Assessing the Viability of Green Channel Route for Combination Approvals in a Resolution Plan

By Priya Ganotra & Sharvari Manapure [1]

INTRODUCTION

In India, the Competition Act 2002 (hereinafter “Act”) follows the philosophy of fostering competition and protecting markets in India from anti-competitive actions. However, in any market, a firm may find it difficult or unable to deliver its goals and business activity can fail, resulting in default in repayment of debts. This default is a legitimate result of a firm’s business operations and may result in insolvency. However, the revival of all insolvent firms in a market is not always possible. Firms may look for means to restructure a defunct firm and work towards its revival in such a case. This puts into effect the operation of the Insolvency and Bankruptcy Code 2016 (hereinafter “I&B Code” or “Code”) works as a market-directed regulation offering a time- bound resolution mechanism.

Consequently, the use of mergers/amalgamations or acquisitions may be done to revive such an insolvency enterprise in the Code. In such a case, the regulations concerning “combinations” become relevant as many times resolution plans can include combinations as a part. While the Competition Commission of India (hereinafter “CCI”) is the entrusted body to overlook the approval of combinations, the Act and the I&B Code need to work in coordination.

In this article, the author(s) explores the interplay between the Act and the I&B Code regarding the approval of combinations in a resolution plan. The article examines the theory and concept behind such interaction. It determines the viability of the green channel route for approving combinations. The authors conclude and recommend the ideal mechanism which must be followed to obtain combination approvals from CCI for combinations arising out of the Corporate Insolvency Resolution Process (hereinafter “CIRP”).

BACKGROUND OF REGULATION OF “COMBINATIONS” BY CCI AND INTERACTION OF THE ACT AND I&B CDE

India’s competition law was enacted to understand that a firm has the freedom to undertake business activity but not refrain from other firms’ freedom to do the same. Since 2011, the Act has played a crucial role in reforming and regulating the merger regime. Mergers and acquisitions have become an integral part of the corporate and business sector and serve as a “restructuring tool” to enterprises. The Act has a specific set of provisions regulating “combinations,” which essentially includes mergers, amalgamations, and acquisitions when it comes to the competition law regime. In the Act, a combination is defined as the – “Acquisition of control, voting rights or assets, shares, acquisition of control by a person over an enterprise wherein such person may have a direct or indirect control on another enterprise involved in competing businesses, and mergers and amalgamations between or amongst the enterprises when the combinations exceed the threshold of the Act”.

The competition legislation in India is graded with a specific higher level of threshold limits to govern combinations within § five and §6. In the regime, every combination must obtain the CCI’s approval before finalizing the transaction. The CCI approval is given after it conducts an inquiry into the combination and forms a prima facie opinion as to whether a combination is causing or has any likelihood to cause an appreciable adverse effect on the market. [2] Interestingly, the Act also plays a significant role in administering combinations within the I&B Code. This interplay is witnessed because during the operation of CIRP, a resolution plan may involve a combination wherein a competitor attempts to acquire an insolvent company/corporate debtor, and this is the point of interaction between India’s insolvency and competition law.

When a combination forms a part of a firm’s proposed resolution plan, the resolution plan proposed in the CIRP must seek the CCI’s approval. This approval for I&B Code-driven combinations in a resolution plan by the CCI was first realized through the recommendations in the Report of Insolvency Law Committee of March 2018 (hereinafter “First Insolvency Committee Report”), which stated that CCI must approve combinations driven by the Code within 30 days from the date of filing a notice concerning such a combination.

However, the First Insolvency Committee Report failed to address the exact stage of sending such notice and its approval. This confusion was resolved through the I&B Code (Second Amendment) Act (hereinafter “Amendment Act”) in 2018 that added §31(4) to the I&B Code. According to §31(4), a resolution plan has to be approved by the CCI before it obtains the CoC’s approval. [3]

However, when the I&B Code was first enacted in 2016, the CCI’s approval was not explicitly given at a prescribed stage of the CIRP. Additionally, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 in its Regulation 37(1) mandated that the resolution process must obtain due approval of Central and State Governments and other authorities. However, no specific time was given for the same. Only after following the recommendations of the First Insolvency Committee Report a separate class of CCI’s approval to other statutory approvals given under §31 of the, I&B Code and a fast-track approval of combinations within a resolution plan was sought. The Amendment Act provided for such approval to be done before CoC’s assent.

