Draft Combination Rules Set To Expand CCI's M&A Deal Portfolio

The proposed regulations allow the acquiring business to make open-market purchases without prior approval from the regulator.

<div class="paragraphs"><p>(Credits: Campaign Creators/Unsplash)</p></div>
(Credits: Campaign Creators/Unsplash)

The Competition Commission of India has come out with a draft of the combination regulations in an effort to bring more merger and acquisition deals within its ambit.

The new draft, following the recent amendments to the Competition Act and which is set to replace the 2011 version, will deal with competition concerns in mergers and acquisitions.

Its key highlights are:

  • Depending on the deal value and whether or not the target corporation has substantial business operations in India, the regulations propose a new method of notifying deals to the regulator.

  • A relaxation in the standstill obligations for open-market purchases.

The competition regulator has invited public comments on the draft until Sept. 25.

The Deal Value Method

According to the 2023 amendments to the act, the CCI must be notified if the enterprise that is being acquired has substantial business operations in India and if the deal is over the Rs 2,000-crore mark.

Under the existing regulations, a deal is notified on the basis of existing asset- or turnover-based thresholds, and not on the basis of deal value.

The proposed regulations say that while calculating the deal value, it shall include every valuable consideration that forms a part of it, be it direct or indirect.

According to the proposed regulations, when calculating the deal value, it should include every valuable consideration that forms a part of it, be it direct or indirect. The regulations also presume all transactions between the parties within a two-year period to be interconnected and require the parties to aggregate their value into the deal value as well.

For starters, Rs 2,000 crore may not appear to be a large number for a deal in present times; and second, the regulations require various other ancillary metrics such as the non-compete fee and supply arrangement payments to be counted while computing the deal value, Anisha Chand, partner at Khaitan & Co., told BQ Prime.

Presuming all transactions within a two-year period are interconnected is not consistent with the position in other jurisdictions where a case-by-case approach is adopted to assess interconnection, according to Ritwik Bhattacharya, partner at Shardul Amarchand Mangaldas.

With the definition of transaction value being expansive, Chand said this is likely to result in a clear uptick in the number of deals being notified.

The draft regulations stipulate that the enterprise which is being acquired must have substantial business operations in India.

A business will be said to have substantial business operations if the target business in India has had 10% or more of its total global number of users and visitors in the last 12 months; or if its gross merchandise value for the last 12 months is 10% or more of its total global gross merchandise value; or if its turnover during the relevant period is 10% or more of its total global turnover.

It is helpful that there is relative certainty to the test. The tests in other jurisdictions are relatively more "open-ended", which can create uncertainty, said Bhattacharya.

However, the inclusion of metrics such as "visitors" is unhelpful, as it may be difficult to ascertain and may not be an accurate yardstick. Additionally, the metric of "users" may not be necessary for non-digital sectors where turnover is typically a sufficient criteria to assess presence, Bhattacharya added.

The definition doesn't take into account situations where a company has valuable assets that meet the deal value threshold, but aren't commercially operational. When such a company gets acquired, the deal may escape notification even though it might alter the market structure.
Anisha Chand, Partner, Khaitan & Co.

Market Relaxations

The proposed regulations permit the acquiring businesses to avail market opportunities by allowing the acquirers to make open-market purchases without getting prior approval from the regulator. The acquiring business will have 30 days after the open-market purchase to notify the regulator.

The regulations also confer certain rights on the acquiring entity before it gets approval from the regulator. These involve availing economic benefits such as dividends and bonus shares, the right to dispose of shares, and the authority to exercise voting rights in issues related to liquidation or insolvency.

Previously, open-market purchases have been the subject of several gun-jumping proceedings before the CCI and such a derogation was much needed. This is a welcome change and is consistent with the Government's ease-of-doing business initiative.
Ritwik Bhattacharya, Partner, Shardul Amarchand Mangaldas

Since these are price- and time-sensitive deals, this 30-day bridge will be helpful to enable open-market purchases fearlessly, Chand added.

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