The Indian merger control regime has undergone a significant overhaul. These changes had been anticipated since the amendments to the Competition Act, 2002 last year and the consequential draft regulations that had been issued and consultations with stakeholders that had been undertaken on the proposed changes. Whilst there have been periodic amendments to the merger control regime ever since it was brought into effect in 2011, this is the first comprehensive amendment which, inter alia, entirely replaces the existing set of exemptions with a brand-new set and introduces a new threshold related to the value of the transaction i.e., the deal value threshold.
Notwithstanding the significant nature of the amendments, the revised regime has been brought into effect immediately without allowing for any transition period. What's more, the new regime has been made applicable even to transactions that were signed, but had not closed, before the implementation of the revised regime.
We have summarised below the key provisions introduced / amended under the new regime and its implications:
(a) Introduction of the deal value threshold: The much talked about deal value threshold has been brought into effect. This additional jurisdictional threshold will function independently of the existing assets and turnover-based jurisdictional thresholds. It will apply to all transactions whose value exceeds INR 20 billion (approx. USD 240 million), provided the target has "substantial business operations in India". A few points to mention:
(i) The new regime will now require a detailed examination of various elements of a transaction to arrive at the deal value. This is because every element of the consideration – whether direct or indirect, immediate or deferred, cash or otherwise – would need to be accounted for. These include, amongst others, consideration attributable to shares that can be exercised pursuant to a future call option (assuming the option is fully exercised), to any acquisitions by one of the parties or its group entities in the target anytime during the two year period prior to signing, and for all arrangements entered into as part of (or incidental to) the transaction in the two year period from closing (which will include technology assistance and IPR licenses). A residual clause provides for this threshold to be assumed to have been exceeded if the deal value cannot otherwise be established with reasonable certainty.
(ii) As for the "substantial business operations in India" test, the new regime contains a deeming provision setting out circumstances where an entity will be deemed to have substantial business operations in India. These pertain to: (A) the number of business users / end users for digital services; (B) gross merchandise value; and (C) turnover value. If any of these India numbers amount to 10% or more of the target's global numbers for a period preceding the signing of the definitive documents / in the previous financial year (as the case may be), the target will be deemed to have "substantial business operations in India". Fortunately, for the GMV and turnover-related thresholds, the CCI has included a qualifying criterion i.e., the target will not be deemed to have substantial business operations in India if its GMV / turnover value in India during the specified time period does not exceed INR 5 billion (approx. USD 60 million).
There is, however, no such qualifying criterion for the digital services threshold. Another concern is what threshold should be applied to a traditional business which also has a digital element (which, increasingly, most traditional businesses are resorting to). Separately, the presence of a "deeming" provision gives rise to an uncertainty as to whether there can be any other scenarios where the entity can be said to have substantial business operations in India? It is interesting to note that other than the thresholds referred to in the deeming provision, there are no other monetary criteria that would apply to the target in case of assessing the applicability of the deal value threshold, i.e., the traditional de minimis / small target exemption has expressly been carved out where the deal value threshold is applicable.
It should be noted that for global deals, the deal value will be what is attributable to the entire global deal, and not just the value of the India leg. However, the inclusion of the qualifying criteria in at least two of the parameters for the substantial business operations test should ensure that the deal value threshold does not end up capturing a significant number of global deals that have a limited India nexus. The intent of introducing the deal value threshold was to capture global deals primarily in the tech space to avoid asset and turnover lite entities from escaping the merger control net. The implementation, however, has significantly widened the scope by including tech as well as non-tech traditional entities within its ambit. The attempt to subsequently introduce a turnover based qualifying criteria to address this issue goes against the idea of introducing a non-asset and turnover-based threshold.
(b) Computation of turnover: The new regime now expressly clarifies that whilst computing turnover in India, parties will need to exclude intra-group sales, indirect taxes, trade discounts and, most importantly, all amounts generated through assets or businesses from customers outside India to determine if the CCI's jurisdictional thresholds are met or the de minimisexemption can be availed of. This streamlines the India turnover computation requirement – which was largely captured in the CCI's decisional practice previously – and provides much needed clarity. This could, however, lead to an unintended consequence of excluding all India based businesses which are focused on overseas customers, which could include, for example, a significant part of the Indian pharmaceuticals and IT / ITeS industries.
