Competition Law Violation: Supreme Court Upholds ₹2 Crore Penalty on SCM Solifert Limited

The Supreme Court of India recently ruled on a crucial case concerning competition law violations and the failure to notify a combination as required under Section 6(2) of the Competition Act, 2002. The case, SCM Solifert Limited & Anr. v. Competition Commission of India, involved the acquisition of shares in Mangalore Chemicals and Fertilizers Limited (MCFL) without prior notification to the Competition Commission of India (CCI). The Court upheld the penalty of ₹2 crores imposed by the CCI under Section 43A of the Act.

Background of the Case

The case originated from share acquisitions by SCM Solifert Limited, which had purchased shares of MCFL in two phases:

• On July 3, 2013, the company acquired 24.46% of MCFL’s shares through bulk and block deals on the Bombay Stock Exchange.
• On April 23, 2014, SCM Solifert purchased an additional 1.7% shares in MCFL.
• The second acquisition was followed by a public announcement of an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, to acquire up to 26% of MCFL.

Under the Competition Act, any acquisition that crosses certain thresholds must be notified to the CCI before completion. The CCI found that SCM Solifert failed to notify its first acquisition and imposed a penalty under Section 43A.

Arguments by SCM Solifert Limited

• The company argued that its first acquisition was made solely for investment purposes and was exempt from notification under Schedule I of the Competition Commission of India (Procedure in regard to the Transaction of Business Relating to Combinations) Regulations, 2011.
• For the second acquisition, the company claimed it had notified the CCI within 30 days of the public announcement as required.
• The company placed shares in an escrow account to prevent exercising control before obtaining approval from the CCI.
• The penalty was unjustified as the violation was technical and not deliberate.

Arguments by the Competition Commission of India

• The CCI contended that the first acquisition was not merely an investment but a strategic move to gain control over MCFL.
• A press release issued by SCM Solifert on July 3, 2013 stated that the acquisition was “very strategic” and expressed interest in working closely with MCFL.
• The company had knowledge of a competing investor (Zuari Group) acquiring shares in MCFL, indicating an intent to influence control.
• The large-scale acquisition (24.46%) in a single day contradicted the claim that it was an ordinary investment.
• The notification of the second acquisition was made after the acquisition, violating the pre-merger notification requirement under Section 6(2) of the Act.

Supreme Court’s Observations

The Supreme Court ruled against SCM Solifert Limited, making the following key observations:

• “Any acquisition that substantially increases shareholding cannot be considered purely an investment. The first transaction gave SCM Solifert a significant influence over MCFL, requiring prior notification to the CCI.”
• “The intent to gain control is evident from the company’s press release and market behavior.”
• “Banking shares in an escrow account does not negate the requirement to notify the transaction before completion.”
• “Under Section 6(2), an acquirer must notify the CCI before completing the transaction, not after.”
• “The penalty imposed is justified given the failure to comply with the mandatory pre-merger notification requirements.”

Final Judgment

The Supreme Court dismissed the appeal and upheld the ₹2 crore penalty imposed by the CCI. The Court ruled:

“The penalty is attracted as soon as the contravention of the statutory obligation under the Act is established. The violation need not be deliberate or willful for the penalty to apply.”

The Court emphasized that pre-merger notification is a fundamental requirement of competition law, and failure to comply results in penalties, irrespective of intent.

Significance of the Judgment

This ruling has critical implications for mergers and acquisitions in India:

• Clarifies pre-merger notification rules: The judgment reinforces that acquisitions must be notified before completion.
• Investment vs. Control: The ruling establishes that large acquisitions, even if claimed as investments, can be deemed strategic control attempts.
• Accountability for procedural violations: The case highlights that even unintentional non-compliance with competition laws attracts penalties.

Conclusion

The Supreme Court’s decision underscores the strict enforcement of competition laws in India. By upholding the penalty against SCM Solifert Limited, the Court has reinforced the importance of pre-merger notification and compliance with regulatory requirements. The ruling serves as a crucial precedent for companies engaging in mergers and acquisitions, ensuring that market competition remains fair and transparent.

Petitioner Name: SCM Solifert Limited & Anr..
Respondent Name: Competition Commission of India.
Judgment By: Justice Arun Mishra, Justice Navin Sinha.
Place Of Incident: India.
Judgment Date: 16-04-2018.

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