MCA Releases Draft Rules on Green Channel, De Minimis, & Exempted Combinations
Context
On March 11, 2024, India's Ministry of Corporate Affairs, Government of India (MCA) released three sets of draft rules for public consultation and feedback (collectively known as the "Draft Rules"):
Draft Competition Commission of India (Green Channel) Rules, 2024 (Draft Green Channel Rules);
Draft Competition Commission of India (De Minimis) Rules, 2024 (Draft De Minimis Rules); and
Draft Competition Commission of India (Exempted Combinations) Rules, 2024 (Draft Exemption Rules).
The Draft Rules propose notable changes, which we outline in this blog post. The Draft Rules are open for feedback until April 10, 2024.
Draft Green Channel Rules
The Draft Green Channel Rules are intended to simplify the procedure for submitting a notification using the “green channel” route. This channel facilitates automatic approval of specified transactions on the day that they are notified to the Competition Commission of India (CCI). Presently, parties may make a “green channel” filing if their respective group entities, and/or affiliates (only step down group entities/affiliates for the target) do not have any horizontal overlaps, vertical or complementary linkages.
The Draft Green Channel Rules revise the definition of "affiliate" through the following changes:
The Draft Green Channel Rules simplify the third limb of the "affiliate" test by limiting it to the "right or ability to access competitively sensitive information" (CSI). Notably, neither the Draft Green Channel Rules nor the Competition Act, 2002 (Competition Act), define the term CSI, leaving its interpretation open-ended.
Draft De Minimis Rules
The Draft De Minimis Rules aim to harmonise the thresholds for small target exemption, with the revised de minimis thresholds announced by the MCA on March 7, 2024 (De Minimis Notification). The De Minimis Notification had increased the thresholds for the small target exemption to 450 crores INR (approximately 54 million USD) for the asset value and to 1,250 crores INR (approximately 150 million USD) for the turnover.
On March 29, 2017, the MCA issued a notification that extended the de minimis exemption to include mergers and amalgamations. On March 16, 2022, the MCA extended this notification for an additional 5 years, through a new notification (referred to as the ‘Existing De Minimis Rules’). The Existing De Minimis Rules stipulate that if the target is a business unit/asset of an enterprise, then only the relevant asset’s value and the turnover associated with the asset must be considered for determining the notification obligations. The Draft De Minimis Rules solely pertain to "enterprises being acquired, taken control of, merged, or amalgamated" but not to the acquisition or merger of particular assets or a specific business of an enterprise. This constitutes a marked departure from the previously beneficial extension of the small target exemption to mergers or acquisitions of particular assets or a business unit of an enterprise. The lack of explicit language in the Draft De Minimis Rules extending the small target exemption to the acquisition or merger of specific assets or a business unit of an enterprise may cause difficulties.
Draft Exemption Rules
On September 5, 2023, the CCI published the Draft Competition Commission of India (Combinations) Regulations 2023 (Draft Combination Regulations) for public consultation. One key aspect of the Draft Combination Regulations is the omission of exemptions for certain types of transactions that were previously not required to be notified to the CCI (Exempt Transactions). This change stemmed from the recent amendments to the Competition Act which have transitioned the authority to grant exemptions for transactions to the MCA.
The Draft Exemption Rules, once notified, will reinstate specific transaction types that won't necessitate prior notification and approval from the CCI. A brief overview of the changes introduced by the Draft Exemption Rules are:
The Draft Exemption Rules set a limit of 25% for acquisitions made by stockbrokers and underwriters to be considered "ordinary course of business" transactions, thereby exempting them from the requirement for notification. Mutual fund acquisitions below 10% of the target's shares or voting rights shall also now be regarded as part of "the ordinary course of business."
The Draft Exemption Rules stipulate the specific circumstances under which sub-25% acquisitions between competitors or parties that have vertical or complementary links may be exempt from filing requirements. Until now, the CCI’s practice has been to not consider sub-25% acquisitions between competitors, or transactions where the parties have vertical or complementary links as being in the “ordinary course” or “solely as an investment”.
Under the Draft Exemption Rules, intra-group acquisitions are not treated as a distinct exempt category, in contrast to Item 8 of Schedule I of the Existing Combination Regulations. Nonetheless, by extending the scope of the existing "creeping" acquisition exemptions to "group companies," the Draft Exemption Rules essentially exempt all intra-group transactions, irrespective of whether they are structured as acquisitions or mergers.
The Draft Exemption Rules now also exempt intra-group exemptions of assets. Previously, the intra-group acquisition exemption was not applicable to asset acquisitions. However, the Draft Exemption Rules now restrict the scope of the exemption that was otherwise applicable to asset acquisitions. Previously, this exemption also applied to ordinary course asset acquisitions. However, it is now only applicable to asset acquisitions made solely for investment purposes.
The Draft Exemption Rules specifically exempt demergers from notification obligations.
A detailed comparative analysis of the Draft Exemption Rules vis-à-vis Schedule I of the Existing Combination Regulations is available here.