Revamped Indian Merger Regime: Significant Developments

Authored by Zenia Cassinath and co-authored by Abhay

The Indian merger regime has undergone significant changes, with effect from 10^th September 2024. These changes have been effectuated through the contemporaneous notification of various sections of the Competition (Amendment) Act 2023 that dealt with changes to the merger control provisions and (i) the Competition Commission of India (Combination) Regulations, 2024 (“Combination Regulations”) which governs the procedural aspects of how transactions are to be notified to the Competition Commission of Indian (“CCI”) and replaces the erstwhile Combination Regulations of 2011; (ii) the Competition (Criteria for Exemption of Combinations) Rules, 2024 (“Exemption Rules”) which provides for various exemptions to transactions based on their structure; (iii) the Competition (Criteria of Combinations) Rules, 2024 (“Green Channel Rules”) which provides for the types of transactions that are eligible for fast tracked approvals under the green channel route; and (iv) Competition (Minimum Value of Assets or Turnover) Rules, 2024 which exempts transactions from needing to be notified to the CCI in the event that the target’s assets/turnover is below certain monetary thresholds (“De-minimis/Small Target Rules” and collectively with all the other changes shall be referred to as the “Amendments”). Set out below is a brief overview of the significant developments in this regard.

I. Applicability of these Amendments to Ongoing Transactions

As per the Combination Regulations, on and from 10^th September 2024, all transactions which have not been fully consummated (i.e. transaction where closing has not yet occurred) will be governed by these Amendments even if such transactions were entered into (i.e. transaction signing has occurred) prior to 10^th September. As such it will be incumbent on parties involved in such transactions that have not yet ‘closed’ to assess and evaluate whether their transactions will be hit by the provisions of these Amendments. Any such parties being so affected by the Amendments should observe the CCI’s standstill obligations until CCI approval is obtained as per the provisions of the Competition Act, 2002 (“Act”), failing which the parties could be subject to penalties under the gun-jumping provisions of the Act. That said, if a transaction was notified to the CCI prior to 10^th September, 2024, the provisions of the erstwhile Combination Regulations of 2011 would continue to apply to such transaction.

II. Introduction of the Deal Value Threshold

A transaction can trigger a CCI notification requirement if the ‘value of transaction’ in connection with acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds INR 2000 Crore (i.e. ~ USD 238 million) (“Deal Value Threshold”). Provided that the target has ‘substantial business operations’ in India. Notably, transactions that meet the Deal Value Threshold trigger a notification requirement irrespective of whether the De-minimis / Small Target Exemption is available to the proposed transaction.

Understanding Transaction Value
As per the Combination Regulations, the ‘value of a transaction’ is to include every valuable consideration, whether direct or indirect, immediate or deferred, cash or otherwise, including but not limited to the consideration:

for any covenant, undertaking, obligations or restrictions imposed on seller or any other person, if such consideration is agreed separately;
for all inter-connected steps and transactions;
payable during two years from the closing date for arrangement(s) entered into as a part of the transaction or incidental to the transaction such as 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;
for call option and shares to be acquired assuming full exercise of such option; and
payable, as per best estimates, based on the future outcome specified under the transaction documents.

Further, as per the Combination Regulations, if the value of a transaction cannot be established with reasonable certainty the value of the transaction may be considered as exceeding the Deal Value Threshold.

Understanding Substantial Business Operations in India
Further, it may be noted that an enterprise will be deemed to have substantial business operations in India, if:

The target’s turnover in the preceding financial year in India is (a) more than INR 500 crore; and (b) 10% or more of its total global turnover derived from all the products and services;
The target’s gross merchandise value (“GMV”) for the twelve months preceding the trigger event in India is (a) more than INR 500 crore and (b) 10% or more of its total GMV;
In the case of digital services, (a) number of its business users or end users in India is 10% or more of its total global users; or (b) 10% or more of the target’s total global turnover in the preceding 12 months is derived from India; or (c) 10% or more of the target’s total global GMV is derived from India in the 12 months preceding the trigger event.

III. Treatment of Open Offers and Transactions on a Regulated Stock Exchange

Open offers taking place in accordance with the provisions of the SEBI Takeover Code and acquisitions of shares or convertible securities taking place on regulated stock exchanges can be implemented without having to strictly adhere to the ‘stand-still’ obligation mandated under the Indian merger regime, provided that the said transaction is notified to the CCI within 30 days from the date of the first acquisition of such shares.

Further as per the Combination Regulations, in such situations, the acquirer can (i) avail economic benefits such as dividend 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 proceeding. However, the acquirer (and/or its group entities) cannot not directly/indirectly influence the target enterprise (or its affiliates) whose shares or securities are being acquired until CCI approval has been obtained.

