Issue of Demerger

The Competition Act, 2002 ("Act") does not define de-merger. In the absence of a definition, it is unclear whether (i) a filing in relation to a de-merger is required, and (ii) if a filing is required, whether a de-merger would fall under sections 5(a) (acquisitions) or 5(c) (mergers and amalgamations) of the Act.

In the past, there have been conflicting views, express or implied, in the orders of the Competition Commission of India ("Commission") on whether demergers require a filing under the Act. Given the lack of clarity, our earlier advice to clients was that by way of abundant caution, a filing should be made or the clients should seek a consultation with the Commission to understand how it would be likely to view the issue.

In a very recent order dated 18 September 2012, the Commission has approved the restructuring of a group involving two demergers, stating that the proposed combination falls within the ambit of Section 5 (c) of the Competition Act, 2002.

The combination examined under the said order involved the following steps:

(a) Transfer by way of a demerger of the power transmission equipment business ("PTE") of Prayas Engineering Limited ("PEL") and EMTICI Engineering Limited ("EMTICI") into Elecon Engineering Company Limited ("EECL");

(b) Transfer by way of a demerger of the material handling equipment business ("MHE") of PEL and EMTICI into EECL;

(c) Transfer by way of a slump sale of the MHE business from EECL to EPL.

EECL is a public listed company. EPL has been set up as a wholly-owned subsidiary of EECL. PEL and EMITCI, EECL and EPL are companies within the same group, falling under the direct or indirect control of the same person, Mr. Prayasvin B. Patel.

In its order, the Commission has stated that the combination, which is a result of restructuring within the same group, falls under Section 5(c) of the Act. The transfer of the MHE business from EECL to its wholly-owned subsidiary, EPL, is an intra-group transaction and thereby can take advantage of the relaxation granted under the combination regulations. It is, therefore, clear that demergers are not excluded from the ambit of the Act and the Commission has examined demergers under Section 5 (c) of the Act. Thus, the Commission's view is that demergers are to be approached in the same manner as mergers.

Please note that the de minimus threshold set out in the Government notification dated 4 March 2011 is not applicable to mergers since the said notification mentions acquisitions but omits to mention mergers or amalgamations. Consequently, de-mergers, which are being treated as section 5(c) transactions, also do not get covered by the said notification.

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