Competition Appellate Tribunal upholds penalty imposed on SCM Soilfert for “gun-jumping”

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Competition Appellate Tribunal (COMPAT) by its order dated August 30, 2016 has upheld the penalty imposed by the CCI on SCM Soilfert for failure to file a notice under Section 6(2) of the Competition Act, 2002(the Act) for a combination.

Deepak Fertilizers and Petrochemicals Corporation Ltd. (DFPCL) is a company engaged in manufacturing and trading of industrial chemicals and fertilizers and is a listed company and SCM is DFPCL’s wholly owned subsidiary.

On July 03, 2013, SCM purchased shares of Mangalore Chemicals and Fertilizers Limited (MCFL) on Bombay Stock Exchange amounting to 24.46% of the paid up capital of MCFL.DFPCL issued a press-release stating that the purchase was a “very strategic and good fit with the company’s business”. The acquisition was not notified to the CCI under Section 6(2) of the Act.

Further, SCM acquired additional equity shares representing 0.8% of MCFL, thus entitling SCM to hold more than 25% of the voting rights in MCFL. SCM filed a notice under Section 6(2) of the Act within 29 days of the acquisition of shares beyond 25% of the shares of MCFL.

The CCI issued a notice under Section 43A of the Act to the Appellants on the ground that they had failed to give notice in accordance with Section 6(2) of the Act in regard to the market purchase consummated on 23.4.2014 as well as the acquisition made in 2013.

SCM contended that the acquisition was “solely for investment” purpose as understood under Item 1 of Schedule 1 of the Combination Regulations and hence did not require notification to the CCI. The CCI considered that the phrase “solely as an investment” indicated “passive investment” as against “strategic investment”. The CCI took note of the press release issued on the day of acquisition as indicative of the fact that the said acquisition was neither made solely as an investment nor in ordinary course of business. Further, as per media reports, SCM and Zuari Group had been in a takeover bid for MCFL since April 2013 and Zuari Group had also purchased shares amounting to 16.43% of MCFL’s share capital just before the SCM made the first acquisition.

SCM also contended that the second acquisition amounting to 0.8% of the equity shares of MCFL was not consummated as the shares were kept in an escrow account and they were not entitled to exercise any legal or beneficial rights over them till approvals of regulatory bodies (including the “CCI”) were obtained. CCI rejected the contention that where a buyer acquires shares but decides not to exercise legal/beneficial rights in them, notice is not required to be filed within Section 6(2) of the Act. The CCI, consequently, imposed a penalty on INR 2,00,00,000(Two Crores only) under Section 43A of the Act for violation of Section 6(2) of the Act.

The COMPAT held that the press release is a good evidence to support the view that the objective was not solely to make an investment in a competitor company. The press release noticeably referred to the acquisition as a “very strategic and a good fit with the company’s business”. There is also a significant pointer in the press release of the intent when it states that DFPCL looked forward to working closely with MCFL to “enhance long term value for the shareholders of both companies“. A mere investment through the stock market, where holders of the shares of MCFL i.e sellers are substituted by the buyer ,in this case SCM, cannot increase the value for shareholders of MCFL, unless the buyer planned to play a strategic role beyond a passive investment.

Regarding the consummation of 0.8% of the equity shareholding of MCFL by SCM, it was contended that the business of hostile purchase is affected by day to day rates and the same having been undertaken by SCM without any agreement, notice under Section 6(2) was to be made within 30 day period of the purchase, which had been done. The COMPAT held that the Section 6(2A) of the Act validates the prior notification requirement by stipulating that no combination shall come into effect until 210 days have passed from the date on which notice was given to the CCI or passing of the order under Section 31 by the CCI, whichever is earlier. Creation of the escrow account did not eliminate the statutory requirement of prior notice.

Lastly, the COMPAT held that usage of the word “shall impose” in Section 43A of the Act means that the failure to notify a combination under Section 6(2) of the Act shall carry a penalty under Section 43A, even if there is no mens rea or malafide intention. The CCI only has a discretion regarding the quantum. The CCI has taken the facts and circumstances of the case in consideration while imposing penalty of INR two Crores and COMPAT see no reason to interfere. The appeal has been dismissed.

(Source: Order dated August 30, 2016. For full text see COMPAT website-)

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