The CCI issues draft merger regulations for public consultation

On 5 September 2023, the Competition Commission of India (CCI) published the draft Competition Commission of India (Combination) Regulations, 2023 (Draft Combination Regulations) - these regulations, along with the yet-to-be-notified amendments to the merger control related provisions of the Competition Act, 2002 (Act) introduce four key changes to the Indian merger control rules.

I. Inclusion of deal value thresholds to capture “killer acquisitions”

Inadequacy of asset and turnover linked thresholds for notification of mergers and acquisitions (M&A) for approval by antitrust regulators has attracted significant attention in the last 5-7 years. Fearing that M&A in the technology and pharmaceuticals sector, where a business may not have significant assets or turnover, but a great potential, slipped under the radar, some competition regulators such as those in Austria and Germany introduced an additional layer of test, linked to the value of a transaction, for notifying transactions.  

In similar vein, to empower the CCI to examine transactions involving small targets in terms of asset or turnover, but significant potential to add to the strength of the acquirer, the Competition (Amendment) Act, 2023 (Amendment Act) expands the definition of the term “combination” under Section 5 to include a deal value threshold of INR 2000 crores (DVT), if the target of the transaction has substantial business operations in India. It defines “value of transaction” to include “every valuable consideration, whether direct or indirect, or deferred for any acquisition, merger or amalgamation.” 

a. Determining the value of a transaction

The Draft Combination Regulations offer guidance on how to determine the “value of transaction” by presenting examples and explanations to help identify “every valuable consideration, whether direct or indirect, or deferred for any acquisition, merger or amalgamation.” They also offer guidance on “substantial business operations” in India.

In its attempt to offer greater clarity, the CCI appears to have focussed greater attention on anticipating and plugging potential loopholes with the filing requirements. For example, the Draft Combination Regulations require transacting parties to look back, and amalgamate the value of all the transactions, involving the same target, undertaken in the preceding two years, to determine the value of a transaction on a specific date. Likewise, they require transacting parties to look into the future, and attribute value to all the arrangements (for example IPR licensing, supply agreement, technology assistance, branding and marketing) which are part of a transaction on a specific date or incidental to the transaction.

Neither of these two provisions offer greater clarity to notifying companies. On the contrary they could potentially create ambiguity if applied. Take for example, a venture capital or private equity fund participating in multiple rounds of fund raise by a start-up. In a two year horizon investors may choose to invest funds through equity purchases more than once. While each investment may be purely opportunistic and unconnected with the earlier round, investors may be faced with the need to notify their investments if they cross the Rs 2000 crore DVT at any time in the two year period and possibly even pay a penalty to the CCI for not having notified earlier investments. 

Likewise, the look into the future provision will require parties to an otherwise not notifiable transaction to assign a numerical value for all of their commercial arrangements with the target, whether they are tied to an M&A deal or entirely independent of it, only because the arrangement takes place within 2 years of the M&A deal. 

The Draft Combination Regulations do however offer some more helpful guidance  by defining “substantial business operations in India” which is particularly important for establishing a clear “India nexus” in global transactions .

b. Substantial business operations test

The Draft Combination Regulations list 3 parameters: (i) users, subscribers, customers or visitors (User Threshold); (ii) gross merchandise value (GMV Threshold); and (iii) turnover from all products and services (Turnover Threshold) for assessing whether a transacting party has substantial business operations in India. If the target derives 10% under each threshold in India, the local nexus requirement is met (although a specific reference to “in India” in respect of the User Threshold and GMV Threshold is missing).  

II. Much needed clarity on share purchase in listed companies off the exchange.

Historically, the Competition Act and the existing Combination Regulations did not include a mechanism which permitted an on-market purchase of shares in a listed company without first notifying the transaction to the CCI (and consequently inviting a penalty for gun-jumping). 

The Amendment Act plugs this gap. The newly introduced Section 6A creates a carve out for on-market purchase of shares subject two conditions- (i) the acquirer notifies the transaction within the prescribed timeline and in the prescribed form; and (ii) the acquirer does not “exercise any ownership or beneficial rights or interest in such shares or convertibles, except as permitted by regulations.” 

The Draft Combination Regulations helpfully permit the acquirer to - (i) avail economic benefits such as dividends and other distributions, participation in rights issues, bonus issues, stock splits and buy-backs; (ii) sell the shares or securities acquired; or (iii) exercise voting rights in respect of insolvency or liquidation proceedings, while the CCI’s review is ongoing. 

III. Increased opportunities for negotiating remedies.

The Competition Act (unamended) and the existing Combination Regulations envisage only one formal opportunity for parties to offer remedies to address the CCI’s concerns, after the CCI had expressed its preliminary opinion that the transaction may cause appreciable adverse effect on competition (AAEC). Historically, the first remedy proposal was made by the CCI, followed by a counter-offer by the parties, which the CCI could either accept, reject or modify. This formalistic approach theoretically affected the parties’ ability to voluntarily offer remedies outside this process (although in practice the CCI had begun to accept voluntary remedy proposals). 

The Draft Combination Regulations broaden the remedy “zone” and allow parties to offer remedies- (i) anytime before the CCI issues its preliminary opinion on whether the transaction may cause AAEC; (ii) as part of the written response to CCI’s notice/letter expressing its preliminary view on likelihood of AAEC; and (iii) upon the issuance of a statement of objects, formally recording the competition concerns identified by the CCI upon a review of the notified transaction. 

IV. Removal of exemptions for certain categories of transactions.

The Competition Act requires that the acquisition of even a single share or voting right be notified if the combined value of assets or turnover of the parties to the transaction breached certain thresholds. This could lead to the notification of transactions that do not necessarily raise any competition concerns. To address such a possibility, the CCI had identified certain categories of transactions (in Schedule 1, of the existing Combination Regulations) which are unlikely to cause AAEC. The parties to such transactions need not notify the deals to the CCI. 

The Draft Combination Regulations do away with the list of transactions that are unlikely to cause AAEC and hence need not be notified. It is anticipated that the Government of India will replace this list of exemptions with its own list, but these have yet to be published and the contents of this list are unknown. Understandably, the list of exemptions will be the subject of subsequent discussion. 

The Draft Combination Regulations, introduce several other substantive and procedural changes. These are discussed in greater detail in the Axiom5 Summary Note (here).