Reshaping “On-Market Purchases” in India: Recent Amendments and its Implications

A balanced approach that ensures operational flexibility, while safeguarding competitive integrity and market fairness is crucial.

Introduction

In 2024, the parliament of India introduced transformative changes to the merger control regime under the Competition Act, 2002 (Competition Act). In a welcome move, these reforms mark a pivotal shift, and include streamlining the regulatory process of on-market purchases and aligning it with global best practices. In this article, we explore the evolving landscape of the Competition Commission of India’s (CCI) scrutiny of on-market purchases (including open offers), challenges faced by investors in the pre-amendment framework and benefits (or hurdles) that the amendments offer to India’s mergers and acquisitions (M&A) landscape.

Prior to the amendment, all on-market purchases (including open offers), which triggered the jurisdictional thresholds and were not otherwise exempt, were subject to the CCI’s suspensory regime until the regulator reviewed and approved the transaction. Such on-market purchases could either be standalone transactions or interconnected to a larger set of transactions, and if such transactions were consummated without CCI’s approval, the transacting parties would face the risk of significant gun-jumping penalties. The rationale for this suspensory regime was to pre-emptively deter M&A transactions that could distort competition or cause irreversible harm to the free-market business environment.

For instance, in CCI v. Thomas Cook (India) Ltd.¹, the Supreme Court of India (Supreme Court) upheld the penalty imposed by the CCI on the parties for gun-jumping and not complying with the standstill obligations prescribed under the Competition Act. Among other steps, the proposed transaction involved an open offer by Thomas Cook to purchase up to 26 per cent of the equity share capital of Sterling Holiday Resorts and on-market purchases of ∼10 per cent shareholding of Sterling Holiday Resorts. Thomas Cook, prior to notifying the CCI, purchased ∼10 per cent shareholding of Sterling Holiday Resorts from the open market. The CCI held that the on-market purchases were interconnected and interdependent to the overall transaction, and thus, imposed a penalty on the parties for gun-jumping. Similarly, in SCM Soilfert Ltd. v. CCI², the Supreme Court upheld the CCI’s decision to impose a penalty for gun-jumping on SCM Soilfert Limited and Deepak Fertilizers and Petrochemicals Corporation Limited for, inter alia, failing to notify prior to their acquisition of shares in Mangalore Chemicals and Fertilizers Limited from the open market.

The imposition of standstill obligations on such time-sensitive transactions created operational bottlenecks, delaying critical timelines and risking price volatility in the target’s share price. The requirement to notify the CCI and defer consummation till approval often rendered such on-market purchases unviable or penalties inevitable. Further, such delays would undermine the strategic intent and commercial viability of the transaction, adding layers of complexity to an already challenging process. Specifically, in the case of hostile takeovers, which trigger an open offer, acting swiftly is crucial for the acquirer to successfully consummate the contemplated transaction.

In a developing economy like India, which aims to attract investors with programs such as ease of doing business, the pre-amendment framework posed significant challenges due to the risks involved in relation to on-market purchases. Navigating the complexities imposed by the standstill obligations required immense strategic planning to avoid premature disclosure of sensitive information leading to price fluctuations, often slowing down the whole process. The approval process was often time-consuming, and during that interval, the stock price could fluctuate, leading to undermining the commercial and strategic intent of the on-market purchases. The inefficiencies of this process called for a more agile and investor-friendly approach that would align India’s regulatory framework with global standards and foster confidence among market participants.

In light of this, the Government of India on 9 September 2024 introduced a new provision, i.e., Section 6-A, Competition Act, which allows acquirers derogation from standstill obligations for open market purchases and other transactions undertaken on a regulated stock exchange, thereby allowing them to capitalise on market opportunities. To appreciate the impact of the recent amendments, it is crucial to first understand the framework within which on-market purchases operate, as set out below.

SEBI framework

The Securities and Exchange Board of India (SEBI) has established clear guidelines for scenarios where acquisitions cross certain thresholds. This creates a balance between acquirers’ strategic intent and protection of shareholder interests.

While on-market purchases are focused on quick and discreet acquisition, certain regulatory thresholds require the acquirer to make an open offer to the shareholders. Under the extant regulations, an open offer is made by the acquirer to the shareholders of a listed target company inviting them to tender their shares in the target company at a particular price. The rationale of an open offer is to provide the existing shareholders of the target company with an option to exit on account of the change in control or substantial acquisition of shares, occurring in the target company (particularly in hostile takeovers, where there is no pre-arranged agreement with the management).

A mandatory open offer is triggered in the following scenarios:³

1. acquisition of 25 per cent or more shares or voting rights (if the acquirer currently holds less than 25 per cent), or

2. acquisition of more than five per cent shares or voting rights in a financial year (if the acquirer already holds more than 25 per cent), or

3. acquisition of control.

