Gauri ChhabraPartner
Gargi YadavCounsel
Shreya ChaudharyAssociate
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Introduction
The year 2024 will be remembered as a watershed moment in the Indian antitrust history. While the first half of 2024 witnessed a slew of changes relating to the leniency regime, installation of the settlement and commitment framework, changes to the confidentiality regime, etc., the second half witnessed tectonic shifts in the merger control regime. Notably, the Competition Commission of India (CCI) (a) brought into effect the deal value threshold as an additional test to assess whether a transaction needs prior approval of the CCI; (b) provided clarity on the treatment of open market operations; (c) changed the parameters of the minority acquisition (i.e., acquisition of less than 25% stake) related exemption; and (d) crystallised its decisional practice relating to information rights.
How do these changes augur for private equity (PE)/venture capital (VC) players? What are the new no-go zones? What are the must-haves and good-to-haves under the new regime? This article deals with these questions, highlights some key changes to the merger control regime and suggests some handrails for deal makers.
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Key recent changes
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Deal Value Test
Effective from 9 September 2024, transactions that surpass the deal value of INR 2,000 crore, and where the target has substantial business operations in India (DVT Test), will require prior approval of the CCI, if they cannot avail of any available exemption. This applies even where the target meets the target exemption thresholds (i.e., where the value of assets or turnover of the target in India is less than INR 450 crore or INR 1,250 crore, respectively).1 At the same time, transactions that meet the existing jurisdictional thresholds2 and cannot avail of any exemption, will also need to be notified to the CCI.
The CCI has set very broad contours to determine the deal value of a transaction, namely, all consideration regardless of its form (such as cash, non-cash, immediate, deferred, direct or indirect) and includes any payments made to the same target group two years prior to or from the date of the transaction, value of all interconnected steps, call options, contingent payments, incidental payments, etc. Interestingly, the rules stipulate that in case of any uncertainty regarding the deal value, it is presumed to exceed INR 2,000 crore. Such a broad definition of deal value may lead to aggregation of unrelated value to the deal value threshold and cast the CCI’s net very wide. For instance, in most transactions, the value of convertibles or contingent payments (especially those that come into effect in default scenarios) cannot be determined upfront. Similarly, it is often the case that the exact shareholding and value at which shares are ultimately acquired is not pre-determined and is subject to broad formulations. Aggregation of stamp duty payments and double counting of a consideration for different steps of a transaction also need to be carefully considered.
The second prong of the DVT test, which deals with ‘substantial business operations’ in India (SBO) also requires greater clarity. Currently, an entity meets the SBO test if (a) more than 10% of its global turnover/gross merchandise value (GMV) for the specified period is derived from India and exceeds INR 500 crore; and (b) in case of digital service providers, if more than 10% of the entity’s end users/business users are in India. While turnover was typically considered, ‘GMV’ and ‘digital services’ are new concepts introduced by the CCI. GMV includes in its scope any consideration paid for facilitating a sale. As of now, there is no clarity on the activities that may be construed to be facilitating a sale. For illustration, it is unclear whether sale of Allen Solly’s apparels on Nykaa will be considered for GMV assessment of Nykaa or Allen Solly, or of both. Similarly, ‘digital services’ are loosely worded to mean any services, digital content or activities provided by way of the internet. This creates confusion with respect to who may qualify as a ‘digital service provider’ given that many entities are engaged in both online and offline delivery models. Given the complexity around these issues, it is likely that the CCI will provide clarity on these aspects in the coming months by way of frequently asked questions.
Handrails for dealmakers for deal value assessment
In cases where the deal value clearly crosses or misses the INR 2,000 crore mark, there is not much to be done, except recording the same clearly in the transaction documents and/or the company documents. Given the obligation to notify CCI vests with the acquirers, the dealmakers involved must be careful in ensuring that the deal value is assessed in a comprehensive manner. In borderline cases, attempts must be made to assign clear value, to the extent possible, to each limb of the transaction.
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Material influence as threshold of control and emphasis on competitively sensitive information
With the recent changes, the CCI has baked into law what it has long practiced, namely, the material influence standard of control and its emphasis on access to competitively sensitive information (CSI) as a metric of control.
The CCI has recently defined CSI3 to include strategic plans, financial data, proprietary technology, business forecast and other confidential information. Inclusion of wide terms such as ‘financial data’ and ‘confidential information’ to define CSI is not helpful in discerning the scope of CSI. It is also unclear if the ability to access CSI alone with no other concomitant rights or shareholding would trigger a filing on its own (given that only acquisition of shares, voting rights, assets or control is notifiable to the CCI). Although CSI access alone should not constitute control and trigger a filing, it appears that the CCI may take a contrary view. CSI plays a pivotal role in overlaps assessment, as entities where the transaction parties have CSI access are important for evaluating overlaps.
Similarly, clarity on ‘material influence’ is also lacking. Material influence, typically considered as the lowest threshold of control, may be inferred from a range of factors such as holding (a) majority shareholding/single largest shareholding; (b) veto rights over strategic commercial decisions such as annual business plans, budgets, recruitment and remuneration of senior management, changing the composition of board, opening of new lines of business, etc; or (c) strategic board positions. As such, there is no brightline test to determine material influence.