The purpose of notifying a combination to the CCI is to investigate these combinations to check if they conform to § five and §6 of the Act. When an enterprise is insolvent, and a merger is taking place, it is vital to assess the impact of such a transaction. Hence, to prevent any anti-competitive impact and excessive market concentration, the CCI looks into the combination to evaluate possible adverse effects. Of course, suppose any combination is found to be causing an appreciable adverse effect on competition within the market or is likely to cause such an impact. In that case, the combination is deemed to be void. [4]

Further, if the CCI’s approval before CoC is based on the understanding that if after the completion of CIRP it is found that the combination has an adverse impact, the entire CIRP would be ruined at the end stage and would not give CoC the ample opportunity to find another resolution applicant offering a less anti-competitive [5] plan. We must note that the I&B Code is a time-bound legislative mandate that prescribes a limit of 270 days to finish CIRP and hence if a resolution plan fails in the end, the corporate debtor shall be pushed into liquidation thereby frustrating the Code’s objectives, value reduction of corporate debtor’s assets, and drop-in recovery rate. Hence, the Amendment allows the CCI to approve, or reject or modify a combination that is a part of a resolution plan (if required) before it obtains CCI’s approval to not derail from the I&B Code’s objectives as well.

In 2019, however, the CCI further took upon itself to streamline the merger control regime in India sought to deviate from its suspensory” model wherein the merger could not be implemented till it received CCI’s thumbs up and brought in the “green channel” route for seeking approval of combinations. In this voluntary model, automatic approval of mergers is officiated. Any enforcement order concerning its modification/prohibition is taken up afterward. This voluntary regime has been extended to the I&B Code-driven combinations as well. The parts ahead survey the concept of this green channel route in India w.r.t. their application to the combinations in a CIRP.

CCI’S GREEN CHANNEL ROUTE FOR COMBINATIONS

In July 2019, the Competition Law Review Committee Report (hereinafter “CLRC Report”) suggested a fast-paced regulatory for approval of mergers and acquisitions forming a part of combination notifications being sent to the CCI. This led to adopting the green channel route as a voluntary merger mechanism for combinations that are not likely to lead to an appreciable adverse effect on competition in the relevant market. According to the CLRC Report, the green channel route was given effect via insertion of Regulation 5A to the Combination Regulations 2011 by the CCI (Procedure concerning the Transaction of Business Relating to Combinations) Amendment Regulations 2019 (hereinafter “Amendment Regulations 2019”). [6] Additionally, in Schedule III of the Amendment, the parties are provided with the criteria/requirements they must fulfill to utilize the green channel route. Following Regulation 5A (1), the parties of specific categories must provide a declaration that their combination shall not result in an appreciable adverse effect in competition to the relevant market. Once the parties file a notification in this prescribed format and are subject to verification of the details provided, and if the combination falls within specific categories, a combination will be deemed as approved by CCI upon its acknowledgment. Any combination that fails to meet these criteria would be deemed void ab initio by the CCI after being heard on the matter. [7]

In a simple sense, the green channel route constitutes a self-certifying and automatic system of combination approval wherein the parties to the combination can self-assess and undertake a pre- filing consultation with the CCI to ascertain if they qualify for the merger mechanism. The privilege of green channel approval has also been extended to combinations within the I&B Code’s administration of an insolvent entity. The objective of including green channel approval in I&B Code-driven combinations was to reduce the transaction costs arising due to a merger which are unlikely to lead to an appreciable adverse effect on competition.

It is crucial to understand that the green channel approval is based on “failing firm defense.” The failing firm defense mechanism is an exception to the general acceptance of combinations within the Act. Herein, the anti-competitive effects of a failing firm are equated alongside the anti- competitive behavior of its acquiring competitor firm. If it is revealed that the firm’s anti- competitive effects do not outweigh the anti-competitive effects of the dominant acquiring firm, then an approval grant to such a combination is provided. In such a case, a three-stage test is relevant- firstly, whether the failing firm (insolvent entity) is about to exit the market because of financial agony; secondly, if there exists an alternative entity that wishes to acquire the failing firm and result in a less anti-competitive transaction, and thirdly, whether the firm would face imminent danger or be forced out of the relevant market such a merger’s absence. [8] If the answer to the three- stage test is affirmative, the combination is allowed.

