Minda Corporation and Pricol Ltd. are both preparing to present their arguments to the Competition Commission of India (CCI) following notices received regarding Minda’s proposed acquisition of an additional 8.79% stake in Pricol. The move was labelled a “hostile takeover” by many in the auto industry, setting the stage for a potential battle before the antitrust regulator.
“The communication sent by CCI has provided our company with an opportunity to represent our views on the matter,” Minda Corporation stated in a regulatory filing.
Likewise, Pricol stated on its part that CCI has communicated its decision, that prima facie the proposed combination by Minda is likely to result in an appreciable adverse effect on competition for multiple reasons, and that therefore the competition watchdog intends to conduct further inquiry into the matter to address the potential harm to competition. “Further, CCI has directed the parties to respond as to why investigation in respect of the proposed combination should not be conducted”.
The case so far:
The development brings back a flashback from when Minda Corporation, in mid-last year, announced decision to acquire 15.7% stakes worth Rs 400 crore in rival Pricol Ltd. While Minda initially brushed off the move as putting extra money to good use, the market speculated it was a hostile takeover. Pricol’s top management promptly responded by reiterating that they had no plans of undertaking any secondary sales or raising equity capital. Pricol management stated it would use all possible legal and financial means to prevent the deal in order to maintain control over the company.
However, things took another turn when Minda Corporation announced its intention to approach the Competition Commission of India (CCI) about taking its stakes up to 24.5%. Coimbatore-headquartered Pricol , in response, has filed a writ petition at Madras High Court against Minda Corporation, challenging the latter’s validity of application to the competition commission of India (CCI)
Why did Minda Corporation approach CCI?
Under the Indian Competition Act, if a specified threshold based on the value of assets and turnover is crossed, it is mandatory for the acquirer to obtain approval from CCI before the actual acquisition (eg. transfer of shares) takes place. The first test is the total assets and turnover of the target company, which should be over Rs 350 crore and Rs 1,000 crore, respectively. Once this is crossed, the combined asset and turnover of the target and acquirer need to be checked, and there are various thresholds provided in the Act. For example, if the assets of the acquirer and target cross INR 2000 crores in India, an acquisition has to be notified. . This obligation only applies to Minda Corporation and not the target company, Pricol. It is immaterial whether the deal is a “hostile takeover” or a “friendly takeover.”.
The requirement to notify creates a standstill, which means that Minda Corporation cannot acquire the share until approval, Deeksha Manchanda, partner (competition practice) at legal firm Chandhiok & Mahajan, earlier told Autocar Professional.
What arethe key issues in the deal that CCI may scrutinise?
The primary issue that the CCI would consider is the impact of the acquisition on the market. For this, the CCI considers the market share of both parties in the deal and tries to determine whether the combined market share would lead to adverse effects for other competitors, buyers, and suppliers. Publicly available data suggests that Pricol currently holds over 50% market share in cluster parts, making this a crucial factor in the CCI’s decision-making process.
After its evaluation, the CCI can approve the transactions, grant conditional approval, or even deny the approval. If the approval is denied, the parties cannot proceed with the transaction. In a conditional approval, the CCI requires the acquirer to fulfil certain requirements before proceeding. This can include ordering the acquirer to divest certain parts if they believe that one segment is likely to be severely impacted if the acquisition goes through.
However, in the case of Minda Corporation’s acquisition of a part of Pricol’s shareholding, the likelihood of the CCI requiring this condition is low. Since Minda Corporation is only acquiring a limited shareholding and not the entire company, it is less likely that the CCI will require the divestment of specific segments. The CCI may, however, impose some other behavioural directions if it sees the need for them.
Interestingly, the CCI has never stopped any acquisitions to date. In other countries, like the United States, some acquisitions are disapproved by the regulator, though the number remains low.
The CCI is also likely to examine whether the initial acquisition of 15.7% was a purely financial investment or a strategic decision made with the goal of reaching 24.5% ownership.
If the CCI finds that the acquisition was indeed a strategic decision and Minda did not seek approval, it may impose a penalty on Minda. In the past, the CCI has imposed penalties on applicants for not notifying similar market purchases of shares, but it has never stopped an acquirer from going ahead with the acquisition.