In our previous article titled ‘Amendments in merger regulations under Competition Act’ we learnt about the amendments brought in by the Ministry of Ministry of Corporate Affairs, Government of India in the Competition Act, 2002 (‘the Competition Act’). One of the essential amendment in relation to introduction of one more layer for evaluation of deals has expanded the scope of transaction to come under the purview of Competition Commission of India (‘CCI’).


In any transaction, in order to examine acquisition of control, shares, voting rights or assets of the target entity either by way of transfer or merger or amalgamation, evaluation of deal value threshold (‘DVT’) and substantial business operations (‘SBO’) in India are pre-requisite before examining it for deminimus test. Accordingly, in case, if a transaction passes tests of DVT that exceeds INR 2000 crores and where substantial business operations of target are in India, same would need to be notified to CCI, even if target passes the deminimus test i.e. its assets are of not more than INR 450 crore in India or turnover of not more than INR 1,250 crore in India.

 

Analysis of DVT:


The DVT test is based on the value of the transaction under review. Primarily it would construe to be deal value specified in the deal documents. For undertaking the DVT test, all kinds of consideration which are direct, indirect, immediate, deferred, cash or otherwise would need to be added.


A Guidance has been provided in the Competition Commission of India (Combinations) Regulations, 2024 (‘the Combination Regulations’).


Under the Combination Regulations, various kinds of categories have been enlisted which must be added to the plain deal value and may be factored in supplementary documentations which may be attached to the main definitive agreement. List of such categories are as under:

  1.  
  2. (i) for any covenant, undertaking, obligations or restrictions imposed on seller or any other person, if such consideration is agreed separately. Example under this category could be consideration towards non-compete fees;
  3. (ii) for all inter-connected steps or small transactions covered under combinations. Interconnected transactions, which, on the face of it appear to be individual, however, are undertaken to achieve the final intended deal transactions.
  4. (iii) payable during two years from the date on which the transaction would come into effect for arrangement(s) entered into as a part of the transaction or incidental thereto including but not limited to technology assistance, licensing of intellectual property rights, usage rights of any product, service or facility, supply of raw materials or finished goods, branding and marketing;
  5. (iv) for call option and shares to be acquired thereof assuming full exercise of such option. A call option is a pre-determined right for an exit on a future date by an acquirer, which may be contingent upon the occurrence or non-occurrence of a future event. that an acquirer plans at the time of its investment in the target;
  6. (v) payable, as per best estimates, based on the future outcome specified under the transaction documents. Example under this category could be contingent consideration which may be payable at the time of achieving a pre-defined milestone.

All the above categories ensures coverage of consideration which may be hidden but making part of a deal value. Thus, even if size of assets or turnover of target is smaller, determination of deal value could play a major role.


Analysis of SBO:


Target is considered to have SBO in India if it exceeds the following thresholds:

  1. (i) in respect of digital service providers, if the number of its business or end users in India is 10% or more of its global number of such users; or
  2. (ii) if the gross merchandise value (GMV) in India during the twelve months prior to the relevant date is 10% or more of its global GMV and exceeds INR 500 crore; or
  3. (iii) if the Indian turnover in the preceding financial year constitutes 10% or more of its global turnover and exceeds INR 500 crore.


The INR 500 crore requirement mentioned in points 2 and 3 above does not apply to digital service providers.


The SBO test ensures that businesses which may not have substantial operations in India, but larger in terms of deal value are outside the purview of CCI. This also ensures ease of doing business in India for the global conglomerates and any such global deals do not get prolonged due to requirement of CCI approval.  


Accordingly, now, larger deals having substantial business operations in India would need to pass CCI scrutiny under the amended provisions. While this would add to the overall timelines for the execution of a deal, it may be a step in the right directions to ensure crack down on anti-competitive practices.



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