Draft Rules For Small M&As, Green Channel Aim To Ease Entrepreneurship

The Indian government recently introduced two new sets of rules: the draft De Minimis and draft Green Channel Rules with an aim to encourage entrepreneurship.

According to experts interviewed by NDTV Profit, these rules aim to further streamline the ease of doing business in the country.

Understanding De Minimis

The De Minimis rules establish thresholds for business deals, stating that the value of assets in these deals should not exceed Rs 450 crore, and the turnover should remain under Rs 1,250 crore. 

If deals fall within these limits, they are classified as 'de minimis', meaning they are considered too small to warrant scrutiny under the Competition Act. These newly set thresholds will be in effect for two years. Even if only a portion of a business is involved in a deal, its specific value will be taken into account when calculating these thresholds.

With these new thresholds, there will be faster movement of deals in the M&A ecosystem that do not cross the threshold, according to Varsha Jalan, partner at Khaitan Legal Associates.

Understanding Green Channel Rules

On the other hand, the Green Channel Rules specify that a combination is automatically approved on the day the form is filed if it meets certain criteria. These rules outline criteria for automatic approval upon form submission, eliminating the need for formal approval from the commission.

This opens up space to ensure fewer overlaps and to enhance business possibilities with less intervention from the authority, Jalan said.

To qualify under these rules, the parties involved should not directly compete by offering similar products or services. Additionally, they should not be at different production stages or have products that complement each other.

One big change in the new rules is how they decide if two companies are "affiliates" or not.

In the past, when deciding if two companies were "affiliates" under the rules, they looked at a few things. Firstly, if one company had a direct or indirect ownership of 10% or more in another company, they were considered affiliates.

Secondly, if one company had special rights or advantages that regular shareholders didn't have, like being able to make certain decisions, they were also considered affiliates.

Lastly, if one company could pick a director or observer for the other company, they were affiliates too.

But now, there's a change in the second point. Instead of just looking at special rights, they're also considering if one company has the right or ability to access commercially important information about the other company's business.

Stakeholders are likely to face challenges in overlap mapping due to unclear guidance around the ‘commercially sensitive information’ limb of the affiliate test, according to Aparna Mehra, partner at Shardul Amarchand Mangaldas & Co.

Hopefully, the CCI will provide clarity on this aspect to obviate any confusion, she said.

These rules provide a quicker approval process for eligible transactions, making compliance easier for companies and promoting mergers and acquisitions, said Manmeet Kaur, partner at Karanjawala & Co.

But that is not all. Apart from swift approvals, there is also a cost-related benefit of these rules for the companies. 

They will help reduce regulatory compliance costs for parties entering into M&A transactions that benefit from the de minimis exemption or satisfy the criteria for green channel route, according to Parthsarathi Jha, partner at Economic Laws Practice.