Building Criteria: Insights from India’s updated Merger Control Regime

- Shivangi Mishra (Fourth Year Law Student at Symbiosis Law School, Pune)

Introduction

The Competition Act 2002 was enacted to control the market and protect consumer interests. In today's world, when organizations are expanding and transitioning into new types of enterprises to advance their aims, ongoing monitoring is critical to maintaining the goal of Competition Law. With the rise of technological advancements, companies in chemicals, industrial manufacturing, defense and aerospace deploy mergers and acquisitions to add technology to their services, find the appropriate talent in tighter labour markets and expand into new areas for a greater ‘services-led approach”.

Merger control is a practice that promotes fair competition and market effectiveness. The strategy ensures that mergers do not result in the concentration of market power, which is damaging to other market participants. To accomplish this, the framework needs to be revised on a regular basis to reflect changing business contexts. In pursuit of this, on September 9 2024, the Ministry of Corporate Affairs notified certain sections of the Competition (Amendment) Act 2023 (“Amendment Act”) that will reform merger control in India. This article aims to examine the notification and its capacity to manage the current corporate complexities.

The Classical Era: How were Mergers done before?

The previous control regime can be viewed as a gatekeeper with a very narrow checklist, focusing on substantial numbers but blind to the newer giants sneaking in. While the previous regime has jurisdictional thresholds, they are mainly comprised of combined assets and turnovers in addition to the other limits of checking for Appreciable Adverse Effects on Combination (“AAEC”), notifying the Competition Commission of India (“CCI”), certain exemptions to the process and handling general corporate procedure.

Due to the narrowed mechanism of the older regime which majorly focused on assets and turnovers, it allowed high-value transactions in niche sectors such as in digital markets, from notifying the CCI and escaping their vigilance since they are low turnover and asset light; even while having the potential to affect consumers and the market overall. This vacuum allows for mergers between IT giants that are not subject to antitrust examination, such as Flipkart's acquisition of Myntra. With an increasingly changing digital landscape due to the introduction of financial technology (fintech) and big data mergers in the market among others. There came a pertinent need to devise a broader system to keep up with not just merger control trends globally but also to be able to have greater surveillance over the competitive market.

The Renaissance: CCI’s new notification

The new Merger Control regime under the Amendment Act attempts to revamp the way combinations are looked at- from assets and turnovers to determine vigilance to a broader, more holistic set of parameters to avoid unfair competition. The features are:

1. Introduction to Deal Value Threshold (“DVT”)- Transactions over INR 2,000 crore (about. USD 238 million) involving targets with significant operations in India require CCI clearance under the newly introduced Combination Regulations 2024. A target has significant operations if it achieves any of the following criteria: 10% of worldwide users in India, GMV more than 10% of total global GMV and greater than INR 500 crore (about USD 60 million), or turnover in the country greater than 10% of global turnover and greater than INR 500 crore (excluding digital services). This increases regulatory attention for high-value transactions.

2. Smaller deadlines- The CCI has accelerated merger control reviews by shortening deadlines. It must now offer a prima facie opinion or award phase I authorization under 30 calendar days (down from 30 working days), and the highest presumed approval period has been reduced from 210 to 150 days.

3. Exercise of ownership- Stock market transactions, open offers, and public market purchases are no longer subject to prior CCI notice or fines provided they are reported within 30 days and do not entail the exercise of ownership or beneficial rights.

4. Minimum Value Rules – The Minimum Value Rules include a de-minimis exception, which specifies that transactions in India do not require CCI notification if the target has a revenue of less than INR 1,250 crore (approx. USD 150.60 million) or assets of less than INR 450 crore (approx. USD 54.21 million).

5. Green Channel - The Green Channel Rules clarify considered approval laws and broaden the definition of affiliates to include individuals who have exposure to commercially sensitive information ("CSI"). This modification has an impact on how overlaps for downstream affiliates, which includes controlled portfolio firms, are assessed in merger notifications.

