consummated a part of a “composite combination” without notifying the CCI or obtaining its approval.
The CCI also held that “mutual interdependence” of the steps was not necessary to determine a composite combination.
Setting aside the CCI’s penalty order, the COMPAT held that the CCI had failed to take cognizance of the fact that the two-stage scheme for demerger/amalgamation was not dependent on the market purchases, or vice versa. The COMPAT took the view that the passing of resolutions to approve the demerger/amalgamation as well as the market purchases by the boards of directors of the parties on the same day could not be made basis for holding that the actions were interdependent. Therefore, the mere fact that various transactions were executed in close proximity of the market purchases was not sufficient to deny the benefit of an exemption to the market purchases when seen individually.
The COMPAT also stated that a bare reading of the target exemption notification made it clear that the exemption “is not riddled with any condition”, thereby suggesting that even if a transaction is part of a composite combination, it need not be notified if exempted on a standalone basis.
Moreover, the COMPAT held that even if the CCI’s reasons for rejecting the parties’ argument regarding the applicability of the exemption were held to be correct, there was no valid ground or justification for sustaining the penalty because the violation, if any, was purely technical. The COMPAT observed that the notice to the CCI regarding the demerger/amalgamation had a categorical reference to the market purchases made earlier, and the parties had not suppressed the fact to obtain any advantage under the Competition Act.
Although the COMPAT steered away from laying down a clear objective test on the meaning of “composite combination”, the order seems to suggest that regulation 9(4) of the combination regulations is merely an enabling procedural rule that allows parties to file a single notice (and avoid multiple notices) in case of a series of steps or smaller individual transactions which are interconnected or interdependent on each other.
This would be converse to the CCI’s stand on “gun jumping” in many cases where a series of steps or transactions was involved, i.e. that the notice to the CCI should be made at the first step, even if individually exempt. Instead, the COMPAT order suggests that the parties are not required to notify the CCI of any step or transaction even if it forms part of a composite combination, if the step or transaction benefits from the target exemption on a standalone basis.
Upasana Rao is a partner at Trilegal and Aditi Halan is an associate. Trilegal is a full-service law firm with offices in New Delhi, Mumbai, Bangalore and Hyderabad.