IV. Minority Acquisition Exemptions

The Exemption Rules provide for certain categories of transactions that would be exempt from requiring CCI approval and replace the exemptions provisioned for under the Schedule I of the erstwhile Combination Regulations of 2011. Notably as per the erstwhile regulations, all minority acquisitions not leading to control or a shareholding of 25% or more were clubbed together, however the Exemption Rules, now recognises three distinct categories of such minority acquisition transactions, the details of which have been set out below.

Acquisitions in the Ordinary Course of Business
Acquisitions undertaken in the ordinary course of business, by underwriters, stockbrokers and mutual funds, are exempt from requiring to be notified to the CCI; provided that the acquiring entity holds shares or voting rights equal to or less than (i) 25% in case of an underwriter, (ii) 25% in the case of a stockbroker and (iii) 10% in case of a mutual fund.

Acquisitions that are Solely as an Investment
Acquisitions undertaken solely as an investment, that do not (i) result in an acquisition of control and (ii) the acquirers’ total shareholding does not exceed 25%, are exempt from the requirement of being notified to the CCI.

That said, the Exemption Rules further clarify that an acquisition will be treated as solely as an investment, if the acquirer:

Doesn’t have a right or ability to have director or observer representation on the board.
Doesn’t have a right or ability to access commercially sensitive information.
Its group entities and their affiliates are not engaged in any horizontal; vertical; or complementarily overlapping activities with respect to target or its downstream group entities and their affiliates. However, if such overlaps do exist, then for the transaction to qualify as solely as an investment, the acquirer’s shareholding post-acquisition should not exceed 10%.

Acquisition of Additional Shares/Voting Rights
Incremental acquisitions of shares or voting rights of an enterprise are exempt provided that the acquirer and/or its group entities’ shareholding in the target does not exceed 25% prior to or after such transaction and there is no (i) acquisition of control; (ii) right or ability to have director or observer representation on the board for the first time; and (iii) right or ability to access commercially sensitive information for the first time, except if it already has right or ability to have board representation.

Further in the event that acquirer or its group entities and their affiliates are engaged in any horizontal; vertical; or complementarily overlapping activities with that of the target, or its downstream group entities and their affiliates, then this exemption will be applicable only if the incremental shareholding acquired by a single acquisition or a series of smaller inter-connected acquisitions (i) does not exceed 5% and (ii) acquirer’s shareholding does not increase from less than 10% to 10% or more.

V. Other Notable Changes

Merger Review Timelines
The Amendments have reduced the CCI’s overall merger review and approval timeline from 210 days to 150 days and further introduced a mechanism for deemed approval of notified transactions if the CCI does not come to any prima facie findings within 30 days of receiving a notice. Consequently, there have also been proportionate reductions in the timelines for each individual step of the CCI’s review process to accommodate for the overall expedited review timeline of 150 days.

Meaning and Usage of Control
The definition of control has been amended to align it with existing decisional practices of the CCI which presently adopts ‘material influence’ over the management, affairs or strategic commercial decisions of an enterprise as the minimum threshold for control. Further, in this regard it may be noted that the Exemption Rules have also introduced ‘change in control’ as the uniform yard-stick to determine the applicability of several exemptions including those relating to intra-group acquisitions and mergers etc.

Meaning and Usage of Affiliate
As per the Green Channel/Small Target Rules and the Exemption Rules, an enterprise would be considered to be an affiliate of another enterprise if it has (i) 10% or more of the shareholding or voting rights of the enterprise; or (ii) right or ability to have a representation on the board of directors of the enterprise either as a director or as an observer; or (iii) right or ability to access commercially sensitive information of the enterprise.

Demerger Exemption
The Exemption Rules have introduced a new exemption pursuant to which the shares issued / acquired through a demerger can, under certain circumstances, be exempt if the shares so issued are proportional to the acquirers’ shareholding in the entity prior to the demerger.

Filing Fees
The Combination Regulations 2024 have increased the filing fees for both Form I and Form II. The filing fees for Form I have been increased from INR 20 lakhs to INR 30 lakhs, whereas, the filing fees for a Form II have been increased from INR 65 lakhs to INR 90 lakhs.

VI. Conclusion

These evolutions in the competition jurisprudence, usher in a new era of merger control in India. Changes like the expedited approval timelines, deemed approval and new categories of exemptions are likely to have a positive impact on the ease of doing business in India. While, the introduction of the deal value test, not only puts the Indian regulator at par with the mature jurisdictions like Germany and Austria but will also help the CCI oversee and protect India’s thriving start-up ecosystem from killer acquisitions.