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Amendments in merger regulations under the Competition Act

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CCI amends merger regulations

On September 9, 2024, Ministry of Corporate Affairs, Government of India notified certain provisions of the Competition (Amendment) Act, 2023 to be effective from September 10, 2024 relating to regulations of combinations, mergers and acquisitions. This article summarises amendments introduced in Competition Act, 2002 (‘the Competition Act’).

Section 5 of the Competition Act introduces ‘deal value thresholds (‘DVT’)’ as an additional parameters for evaluation of deals from the perspective of Competition Act. DVT mandates notification for transactions exceeding INR 2000 crore. It applies to acquisitions involving entities with substantial business operations (SBO) in India. Competition Commission of India (CCI) will determine SBO based on following three criteria:

  1. For digital services, if 10% or more of global users are in India;
  2. Gross Merchandise Value (GMV): If 10% or more of global GMV is from India and exceeds INR 500 crores (USD 60 million);
  3. Turnover: If 10% or more of global turnover is from India and exceeds INR 500 crores.

Further, the deal value must include interconnected transactions within two years, along with estimates for future payments and contingencies. Accordingly, transaction which may appear separate and distinct may be considered as interconnected while evaluation the DVT if such transactions are incidental to the deal under consideration.

Thus, DVT criteria is to be tested even if the deal value is within the diminimus exemption test criteria. Thus, even if the target has either assets of not more than INR 450 crore in India or turnover of not more than INR 1,250 crore in India, but DVT exceeds INR 2,000 crore, transaction would still need to be notified to the CCI prior to its implementation.

Further, explanation to section 5 defines ‘control’ as the ability to exercise ‘material influence’, in any manner over the management or affairs or strategic commercial decision. The definition of control has been amended from ‘decisive influence’ to ‘material influence’, expanding the scope of influence thereby.

In order to bring in ease of doing business, in cases of such large deals, various amendments in relation to curbing of timelines are made effective. Such as

  1. Reduction of the time-limit for approvals of combinations (M&As) from 210 days to 150 days;
  2. Reduction of time limit for forming a prima facie opinion by the Commission to issue a show cause notice to parties within 15 days (from existing 30 days) for expeditious approval of combinations;
  3. Reduction of time limit for formation of prima facie opinion, whether the proposed combination is likely to cause appreciable adverse effect on competition (AAEC) in India or not within 30 calendar days (as against 30 Working days at present).

Section 6(4) formally introduces “Green channel” (supra) or deemed approval for certain combinations which will not likely to have adverse appreciable adverse effect on the competition to get automatic approval on the date of filing the Notice to CCI in FORM 1 with the prescribed fee.

Further, section 6(A) waives off standstill obligations for open market purchases whereby an open offer/public announcement and acquisition of convertible shares/securities on a stock exchange are waived off provided: (a) a merger notification is filed with the CCI within 30 days of first acquisition pursuant to open offer and (b) the acquirer does not exercise any ownership or beneficial rights/ interest/ receives dividends in such shares/ securities till the receipt of approval from CCI.

Additionally, the new Competition (Criteria for Exemption of Combinations) Rules, 2024 (Exemption Rules) exempt certain Combinations from compliance with the CCI’s notification requirement altogether (Exempt Combinations).

  1. Acquisition by underwriter, stockbroker and mutual fund in ordinary course of business: An underwriter can acquire up to 25% of unsubscribed shares; a stockbroker can acquire up to 25% of shares; and a mutual fund can acquire up to 10% of shares.
  2. Acquisitions below 25% to be treated as solely for the purpose of investment: Acquisitions below 25% of shares or voting rights are exempt, provided there is no change in control, board representation, or access to commercially sensitive information. The acquirer or its group entities should have no horizontal or vertical or complementary overlapping with the target entity (ies), but if such overlapping exists then it should not lead to the acquirer holding more than 10% or more shares or voting rights after the acquisition.
  3. Acquisition of additional shares where the acquirer already holds not more than 25 % shares or voting rights. Provided that the transaction will not result in:
    1. No new board representation;
    2. No access to commercial sensitive information, for the first time;
    3. In cases where acquirer has horizontal or vertical or complimentary overlap with the target increase in incremental shareholding or voting right should not exceed 5% for the first time or up to 10% maximum thereafter.
  4. Intra-Group Transaction(s) & Demergers: Following acquisitions or mergers or amalgamations within the same group are exempted if they do not result in a change of control of the acquirer:
    1. Acquisition of additional shares where the acquirer already holds more than 25 % shares or voting rights but does not hold more than 50%;
    2. Acquisition of additional shares if the acquirer already holds more than 50% of the shares or voting rights;
    3. Acquisitions of assets within the same group;
    4. Merger or amalgamation within the same group.

In cases of demerger, issuing of shares by the resulting company either to the demerged entity or to the original shareholders of the demerged company in proportion of their shareholding in the demerged company prior to such demerger is exempt, except for discharge of consideration for fractional shares.

An acquirer whose transaction qualifies as an Exempt Combination need not notify the CCI even if such a transaction exceeds the DVT.

The amendments as mentioned above increases the scope of scrutiny on the acquisition deal. An influence, direct or indirect on the decision making for an acquisition would need to undergo various tests. Further, the calculation of DVT becomes an essential factor to determine the applicability of notification to CCI. It would be interesting to analyse upcoming larger deals in light of the above amendments.

 

For detailed discussion on this article, please feel free to contact devadhaantu@devadhaantu.in 

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