The Competition Commission of India (CCI) has published the draft CCI (Combinations) Regulations, 2023 (Draft M&A Regulations) on 5 September 2023 and has invited stakeholder comments, to be submitted by 25 September 2023. The Draft M&A Regulations would replace the current CCI (Procedure in regard to the transactions of business relating to combinations) Regulations, 2011 (Combinations Regulations, 2011).
The key changes introduced in the Draft M&A Regulations explain the applicability of the deal value threshold (DVT), which was introduced by the recently introduced Competition (Amendment) Act, 2023 (Amendment Act) and the derogation from standstill obligations for stock exchange transactions. Once these Draft M&A Regulations are notified, the major amendments in relation to M&A in India will become effective. Our previous client alert on the Amendment Act is available here.
The key changes introduced by the Draft M&A Regulations and potential implications of such changes are as follows:
Schedule I exemptions will likely move to rules to be framed by CCI
Exemptions under Schedule I to the Combinations Regulations, 2011 (i.e., transaction specific exemptions such as for minority investments, intra-group transactions, etc.) are not included in the Draft M&A Regulations.
It is expected that these exemptions will now be part of the rules that the CCI will frame under Section 63 of the amended Competition Act, 2002 since it is unlikely that the Schedule I exemptions would be omitted.
Applicability of DVT on transactions
The Amendment Act had introduced DVT as a new category of jurisdictional threshold to determine the notifiability of a transaction in addition to the existing asset and turnover based criteria. The DVT is breached and a notification is triggered where the value of a transaction exceeds INR 20 billion (INR 2,000 crore / USD 251 million / EUR 247 million approximately), provided that the target enterprise in question has ‘substantial business operations in India’.
Value of Transaction
In essence, the ‘value of transaction’ is a ‘catch-all’ provision and aims to cover the entirety of consideration paid for a transaction. Simply put, the ‘value of transaction’ is inclusive of any and all forms of consideration for the transaction.
One would consider the following factors for the determination of ‘value of transaction’: (a) any noncompete fee paid to the seller or any other person; (b) consideration payable for inter-connected transactions; (c) the value of any consideration paid in connection to incidental arrangements such as, technology assistance, IP licensing, right to use any product/service/facility, supply of raw materials, finished goods, branding and marketing that is part of or incidental to the transaction, and which is executed anytime during a 2 year period from the date of completion of the relevant transaction; (d) in case of transactions involving call or put options, one has to consider the transaction value assuming the consideration payable on full exercise of such options, etc.
Parties are also required to consider previous investments / acquisitions in the “target” by the acquirer or its group entity during a two-year period preceding the date of the transaction.
Interestingly, the DVT will be assumed to have been exceeded where the precise value or consideration of a transaction cannot be established with reasonable certainty.
Substantial Business Operations in India
The Draft M&A Regulations also clarify that if 10% of the target enterprise’s global user/subscriber/ customer base, gross merchandise value (GMV), or turnover in the past 12 months/last financial year is in India, the target would be deemed to have substantial business operations.
Stock exchange transactions do not require CCI’s prior approval
At long last, an important inclusion in the Draft M&A Regulations is the framework for derogation from suspensory obligations (i.e., parties are not allowed to act on any part of the transaction till such time the CCI approval is not obtained) for open market purchases (of securities of listed companies). The CCI can now be approached within 30 days from the first acquisition / implementation of the open offer / purchase on the open market.
The CCI has adopted a practical approach and allowed the acquirer rights to dispose of the securities, exercise voting rights (only in in case of liquidation / insolvency proceedings) and avail economic benefits (such as dividend, subscribing to rights issue, bonus share and buy-back of securities) prior to obtaining the CCI’s approval. However, this is subject to the acquirer not influencing the enterprise whose securities have been acquired till the post-facto notification is approved by the CCI.
Review period – reworking the clock
The Draft M&A Regulations indicate that in case a filing has been made without all the requisite information, the CCI is likely to issue a defects letter within 10 business days of receipt of the filing, and parties would be given to time to clear the defects. However, the CCI’s statutory time frame for review (or the clock) will start only once the “defects” are cleared by the parties. At present, the review clock is paused for the time taken by parties to respond to CCI’s requests for information and does not reset as proposed in the Draft M&A Regulations.
Pre-filing consultation (PFC): The Draft M&A Regulations formalise the pre-filing consultation process and reiterate that the guidance provided during the PFC is not binding on the CCI.
Increase in filing fees: The amount of filing fee payable for filing the notice in Form I and Form II has been increased to INR 3 million (INR 30 lakh / USD 36,000/ EUR 33,500 approximately) and INR 9 million (INR 90 lakh/ USD 108,000/ EUR 101,000 approximately), respectively from the existing INR 2 million (INR 20 lakh/ USD 24,000/ EUR 22,500 approximately) for Form I and INR 6.5 million (INR 65 lakh/ USD 78,000/ EUR 73,000 approximately) for Form II.
Format for filing voluntary modifications: A new filing format in Form IV (provided in Schedule I) has been introduced to aid the process of offering voluntary modifications in a notified transaction. An important aspect is that the parties will explain how the modifications offered are sufficient to address the likely appreciable adverse effect on competition (AAEC) in the relevant markets.
Interplay of current Schedule I exemptions with DVT: Section 6(2A) clarifies that transactions breaching the DVT threshold of INR 20 billion (INR 2,000 crore / USD 251 million / EUR 247 million approximately) are notifiable to the CCI even if the transaction benefits from the small target exemption. Subject to the rules to be introduced, we expect that the Schedule I of the Combinations Regulations, 2011 which exempts certain categories of “combinations” (i.e., those presumed to not impact the markets) would be available even if the DVT is breached.
Substantial business operations test is more relevant for global transactions than India centric businesses: While the indicative factors for determining “substantial business operations in India” for a target enterprise under DVT make references to a global user-base, GMV and turnover value, acquisitions of target enterprises operating only in India (which do not have a global user-base, GMV and turnover value) will be notifiable to CCI if the consideration threshold of INR 20 billion under DVT is met. While the Competition Law Review Committee recommended the introduction of DVT to capture and assess transactions in new age digital markets, a sector specific applicability of such nature has not been prescribed. As a result, the applicability of DVT will be sector agnostic.
Significance of PFC meetings: Considering the constricted time-frame of 30 calendar days to approve a notified transaction, the CCI is likely to expect a notification complete in all aspects. An incomplete notification in any respect would be a ground to immediately reset the review clock. As previously commented by us, parties would be advised to use the facility of PFC meetings with the CCI (similar to stateof- play meetings) to perfect the draft before making the formal notification with the CCI. This is likely to stave off risk of an invalidation or clock reset as contemplated in the new regulations.
Derogation for on-market purchases of listed securities: CAM has advocated for this change since 2018 and the derogation of suspensory obligations for stock-exchange transactions is a significant step towards harmonising the need for CCI approval with parties’ legitimate right to make opportunistic purchases on the stock market.