(c) A streamlined set of exemptions: The new regime streamlines exemptions available to transactions, including providing much-needed clarity to the scope of certain previously ambiguous exemptions as well as addressing gaps such as with respect to demergers. Some of the key exemptions under the new regime are:
(i) The "financial investor" exemption: This covers acquisitions of shares / voting rights of 25% or less, provided there is no acquisition of control. However, the control test remains broad and includes, for instance, the acquirer gaining the right or ability to access commercially sensitive information of any other enterprise. The term "commercially sensitive information" itself could also be broadly interpreted. Whilst previously, some rights could be viewed to be in the nature of minority investor protection rights, it may now become more difficult to adopt such a view. Accordingly, with this requirement and without a definition of what constitutes "commercially sensitive information", investors who wish to rely on this exemption will have to let go of any contractual information / inspection rights. Of course, any assessment in this respect would need to be conducted on a case-to-case basis.
A positive change for this exemption is that it will now exempt acquisitions where acquirers have investments in horizontally overlapping or vertically or complementarily linked businesses as the target, but do not acquire 10% or more of the shares / voting rights of the target (provided, of course, there is no acquisition of control). The "financial investor" exemption under the earlier regime did not expressly disregard investments in overlapping / linked businesses within the merger regulations; however, the CCI's decisional practice typically viewed such investments as "strategic", creating uncertainty regarding the availability of this exemption.
(ii) The creeping acquisition exemption for acquisitions under 25%: Previously, there was no clarity on whether "creeping acquisitions" within the 25% threshold, without the acquisition of any additional controlling rights, would trigger a merger filing. The new regime reduces this uncertainty by introducing an express exemption for creeping acquisitions of shares / voting rights under 25%, subject to certain conditions (including no acquisition of control of the target). This exemption also addresses acquisitions where acquirers have investments in similar or vertically / complementarily linked businesses as the target, and exempts these so long as the incremental acquisition(s) does not exceed 5% and does not result in the acquirer's total stake in the target increasing to 10% or more. This also provides greater flexibility to investors who already hold the right or ability to nominate a director or observer to the board / access commercially sensitive information of any enterprise.
(iii) Change in control test for other creeping acquisitions: The new regime has done away with references to joint / sole control in its creeping acquisition exemptions for acquisition of additional shares / voting rights between 25-50% and 50-100%. Instead, these now have a uniform test for the additional acquisition not resulting in a "change in control" of the target. However, the contours of this test are quite broad and lack clarity, opening room for multiple interpretations. It remains to be seen whether the 'change in control' of the target will be viewed more narrowly (as under Indian securities law) or more broadly, encompassing changes in the nature, quality and / or degree of control (as under the European Union merger regulations). To address any concerns around this interpretation – including possibly an unintended increase in merger filings – it would be best if the CCI could issue some guidance around this.
(iv) Restricted intra-group exemptions: Whilst intra-group asset acquisitions and merger and amalgamations are exempt under the new regime (provided there is no change in control over the assets being acquired / the target(s)), no specific exemption has been provided for intra-group transfers of shares / voting rights. Given that these are very typical of internal restructurings within organisations, it is unclear why such a major gap has been left unaddressed. Whilst perhaps it is possible to view asset acquisitions as including shares and voting rights, both "assets" and "shares" are technically considered distinct and are used in such distinct manner under competition law. Clarity from the CCI on whether this exemption extends to intra-group transfers of shares / voting rights would help mitigate interpretational concerns.
(d) Market purchase relaxation: 2019 saw the CCI issue draft regulations providing on-market purchases and open offer scenarios a relaxation from its stringent standstill provisions. Whilst much lauded, these draft regulations only saw the light of day as part of the amendments to the main Indian competition legislation in 2023.
The new law does provide a framework for acquirers to operate within in such scenarios. For instance, they would need to make a filing with the CCI within 30 calendar days of acquiring the shares or convertible securities via a market purchase (or the first acquisition, in case of an open offer). Given the extent to which checks need to be conducted to determine "affiliates" and the possibility of any horizontal overlaps or vertical / complementary linkages with the target, and arrive at the market shares to determine the appropriate form for the filing, we anticipate that the wheels for a filing ought to ideally be put in motion much more in advance of the 30-day timeline.
