Exempted Combination Rules: Are We Losing Sight Of The Bigger Picture?
The rules have been notified by the government in a bid to reduce regulatory hurdles for parties involved in certain classes of deals.
In a bid to reduce regulatory hurdles for parties involved in certain classes of combinations, the Union government has notified draft regulations exempting certain deals from regulatory approval.
In essence, select deals that aren't likely to cause a competitive imbalance in the market won’t have to be notified to the Competition Commission of India.
Potential Upsides
According to the draft rules, shares acquired in the ordinary course of business or solely for investment purposes will be exempt.
For an acquisition to take place in the ordinary course of business, it shouldn't entitle an investor or a stockbroker to hold 25% or more of the total shares of the company and for a registered mutual fund, this threshold is 10%.
In addition, an acquisition will be treated as solely an investment only when conditions such as the acquirer not gaining a right to have a representation on the board of directors and not gaining a right to access commercially sensitive information of any enterprise are satisfied.
"Companies involved in purchase of shares/assets in routine course of business without actually intending to lose or gain control like angel investors and investment companies would benefit from these draft rules by way of substantially reduced compliance cost on account of merger filings," KK Sharma, former head of merger control at the CCI, told NDTV Profit.
"Small and medium-sized enterprises looking to expand through mergers or acquisitions, startups seeking to consolidate their market presence without facing extensive regulatory hurdles, and companies in sectors with relatively lower turnovers where the previous thresholds were more restrictive will benefit the most," said Winnie Shekhar, partner at IndusLaw.
Nonetheless, these enterprises should exercise caution lest they should be accused of having not made a filing when it was necessary, Sharma said.
Missing The Wood For The Trees?
The draft rules also exempt follow-on acquisitions where the acquirer or its group entities, prior to the acquisition, already hold shares of the enterprise but don't hold 25% or more of the shares of the enterprise—either prior to or after such an acquisition.
When an enterprise already holds 25% or more shares of an enterprise, this exemption will be extended if after the acquisition, the enterprise holds less than 50% of the shares of the concerned enterprise.
However, these follow-on acquisitions shouldn't result in a change in control of an enterprise.
Further, an M&A deal within the same group of entities will be exempt, provided that the transaction does not result in change of control.
"Exemptions for minority investments/follow-on acquisitions will be severely constricted and acquirers will be expected to notify transactions even where there are basic information rights (or information not available in the public domain) that the investor receives," Avaantika Kakkar, partner at Cyril Amarchand Mangaldas, said.
This is an extremely limited view of the competition landscape and misses the wood for the trees.Avaantika Kakkar, Partner, Cyril Amarchand Mangaldas
Similarly, multiple corporate actions that would be exempted will now be subject to the condition that they do not result in any change of control, as opposed to the reasonable standard of not resulting in joint or sole control, Kakkar said.