Understanding the legalities of Minda Corporation's attempt to acquire additional stake in Pricol

The Indian automotive industry has been abuzz with news of Minda Corporation's recent decision to acquire a 15.7% stake 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 as a hostile takeover. Pricol's top management promptly responded by reiterating that they had no plans of undertaking any secondary sale or raising equity capital. However, things took another unexpected turn when Minda Corporation announced its intention to approach the Competition Commission of India (CCI) for taking its stakes up to 24.5%, leaving Pricol silent. To understand the potential impact of this situation on the automotive industry, Autocar Professional's Shahkar Abidi and Shruti Mishra spoke with Deeksha Manchanda, Partner (competition practice) at legal firm Chandhiok & Mahajan, who provided valuable insights. Read on for all the details.

Why did Minda Corporation approach CCI?
Under the Indian Competition Act, if a specified threshold based on 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 eg. if the assets of the acquirer and target cross Rs 2000 crore 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 the approval.

What are key issues in the deal that CCI may scrutinise closely?
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, the 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 or grant  conditional approval; or may 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 fulfill 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 acquiring only 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 behavioral directions if it sees the need for it.

Interestingly, the CCI has never stopped any acquisition till date. In other countries like the United States some acquisitions are disapproved by the regulator, though the number remains low.

Will CCI also look at contention of investment decision versus strategic decision?
The CCI is likely to examine whether the initial acquisition of 15.7% was a pure 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 approvals, 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 never has it stopped an acquirer from going ahead with the acquisition.

What are the penalties for not complying with taking a nod from CCI before the acquisition and whether there is any time limitation to that?
In theory, the legal provisions allow for penalties of up to 1% of the combined turnover of companies in cases of non-compliance with regulations surrounding mergers and acquisitions. However, in reality, these fines are generally quite low, ranging from Rs 10 lakh to Rs 1 crore.

While there is no time limit for the acquirer to approach the CCI, they must obtain approval before the actual transfer of shares takes place if they make open market purchases.

While Pricol's management claims to be working on its defense strategies with the intention to keep the company's control under the current promoter group, the promoter family has seemingly also agreed to put together a "war chest" for the next fight if the situation gets to that point. What are the other options available with Pricol in such a scenario?  
When a company faces a potential crisis there are few out-of-court measures or corporate level strategies that can be adopted to prevent the takeover. One such strategy is the adoption of a poison pill, where the company deliberately degrades the value of its own holding to make it less attractive to potential acquirers. Another strategy is to sell off the company's "crown jewels", which are its most valuable assets, making it less attractive as a target. While these strategies can be effective in preventing a hostile takeover, it is important to carefully consider all options and their potential impacts before implementing corporate-level strategies.