The Revamped Indian Merger Control Regime

In a significant development in the Indian merger control regime, the Ministry of Corporate Affairs (MCA) notified certain critical amendments to the Competition Act, 2002 (Competition Act) that have come into force today, i.e., September 10, 2024. The notification of these provisions, which were introduced in 2023 pursuant to the Competition (Amendment) Act, 2023, represents a decisive shift in the merger control regime under the Competition Act. The most important change is the introduction of deal value threshold (DVT) (explained below) which may impact some of your ongoing or forthcoming transactions.

A quick snapshot of the key provisions that have been notified are:

• Introduction of DVT: Transactions where the “deal value” exceeds INR 2000 crores (~USD 240 million) will now have to be mandatorily notified to the Competition Commission of India (CCI) for approval. This notification is, however, subject to the target company also having “substantial business operations” (SBO) in India. The applicable regulations also provide a very broad criteria for determination of the DVT threshold of INR 2,000 crore.
• Expedited timelines: The overall timeline for clearance of combinations by the CCI has now been reduced from 210 days to 150 days.
• Definition of ‘control’: The definition of ‘control’ has been broadened to include the ability to exercise “material influence over the management affairs, or strategic commercial decisions of an enterprise”, in line with CCI’s decisional practice.
• Derogation from “standstill obligations” for Open Offer: Parties to open market transactions will now be exempt from the “standstill obligation” – which basically prevents an acquirer from taking any steps to consummate the transaction prior to receipt of the CCI’s approval. Following the MCA notification, parties to such on-market transactions can, pending the CCI’s approval, acquire shares from various sellers through a series of transactions on a regulated stock exchange or implement an ‘open offer’ if: (i) notice of the acquisition is filed with the CCI within the prescribed timeline; and (ii) the acquirer does not directly or indirectly influence the enterprise whose shares/ securities are being acquired. However, the acquirer(s) can – (i) avail economic benefits such as dividends or any other distribution, subscription to rights issue, bonus shares, stock splits and buy back of securities; and (ii) exercise voting rights only in matters relating to liquidation and/ or insolvency proceedings.
• Increased fee for filing: The fee for filing a merger form has been increased (i) from INR 20 lakhs to INR 30 lakhs, for a Form I filing; and (ii) from INR 65 lakhs to INR 90 lakhs, for a Form II filing.

Previously, the Competition Act only required such transactions to be notified to the CCI where the value of assets or turnover of the parties to the transaction or the group to which they belong exceeded the specified threshold limits (on a domestic or worldwide basis). These thresholds remain unchanged and are in the range of (i) For enterprises: Assets in the range of INR 25 bn to USD 1.25 bn globally with at least 12.5 bn in India & Turnover in the range of INR 7.5 bn to USD 3.75 bn globally with at least INR 3.75 bn in India; and (ii) For group: Assets in the range of INR 100 bn to USD 5 bn with at least INR 12.5 bn in India & Turnover in the range of INR 300 bn to USD 15 bn globally with at least 3.75 bn in India.

The DVT comes in as an additional threshold test for transactions that need to be notified to the CCI. Transacting parties that were previously benefitting from the de minimis / target exemption, will now have to seek a prior mandatory approval from the CCI if the value of their “deal” meets the twin DVT criteria (value threshold and the target having an SBO in India). This provision is likely to impact acquisitions involving small startups (target companies), where the assets or turnover values are low given the size of the entity, but the value of the deal crosses INR 2,000 crore.

The MCA also notified the CCI (Combinations) Regulations, 2024 (Combination Regulations) which lay down certain substantive and other procedural requirements for the newly notified provisions (including the DVT).

Importantly, the Combination Regulations lay down the criteria for determination of consideration for any transaction which will be key in assessing notification requirements under the new DVT system, subject to the target having SBO in India.

The Combination Regulations set out determinants for calculating the value of any transaction and this includes every valuable consideration, direct or indirect, immediate or deferred, cash or otherwise including consideration:

• for any covenant, undertaking, obligation or restriction if such consideration is agreed separately;
• for all inter-connected transactions as explained in the Combination Regulations;
• payable during 2 years from the date on which the transaction would come into effect for any arrangement entered into as part of the transaction (e.g., technology assistance agreement, IP licensing agreements, agreements for supply of raw materials etc.);
• for call option and share to be acquired pursuant to exercise of such option;
• payable, as per best estimates, based on the future outcome specified under the transaction documents.

The Combination Regulations also offer explanations on calculation of value of any transaction. Importantly,

• Value of future payments must not be discounted to present value;
• ‘Value of transaction’ would include consideration for any acquisition by one of the parties or its group entity in the enterprise being acquired or merged in the transaction,payable at anytime during 2 years before the relevant date;
• ‘Value of transaction’ will include the full subscription to the offer in case of an open offer;
• ‘Value of transaction’ will exclude cost towards legal advice, fee payable to investment banks, regulators, statutory authorities, etc;
• In case ‘value of transaction’ cannot be established with “reasonable certainty”, the DVT threshold of INR 2,000 crore may be deemed to be met;
• For any future events planned as part of the transaction and specified in the transaction documents, parties may calculate the consideration for such events based on best estimates or the maximum payable amount in the absence of a best estimate.

As per the Combination Regulations, the criteria for SBO would be met if:

• the target’s gross merchandise value (GMV) in India, in the 12 months preceding the relevant date of the transaction is 10% or more of the global value AND more than INR 500 crores; OR
• the target’s turnover in India in the preceding financial year is 10% or more of its global turnover AND more than INR 500 crores.

Specifically, for transactions involving digital services (which has been broadly defined to include any service or content provided by means of the internet for consideration or otherwise), the Combination Regulation excludes the INR 500 crore monetary threshold set out above. For such entities, the criteria for SBO would be met if:

• the target has 10% or more of its business users or end users in India compared to the global number; OR
• the target’s GMV in India, in the 12 months preceding the relevant date of the transaction is 10% or more of the global value; OR
• the target’s turnover in India in the preceding financial year is 10% or more of its global turnover.

The DVT notification provisions would also apply to all deals that meet the DVT criteria as on September 10, 2024 but are yet to be consummated, whether wholly or partly irrespective of when the transaction was approved by parties or a binding agreement was signed to give effect to the transaction. Therefore, parties to on-going transactions will now need to re-evaluate the notifiability requirement of transactions (that otherwise did not meet notification requirement or were otherwise exempt under the previous regime (i.e. before September 10, 2024) which are either yet to be given effect to or have been partly given effect to. That said, if any part of a transaction that is now notifiable to the CCI has been given effect to, it would not attract gun-jumping penalty provisions of the Competition Act.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ravisekhar Nair, Partner – Email –ravisekharnair@elp-in.com

Parthsarathi Jha, Partner – Email – parthjha@elp-in.com

Abhay Joshi, Partner, Email – abhayjoshi@elp-in.com

Ketki Agrawal, Senior Associate, Email –  ketki agrawal@elp-in.com

Raagini Agrawal, Associate, Email – raaginiagrawal@elp-in.com