ANALYZING COMBINATIONS IN THE CODE VIS-À-VIS GREEN CHANNELS

Though the green channel route is a shift from the suspensory model of competition law to a more voluntary regime, assessing the viability of green channel approval for combinations arising out of CIRP is vital. One must note that the enactment of the Act in India ensured that firms operate on a level playing field in the relevant market. Within §20(4)(k) of the Act, the “possibility of a failing business” shall be a determinant factor in ascertaining if a combination would be resulting in or likely to result in an appreciable adverse effect of competition within the relevant market structure. Additionally, even the Raghavan Committee Report 2000 argues that the law’s essence and spirit are for the preservation and promotion of competitive process that promotes efficiency and economic growth.

However, the failing firm defense mechanism within the green channel route does not even allow the CCI to scrutinize a merger since interim resolution plans automatically qualify for CCI’s approval. To date, CCI has approved sixteen interim resolution plans post regular scrutinization by the CCI through a case-to-case analysis- without applying the green channel route. This means that we are yet to witness a combination that leads to appreciable adverse effects on competition. Hence, no guarantee can be taken as to whether future resolution plans in a CIRP will not result in appreciable adverse effects. As mentioned earlier, the green channel route runs on self- certification. Hence, it will always be tough to determine the weight of a merger on the financially distressed firm and the relevant market. A voluntary mechanism cannot alone be used to determine a weight of such a transaction through self-assessment.

Additionally, CCI’s mandate is very crucial in a CIRP and has an independent role. If at all resolution plans continue to get a fast-track approval and its anti-competitive effects were realized at a later stage- the combination would require modifications or be declared void. In a scenario like this, the inconvenience to the CoC and I&B’s resolution procedure will be much more amplified. When a financially distressed firm is being considered for a combination- the intent is to revive the firm and survive. In a regular CIRP, a resolution plan is rejected a new one can be called for as the next best alternative. However, in a green channel route, the situation is not so. Thereby, troubled by an anti-competitive effect, the financially distressed firm may find itself detangling from such a merger and work towards separating its assets from the dominant. In actualization, this could be immensely troublesome for a firm already in a weak position and struggling in financial agony. This quickly deviates from core principles of the I&B Code and would also dilute the role of CCI in performing its essential functions.

CONCLUSION AND RECOMMENDATION

In recent times, the merger control regime in India has been shifting from suspensory to voluntary. This impacts the working of the CCI, the principles of the Code and will create a more complex regime for governance of combinations; instead of simplifying it. If the Amendment Regulations 2019 are applied uniformly, it will adversely impact the interest of stakeholders in CIRP and only increase prospects of liquidation if the firm seeks to disengage from the merger after fast-track green channel approval. This would derail from the primary intent of the operation of the I&B Code- making liquidation the last resort for an entity.

The CCI’s approval of the resolution plan before the CoC regularly helped maintain consonance between the laws and allowed I&B Code to obtain CCI’s approval at the earliest stage of a resolution plan. This provides for a level of coordination between the two laws. Nevertheless, the green channel approval may have a false sense of security since CCI has not rejected a combination. This increases the possibility of an adverse competitive impact on businesses, consumers, and disharmony between the operations of the laws.

In our opinion, the CCI must continue with its prudent practice of approving combinations and shall stay true to its independent, distinct role. Only because this prudent practice also allows the CCI to ensure the sanctity of the CIRP by allowing CoC to consider other resolution plans. Hence, the green-track approval may only be used as a tool for scrutinizing mergers/combinations but cannot substitute the entire procedure for approval. Hence, the Amendment Act for approval of combinations by the CCI is the ideal mechanism for CIRP, which shall result in a harmonious arrangement between the laws and subserve CCI’s commercial wisdom and independent role.

[1] Ninth Semester, B.A. LLB (Hons.), National Law University, Nagpur.

[2] Sonalika Ahuja, Regulating Combination Under Competition Law in India¸Taxmann, [2019] 112 taxmann.com 393 (Article).

[3] The Insolvency and Bankruptcy Code, 2016, Proviso to §31(4), inserted vide The Insolvency and Bankruptcy (Amendment) Act, 2018 (w.e.f. June 6, 2018).

[4] Id.

[5] Ribhav Pande, Notice of Combinations in Insolvency Resolution, NUJS Law Review, 14 NUJS L. Rev. 1 (2021), p. 8.

[6] The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Amendment Regulations, 2019, Reg. 2.

[7] Ribhav Pande, Notice of Combinations in Insolvency Resolution, NUJS Law Review, 14 NUJS L. Rev. 1 (2021), p. 19.

[8] Bhumesh Verma and Ishika Chattopadhyay, Green Channeling of CIRP’s: Pros and Cons., (2021) PL (CL) February 71.

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