Competition Commission of India issues revised FAQs on merger control

Partners: Aparna Mehra, Gauri Chhabra, Gautam Chawla and Rudresh Singh

The Competition Amendment Act, 2023 (Amendment), introduced several changes to the Indian merger control regime. Key reforms include (i) the introduction of deal value thresholds (DVT), (ii) codification of the ‘material influence’ standard of control, (iii) shorter approval timelines, and (iv) derogation from suspensory obligations for open offers or public market acquisitions, amongst other significant changes. These changes, with the implementing regulations (Regulations), came into effect in September 2024. (To read our detailed update on the Amendment, click here.)

Drawing on nine months of implementation experience and the need for clearer guidance for stakeholders, the Competition Commission of India (CCI) has released revised Frequently Asked Questions (FAQ) which interpret the amended provisions and Regulations. The CCI’s efforts in bringing clarity to the merger control regime are a welcome step to promote transparency amongst all stakeholders. However, it is important to note that these FAQs have been published as a part of the CCI’s advocacy and awareness initiatives and are not meant to be considered as the CCI’s official views. Accordingly, they are not binding and are only intended to serve as guidance.

Key highlights of the FAQs and their impact

Control

The Amendment codified the ‘material influence’ standard for determining control under the Amendment. However, the distinction between investor protection rights and control-conferring rights remained unclear. Through the FAQs, the CCI draws on its decisional practice to provide an indicative list of rights that are generally viewed as conferring control. This guidance is broadly in alignment with the guidance provided by the European Commission on this issue.

Control-Conferring Rights

Investor Protection Rights (generally not considered control-conferring)

Appointment or removal of senior management personnel; approval of budget; approval of business plans; alteration of charter documents which directly or indirectly affects the day-to-day operational dynamics; and any right relating to operational parameters, namely, research & development, manufacturing, marketing, general day-to-day administration, etc.

Information rights; right to ensure investment amount is utilised in accordance with agreed contractual terms or business plan; exit rights; tag along rights; anti-dilution rights; rights restricting transfer of shares to particular identified persons or enterprises; alteration of charter documents as regards adverse changes in other rights of the investor which are agreed between the parties; and right to appoint an observer.

As ‘control’ is an integral principle in assessing notification requirements, availability of exemptions and overlap mapping, the guidance issued by CCI will help to provide clarity on which rights are control-conferring rights and which rights are mere investor protection rights.

Deal value thresholds

A key change introduced by the Amendment was the introduction of the DVT. A transaction with a deal value exceeding INR 2,000 crore (~ USD 234 million) will require a prior merger notification filing to the CCI, provided the target or the merging parties have substantial business operations in India. The DVT was introduced to expand the CCI’s oversight of M&A activity, especially in the digital economy, which may escape traditional asset or turnover-based thresholds.

While the Regulations provide the framework for calculation of the DVT, its application has raised several interpretive questions, necessitating further guidance. The FAQs now provide guidance on the computation and applicability of the DVT, covering key aspects relevant for determining the value of a transaction, as discussed below.

1. Call options are treated as shares and must be included in the value of the transaction at the time of acquisition. This includes both the option premium and the exercise price, unless such options vest with the acquirer more than two years from the date of signing. Notably, the value of call options that vest upon the holder only at the occurrence or non-occurrence of an event outside the control of contracting parties are excluded from the deal value computation.
2. Put options are not considered as acquisition of shares, and therefore excluded from the value of the transaction for the purpose of triggering notification requirements.
3. For share swaps, the value of the transaction will include the aggregate value of both the share acquisitions.
4. Where a seller remains a key managerial personnel in the target enterprise post-closing and is contractually entitled to additional payments based on the company meeting certain targets, the estimated value of such payments must be included in the transaction value. The value of such payments should be based on the best estimate approved by the board or relevant authority. If no estimate is recorded, the maximum possible payout must be considered.

Inter-connected transactions

The regulations provide that where the ultimate intended outcome of a transaction is achieved through a series of interconnected steps, the parties must file a single notice, covering all steps, including those that might be otherwise exempt, before the CCI. The standstill obligation – which prevents parties from closing the transaction until CCI approval is received – will consequently apply to all interconnected transaction steps.

