Red Flags in the Green Channel Route

Introduction

In 2019, the Green Channel Route (“GCR”) was introduced in Reg. 5A of the Competition Commission of India (“CCI”) (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Regulations”). It is an automatic system of approval for combinations, where parties need not endure the mandatory 150-day waiting period before consummating the transaction.

The parties must disclose there are no vertical (do not manufacture similar/identical/substitutable goods), horizontal (not involved in any activity relating to production, supply, sale and distribution of goods, belonging to different levels of the product chain) or complementary overlaps (not involved in any activity relating to production, supply, sale and distribution of goods which are complementary to each other), while considering all plausible alternative market definitions.

This article analyses a recent order of the CCI, wherein it invalidated a green channel notification. Through this analysis, the shifting stance of the CCI is observed, along with a reflection on the intent of the GCR. First, the objectives of the GCR are discussed, through reports and prior jurisprudence. Second, a consideration of recent orders by the CCI reveals the CCI’s misguided focus on negligible overlaps and dissonance with the aims of the GCR.

Deviation from Purpose and Prior Jurisprudence

In the Report of Competition Law Review Committee, 2019 (“Report”), the GCR was one of the key recommendations, that ultimately manifested into the amendments to the Regulations. Therefore, reference to the same is paramount to cull out its intent.

The Report noted the need for the GCR stems from empirical research suggesting that many combinations need not endure the mandatory waiting period, and there is a need to reduce merger transaction costs and delays. This is owing to the fact that many combinations “have no major concerns” regarding Appreciable Adverse Effect on Competition (“AAEC”). The Raghavan Committee, that inspired the Competition Act 2003, believed that mergers should only be challenged if they adversely affected competition and welfare. Thus, the GCR aimed to improve the ease of doing business and allowing combinations “that are unlikely to result in AAEC”. The Report does not suggest that there must be zero-overlaps in the combination but takes a more broad approach in saying that the GCR should be made available if there is an unlikely AAEC.

The confirmation of this intent is clear from prior jurisprudence of the CCI. In 2021, the CCI found no concerns with International Finance Corporation’s (“IFC”) acquisition in Dodla Dairy, despite a vertical overlap (“IFC/Dodla”). The former had a “miniscule shareholding of less than 5%” in another food retailer, where Dodla had limited retail presence. The GCR was not invalidated due to the “insignificant nature of the overlap”.

In 2022, the CCI did not raise issues in the acquisition by BW Investment Limited into Rabo Equity Management Company Limited, the investment manager of India Agri Business Fund II Limited (“IABF”). The portfolio companies of IABF were engaged in a similar relevant market. However, on a “narrow level”, no overlaps were noted in terms of “actual business activities”. Further, there would be no AAEC, due to the combined market share of less than 1% (“BW/Rabo”).

However, there was an unwarranted shift in the CCI’s jurisprudence in 2023, with the acquisition by Platinum Jasmine A 2018 Trust and TPG Upswing Ltd into UP Sustainable Agri Solutions Limited (henceforth, “Platinum Trust Order”). The CCI, for the first time, invalidated a combination that went through the GCR. It held the GCR does not envisage a detailed assessment of AAEC but the test is to note overlaps. Meaning, an objective and rather, mechanical approach – where existence of overlaps invalidates the GCR.

Not only is this in contradistinction to the prior jurisprudence but also against the very intent of the GCR. The purpose was to increase ease of doing business and allow combinations which do not raise caution concerning AAEC. If the intention was to negate the mechanism due to mere existence of overlaps, the amendment is rendered infructuous by excluding a majority of enterprises who have portfolio entities. One of the key objectives of the GCR was to permit companies to undertake combinations with minimal regulatory compliance and grow economies of scale. Notably, the Report stated that the filing should not be so burdensome that it is a deterrent and it should become the preferred mechanism.

India Business Excellence Fund – IV and VVDN Technologies Private Limited (“IBEF/VVDN”)

Background

On 17th April 2023, a green channel notification was filed by India Business Excellence Fund – IV (“Acquirer”) for its acquisition in VVDN Technologies Private Limited (“Target”). The ultimate controlling entity of the Acquirer is Motilal Oswal Financial Services Ltd. (“MOFSL”). MOFSL is the parent entity of the Motilal Oswal group (“Acquirer Group”). The Acquirer Group is a diversified financial services provider. On the other hand, the Target is engaged in the business of providing electronic manufacturing services, original design manufacturing and product design services.