Such ambiguity in key concepts such as CSI and material influence that are critical to assess if a transaction is notifiable, manner of notification (green channel or normal form) and how overlaps assessment is undertaken, creates regulatory uncertainty and may adversely affect the ease of doing business.
What should the dealmakers do?
In cases where there is no intent to acquire control of the target, rights being acquired should be carefully perused to ensure that no triggers for a CCI filing (such as acquisition of CSI or strategic rights such as veto rights over key managerial personnel related matters, or change in business line/business plan, etc.) are included in the transaction documents. All public statements and releases should also be aligned with such underlying intent.
In cases where a CCI filing is triggered, an overlaps assessment needs to be undertaken very carefully in accordance with the materiality thresholds prescribed by the CCI. Further, no measures can be taken between signing and closing of the transaction that set off gun jumping alarms. To this end, the standstill provisions and conditions to closing need to be carefully assessed and parties should continue to operate independently until closing.
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Exemption for minority acquisitions
Broadly speaking, transactions that entailed acquisition of less than 25% stake were previously exempt from obtaining the prior approval of the CCI if there was no concomitant acquisition of control. The CCI also considered if the control of the target was changing from joint to sole control or vice versa, to assess if the acquisition of additional shareholding in the target triggered a CCI filing.
Under the new regime, much like the old regime, fresh acquisition of less than 25% stake is exempt if there is no concomitant acquisition of control. However, two additional layers have been added. First, there must be no acquisition of the right to access CSI of any entity as a result of such acquisition. Second, if there are overlaps between the acquirer group and the target group, then the 25% threshold drops to 10%. More nuanced rules are applicable where the investor’s shareholding remains under 25% pre and post transaction. Further, less than 10% acquisition is exempt if there are no overlaps between the parties and the investment is made solely for investment purposes. However, upon crossing the 10% threshold or securing strategic rights, the path forward requires a more refined and careful evaluation.
What does this mean for PE/VC transactions?
In case of minority acquisitions, determining whether control, CSI or board rights are being acquired becomes pivotal. Overlaps assessment between transacting parties (including its portfolio companies)4 may also be required for exemption assessment in certain cases.
Another aspect of minority acquisitions by financial investors that is high on the CCI’s radar is instances where common shareholders have stakes in competing businesses. This has raised concerns about interlocking directorates and access to CSI, both of which could suggest an element of control and increase the risk of co-ordinated market behaviour.
At this point, it would be remiss not to mention that the CCI is taking a very strict note of overlaps assessment undertaken by the parties, particularly when availing of the green channel (deemed approval) route. No matter the extent of any pre-existing arrangement between the parties, or the scope of an overlap, it is imperative that the letter of the law is strictly observed and any synthetic tests for overlaps assessment are avoided.5
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Other notable changes
In a welcome respite, on-market transactions have received favorable treatment. Now, on-market transactions must be notified post facto within 30 days of their completion and pending receipt of the CCI’s approval, the acquirer may enjoy economic rights accruing to the shares while refraining from exercising any influence on the target.
On the procedural side, the CCI has crunched the approval timelines. It is widely expected that such increased pressure on an already resource strapped regulator may lead to more frequent clock stops (effected through issuances of information requests/extended defects letter) and higher risk of invalidation of filings. This makes constant and timely engagement with the CCI by way of vigorous pre-filing consultations imperative to conserve the transaction timelines.
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Final thoughts
One hopes that the CCI will provide clarity on key concepts such as CSI, material influence, deal value and other related open points. In the interim, PE/VC players need to note that any access to CSI is a very sensitive area. Any possible exchange of CSI in case of sector investments is likely to invite heightened scrutiny. Thus, appropriate safeguards must be implemented to avoid any cross pollination of CSI where common directorship exists.
A thorough assessment must be undertaken to ascertain if a transaction is notifiable. Transaction documents must be cautiously tailored so that no gun jumping concerns are triggered. Flexible transaction timelines are essential to accommodate informal engagements with the regulator, given the grey areas and pro-active issuance of notices by the CCI where notifiable transactions were closed without the CCI’s approval or transactions were notified in incorrect manner. Finally, continued engagement with the CCI is crucial for achieving greater clarity and fostering business certainty in the Indian M&A landscape.
[1] Notification regarding revision of (a) de minimis exemption; (b) relevant assets and turnover in case a portion of an enterprise or division or business is being acquired, taken control of, merged or amalgamated with another enterprise introduced on 7 March 2024.
[2] Jurisdictional thresholds refer to stipulated thresholds based on the asset and turnover of the acquirer, target and their respective groups.
[3] Goldman Sachs (India) Alternative Investment Management/Biocon Biologics (Ref. No.: M&A/10/2020/01/CD) order dated 14 January 2025
[4] Such portfolio entities that meet the affiliate test and have physical or business presence in India.
[5] India Business Excellence Fund - IV / VVDN Technologies Private Limited (C-2023/04/1021), order dated 16 August 2024, (C-2024/01/1102), (C-2022/05/928), and (C-2021/11/882)