Through its decisional practice, the CCI has in the past indicated that factors, such as (i) commonality of business and parties involved, (ii) simultaneous negotiation, execution and consummation of the transaction, (iii) common board approvals or press releases, etc., and (iv) commercial feasibility of isolating the transactions, are relevant to determine whether two or more transactions are inter-connected.

In an industry-friendly move, the FAQs now clarify that the key consideration for ‘inter-connection’ is whether there is a shared intent or a mutual understanding – a meeting of minds – between parties over the decision to invest in the same entity.

The existence of separate agreements alone will not be a determination of interconnection. If two investors have separate transaction documents but other factors exist, such as their investments being mutually conditional, through conditions precedent or subsequent, this can indicate dependent transactions and economic inseparability.

Businesses are likely to embrace this clarification from the CCI. It significantly simplifies compliance by alleviating the regulatory burden on parties whose transactions were independent and limiting it to those which are based on genuine commercial interdependence or a shared decision to invest.

Commercially sensitive information

Another key change introduced by the Amendment was a revised definition of ‘affiliate’ to include entities that have the right or ability to access commercially sensitive information (CSI) of another enterprise in addition to the shareholding or board representation criteria.

The expanded ‘affiliate’ test is important for identifying overlaps between the activities of parties, which in turn impact the applicability of key aspects of merger control, such as the availability of several exemptions and the ‘Green Channel’ route. The Green Channel is available if the parties, their respective group entities and/or their ‘affiliates’ have no overlaps, and the notified transaction is deemed approved on the day of the filing.

However, the Regulations did not define what constitutes CSI, leading to ambiguity for businesses and legal advisors. For example, it is unclear whether routine investor rights, such as access to unaudited financial statements, will qualify an entity as an affiliate.

To address these ambiguities, the CCI has provided a non-exhaustive, indicative list of what information is and is not considered as CSI.

Information considered to be CSI by the CCI

Information not considered to be CSI by the CCI

Pricing, sales, market share, etc.; capacity, output, quality, etc.; budgets, annual business plan, minutes of board meetings; innovation, pipeline products, research and development, etc.; and strategic plans, such as marketing plans, plans to enter or exit a market, promotional plans, etc.

Unaudited (monthly, quarterly, annual) or audited financial statements made in accordance with GAAP, provided they only contain information that audited financial statements contain; information which is available to an ordinary shareholder and historical data; publicly disclosed information or information which is readily ascertainable through appropriate means; information that cannot be linked to a specific company; and ownership structure.

Open offer

The Amendment allows derogation from suspensory obligations for open offers or public market acquisitions. Specifically, such transactions will no longer attract gun jumping penalties if:

1. they are notified to the CCI within 30 days from the date of the first acquisition of shares, following the implementation of the open offer, and
2. only mere economic benefits (such as dividends, bonus shares, stock-splits, etc.) are exercised while voting rights are limited to matters relating to liquidation or insolvency.

While the intent of the Amendment was to allow derogation from the suspensory regime for all secondary market acquisitions on the stock exchange, there was ambiguity as to whether block and bulk deals, which are negotiated in advance but implemented on the stock exchange, would be eligible for this benefit.

The FAQs now clarify that block deals and bulk deals will also benefit from the derogation as they relate to secondary acquisition of shares through the stock exchange. However, preferential allotment of shares, which involves the preferential issuance of fresh shares, results in a primary acquisition and may not benefit from the derogation.

This clarification is particularly relevant for entities looking for open-market share acquisitions including hostile takeovers, which may be made without the target enterprise’s consent, since such transactions will not automatically trigger gun jumping proceedings.

Conclusion

The FAQs also provide additional guidance, for instance, on the methodology to be used to assess overlaps and determine the ‘ultimate controlling person’. The publication of the revised FAQs underscores the CCI’s proactive stance in providing clarity and transparency, despite the fact that it is not the official view of the CCI. The FAQs are a living tool which will evolve based on experience gained through the implementation of the law.

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