The Acquirer submitted that there are no horizontal, vertical or complementary overlaps between the business activities of Acquirer Group (including its portfolio companies) and the Target. It was later, submitted that there was an ad-hoc supply arrangement during COVID-19, for Printed Circuit Board (PCB) devices for testing kits, from one of the portfolio companies of the Acquirer Group (whose name was redacted) to the Target. On 16 August 2024, due to this supply arrangement, the CCI penalised the Acquirer on account of a vertical overlap, imposing a fine of 10 lakhs.

Analysis

The CCI’s rejection centred around the miniscule vertical overlap, having a negligible impact on the business activities of the Acquirer and Target.

Here, the supply arrangement was merely for the period of COVID, due to the supply chain crisis. Further, PCB assembly devices was unrelated to the core business activities of the Target – which was electronic design and manufacturing services. Further, there was no formal agreement – an intention to keep the relations temporary. The Acquirer also disclosed that orders being fulfilled at the time of filing the notification were merely back orders. Importantly, the turnover constituted less than 1% of the total turnover of the Target. Further, the market share of the Target in assembling PCB devices was miniscule – “in the range of 0 to 5%”.

As per the Raghavan Committee and Report, combinations necessitate CCI intervention only when there are genuine competition concerns. The GCR was intended to allow businesses to grow at a faster pace, when the combination was unlikely to result in an AAEC. Considering the core business activities were not PCB assembling, the low turnover and negligible market share, the CCI was misguided in invalidating the GCR. If the jurisprudence predating Platinum Trust was to be adhered by, the insignificant nature of the overlap would not be a ground to invalidate the combination, as in the IFC/Dodla matter. In the BW/Rabo matter, although there were overlaps in the relevant market, there was no cause for concern in “actual business activities”. In other words, this Order simply negates the intent of introducing the GCR, which itself was recognized by the CCI prior.

Here, the CCI followed the mechanical approach as in the Platinum Trust Order – the mere existence of any overlap is a ground for invalidation. The focus on the zero-overlap threshold becomes extremely onerous, essentially restricting the GCR to smaller companies. This objective approach is aiming to be solidified, as seen in the Draft Green Channel Rules, 2024 – where parties to the combination include the ultimate controlling person of the acquirer/target and all other such group entities. With this focus on overlaps, the objective of making the GCR the preferred route for enterprises cannot be achieved.

Conclusion

The IBEF/VVDN Order marks the second combination through the GCR which has been invalidated by the CCI. In keeping such a high threshold of zero-overlaps, the CCI has ignored the objective of the GCR, by extending its intervention beyond where there are genuine competition concerns, to an unnecessary focus on the mere existence of overlaps. To harmonise the objective of the GCR and allaying the CCI’s fears regarding competition, reference to other jurisdictions can prove beneficial. Akin to India, where the impact on competition is negligible or absent, Brazil also offers a fast-track merger procedure, introduced by the Administrative Council for Economic Defence, Regulation 33/2022 (“CADE Regulation”). Instead of negating all overlaps as in India, the CADE Regulation imposes thresholds on overlaps. For example, parties may avail the fast-track procedure, even when there are horizontal overlaps, provided the consolidated market share is below 20%. The CCI, amidst amending the green channel rules, should consider imposing similar thresholds for horizontal, vertical and complementary overlaps. Through this, the intent of the GCR, as reflected by the Report and early jurisprudence can be fortified – that is, to permit combinations that would not negatively impact competition. Simultaneously, the CCI can retain its vigilance, relying on bona fide filing by parties.

(This post has been authored by Zoya Hassan, a penultimate year student at Jindal Global Law School, Sonipat.)

CITE AS: Zoya Hassan, ‘Red Flags in the Green Channel Route’ (The Contemporary Law Forum, 17 January 2025) <https://tclf.in/2025/01/17/red-flags-in-the-green-channel-route/>date of access