6. Exceptions- The Exemption Rules specify specified combinations that are exempt from notice. 

a)     The Minority exemption allows for up to 25% purchase sans control or board powers; the ceiling is reduced to 10% in case of an overlap.

b)    Incremental acquisitions allow companies to keep their holdings under 25% while purchasing shares without control; overlaps allow to add an extra 5% under certain situations.

c)     Exemption from issuing pro rata share in case of Demergers.

d)    Financial intermediaries may buy up to 25% of stockbrokers and underwriters and 10% of mutual funds without prior notification.

Age of Enlightenment: Impact of the new regime

The new regime comes with a variety of positives. The DVT, combined with the existing de minimis exemption that exempts certain combinations from alerting the CCI (if the assets of the target exceed ₹450 crores or turnover exceeds ₹1,250 crores) aims to capture large deals, especially in technology, that exceed one but not both de minimis limits. The establishment of the DVT has diminished the importance of the de minimis exemption, since buyers with transactions surpassing the DVT are ineligible for it. Consequently, if a transaction surpasses the Deal Value Thresholds, the significance of the de minimis consideration becomes irrelevant.

The Exemption Rules appear to mitigate the effect of the DVTs. However, establishing as an Exempt Combination is difficult owing to onerous requirements. Acquirers shall not have ‘material influence’ on the target's management or special privileges, such as board representation. It is doubtful that first-time acquirers in high-value mergers will lack such power, especially with unlisted targets. As a result, most deals that exceed the Deal Value Thresholds would not qualify for exemptions, rendering DVT analysis crucial for the CCI's regulatory scrutiny.

Section 5(d) of the Competition Act defines a combination as any acquisition of control, shares, voting rights, or assets worth more than ₹2,000 crores if the acquired entity has “substantial business operations in India.” The Substantial Business presence ("SBO") Test guarantees that major worldwide acquisitions involving corporations with minor presence in India are not subject to CCI examination only for surpassing the Value Test. Although the CCI has yet to define SBO, this framework attempts to oversee transactions that have a genuine impact on competition especially during cross-border combinations for CCI to prefer businesses that do have operations in India. Germany and Austria consider the value at €400 million and €200 million, respectively. 

The merger control offered by DVT and SBO should be regarded with caution under the new regime. The circumstances that allow a transaction to avoid reporting to the CCI have been tightened through amended exemptions from filing requirements. It is critical to assess any changes in control, accessibility of sensitive business data, and overlapping operations between the parties and their affiliates, particularly when evaluating whether to apply the minority share acquisition exemption.

The majority of exclusions are based on a lack of a change in control, which the Amendment Act defines as the power to exert considerable influence, which is less stringent than the decisive influence requirement in other jurisdictions. As a result, if control changes, exemptions may no longer be eligible. Furthermore, the agreement review deadlines create issues, since significant time exemptions in the laws may render the period useless. The regulations also permit removing and refiling a notification during Phase I if the CCI requires further review time, allowing parties to avoid a complete examination of the deal.

There also exists contention regarding the impact of the transitional provisions as some practitioners of the field deem them as ‘draconian’. Given the suspensory and obligatory character of the Indian merger control framework, parties would be required to respect standstill commitments (i.e., not giving effect to any element of the deal as of today). This has resulted in major ambiguity about transaction timescales, necessitating immediate attention from all deal-making parties to ensure that they avoid breaking the law and face fines for gun jumping.

Is this the End? Conclusion and Way Forward

While the regime is certainly a step forward in modernizing India’s approach to mergers in a digital era. it is extremely important to have a system that can handle the changing and rapid pace of business decisions to ensure that such moves are in alignment with the law to protect the consumers as well as have to a lawful and friendly competitive environment. While the new regime presents well thought-out measures for improvement of surveillance, it is also important to consider the limit of such regulations and to ensure that such regimes do not lead to ‘over-regulation’ in the industry unintentionally impacting competition.

Implementation issues, such as shorter timescales, may impede cross-border and industry-specific combinations. Nonetheless, the framework successfully protects consumer interests while encouraging competitive welfare. While certain regulatory concerns may develop, they are likely to be resolved with time and judgements. Therefore, the regime presents a good idea when considered from the government perspective and should be understood as CCI’s ‘services-led approach’ to consumers