Further, acquirers would not be able to exercise their ownership or beneficial rights or interest in such shares or convertible securities till the time the CCI approves the transaction (other than certain economic benefits, including dividend, bonus shares and the ability to subscribe to rights issue shares, as well as the ability to vote during any liquidation / insolvency proceedings).
(e) Compressed timelines: In theory, the overall merger review timelines now stand significantly compressed. The CCI now needs to form its prima facie opinion regarding competition concerns for any notified transaction within a mere 30 calendar days (as opposed to 30 working days earlier) from the receipt of the filing. Failure to do so will result in the transaction being deemed to be approved in Phase I itself.
If the CCI prima facie finds that the transaction may lead to competition concerns in any relevant market, it may proceed to a more detailed Phase 2 investigation. However, the outer limit for the entire scrutiny process (starting from Phase I) has been reduced from 210 calendar days to 150 calendar days – post which the transaction will be deemed to be approved.
These numbers do not, however, provide the complete picture. The law provides for significant time-related exclusions. For instance, if the CCI finds any "defects" in the filing (which is almost inevitably the case in all filings), the filing will be deemed to have been made on the date when the parties have removed these defects – thereby turning the clock back to zero till all defects have been addressed. Even the time taken to furnish any additional information requested by the CCI will be excluded from the time on the clock – which was the practice under the old regime as well. These will, accordingly, bring down the 'official' time taken by the CCI to review and approve transactions, although we expect the actual time taken to satisfy the CCI's queries will remain the same as under the old regime. If anything, these stricter timelines may compel an already overburdened regulator to resort to invalidating a greater number of filings to ensure that the statutory timelines are met.
(f) Ability to offer modifications before CCI's prima facie opinion: Whilst the law previously permitted parties to offer modifications only once the CCI had formed its prima facie opinion, the new regime permits the parties and even the CCI on its own motion to offer / propose modifications even before the regulator has formed its prima facie This is a welcome change, which will hopefully further reduce the number of detailed Phase 2 investigations, avoid lengthy to-and-fro to address any competition concerns that may be apparent on the face of it, and ultimately help in facilitating timely transaction approvals from the CCI.
(g) Formalisation of the 'green channel' route and the de minimis exemption in the main legislation: The regime now formalises the 'green channel' route and the de minimis exemption as part of the main competition legislation:
(i) The de minimis exemption previously flowed from a more general ability provided to the government to notify exemptions in public interest. Whilst immensely helpful, such notifications would be issued for a limited duration, thereby necessitating their "renewal" / extension periodically. The inclusion of this exemption within the main competition legislation will at least ensure its continuity. So far as the thresholds are concerned, they remain the same as notified by the government in March 2024.
(ii) As for the 'green channel' route, the new regime has brought about certain subtle changes. The relevant rules, for instance, now expressly clarify that the overlap assessment would need to be conducted vis-à-vis the ultimate controlling person (as opposed to the ultimately controlling entity) of the acquirer – necessitating a compulsory check at the level of the ultimate controlling individual of the acquirer.
Another pertinent aspect relates to the "affiliate test", which sets out the materiality thresholds to determine whether an enterprise would be considered an affiliate of another. The rules now provide that if any enterprise has the right or ability to access commercially sensitive information of another enterprise, such other enterprise would be its affiliate. This brings about similar concerns as discussed at the "financial investor" exemption above. But given that the CCI seems to have the ability to open any green channel filing within a year of its consummation, it may become necessary to engage with the regulator by way of pre-filing consultations at a much earlier stage of the transaction to ensure that no merger laws are accidentally tripped.
(h) Deal value in computation of gun-jumping penalty: Under the old regime, the CCI had the power to impose penalties of up to 1% of the higher of the total assets or turnover of the combined entity for gun jumping. The new regime will now see the CCI accounting for the deal value (in addition to the total assets / turnover) to determine the maximum penalty that can be imposed in gun jumping proceedings.
On a slightly positive note, in the event any filing made under the 'green channel' route is found by the CCI to not meet the relevant criteria (thereby requiring a filing under the approval route), no gun jumping-related action will be taken by the CCI so long as the re-filing is carried out within 30 calendar days of the CCI's order in this respect.
(i) Increase in the merger filing fees: The fees payable to the CCI for merger filings now stand increased to INR 3 million (approx. USD 36,000) for short form filings and INR 9 million (approx. USD 108,000) for long form filings.
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