The process allows existing shareholders to make informed decisions regarding their investment since control of the target company changes hands, particularly in unsolicited or hostile takeovers. It is pertinent to note that the open offer should be subject to a minimum offer size of 26 per cent.⁴

Under the erstwhile framework, the standstill obligations imposed by the CCI with respect to on-market purchases required an acquirer to notify the CCI and obtain prior approval before consummating the transaction, unless an applicable exemption applied. The standstill obligations often led to price volatility or the loss of strategic opportunity before the acquirer could complete the acquisition. Acquirers were thus placed in an untenable position, as they were compelled to act swiftly under the regulatory framework administered by SEBI, whilst simultaneously being precluded from implementing the acquisition pending receipt of the CCI’s approval. This underscored the urgent need to reconcile the operational imperatives of the SEBI framework with the standstill obligations under the Competition Act.

Need for balancing obligations between SEBI and CCI

To address hurdles faced by companies in balancing obligations of both SEBI and CCI, and to facilitate smoother implementation of such transactions, the Competition Law Review Committee (CLRC) (formed by the Ministry of Corporate Affairs in 2019) recommended adopting an approach which allows implementation of on-market purchases in an efficient and timely manner, while ensuring that such transactions do not avoid CCI’s scrutiny. The CLRC found that in mature jurisdictions such as European Union (EU) and Brazil, standstill obligations do not prevent the implementation of a public bid or a series of transactions in securities in a market, where control is acquired from various sellers.⁵ The European Union Merger Regulations⁶ provide that during the pendency of the approval of the merger, the acquirer should not exercise any ownership or voting rights attached to the securities involved. A similar position has also been adopted in Brazil.⁷ In light of this, the CLRC proposed allowing parties to undertake on-market purchases, provided they surrender all beneficial rights until the CCI’s approval is granted.⁸

This recommendation reflected widespread feedback from investors who were calling for more flexibility in navigating the regulatory environment. The challenges posed by stringent standstill obligations often delayed transactions and hindered the investors’ ability to make timely acquisitions and respond to market opportunities. Moreover, they highlighted the importance of acting swiftly in hostile takeovers and other market-driven acquisitions for staying competitive, especially in a rapidly evolving market.

Derogation of standstill obligations

The Government of India recognised these difficulties and implemented a pragmatic solution for investors looking to undertake on-market purchases. Investors are now permitted to proceed with on-market purchases; however, due care and attention must be exercised to ensure that the acquirer does not exercise any ownership or beneficial rights in the target, prior to the CCI’s approval.

A notice under Section 6-A is subject to: 1) the parties filing a notification form (in a standard Form I (short form) or Form II (long form), as applicable) within 30 days of the first on-market acquisition; and 2) the acquirer not exercising ownership or beneficial rights or interest in such securities (including exercising voting rights), until the CCI approves the transaction.⁹

However, the acquirer can 1) receive economic benefits, such as dividends, bonus shares, stock splits, etc.; and 2) exercise voting rights only in matters relating to liquidation and/or insolvency proceedings. Provided that the acquirer shall not influence the target (including affiliates) in any manner, either directly or indirectly.¹⁰

The amendment makes it easier for companies to implement open offers and other on-market purchases, without waiting for prior CCI’s approval, significantly reducing delays and enabling faster execution. It is also in line with the government’s ease of business program and allows investors to benefit from competitive pricing while ensuring that the CCI retains its regulatory oversight over market activities.

These changes are anticipated to have a significant impact on deal-making in India and offer greater flexibility to acquirers, while reducing the risk of gun-jumping penalties, which was previously a significant deterrent for time-sensitive acquisitions. The 30-day approval window not only helps expedite deal closure timelines but also minimises holding costs, benefiting both buyers and shareholders who are eager for liquidity.

Till date, a very limited number of transactions have been approved under Section 6-A, Competition Act, such as, the CCI’s approval in Abu Dhabi National Oil Co. P.J.S.C., In re transaction¹¹ and Amundi Asset Management S.A.S./ICG plc¹².

Conclusion

It is yet to be seen how the process will play out if the CCI blocks such an application, given the acquirer would have already acquired shares of the target from the open market. Going forward, the focus should be on assessing the effectiveness of these provisions and ensuring that any potential gaps or challenges are addressed appropriately. A balanced approach that ensures operational flexibility, while safeguarding competitive integrity and market fairness, will be crucial. The CCI has shown openness to feedback and suggestions, which bodes well for refining the regulatory framework further.

In conclusion, a streamlined and responsive framework will help make India a more attractive destination for investment. A holistic approach, in collaboration with regulators and stakeholders will ensure that the regulatory landscape supports growth while maintaining the integrity of India’s competitive market.