Introduction
Having obtained presidential assent on 11th April 2023, the Competition Amendment Act, 2023[1] is being implemented in a staged manner to rework the competition regime within the country. In line with this Amendment, the new proposed merger control regime has also been issued by the CCI. This draws our attention to the Draft Competition Commission of India (Combinations) Regulations, 2023 (“Draft Regulations”).[2] This post seeks to examine the key features and changes within the Draft Regulations, and analyze their implications on market dynamics, industry players, and consumers alike. Additionally, this post will scrutinize any potential enforcement challenges that may arise as the regulatory framework undergoes transformation, offering potential policy suggestions for the same.
The New Timeline and Deal Value Thresholds
A notable change introduced are the new notification thresholds under Regulation 4. It can be divided into two main aspects; Deal Value Threshold (“DVT”) and Substantial Business Operations. Addressing the former, if the value of a transaction exceeds INR 20 billion, it is mandatory to notify the CCI. Moreover, there has been an expansion of the guidelines for determining the valuation of a transaction to encompass “every transaction of value,” whether it be direct, indirect, immediate, or deferred, involving cash or other forms of consideration. The definition provides further clarifications on what values must be computed into the transaction value, they are; (i) non-compete fees; (ii) consideration attributable to inter-connected transactions; (iii) consideration for transactional or incidental commercial arrangements entered within 2 years of the closing of the notifiable transaction; (iv) consideration for options and securities on an as-converted basis and; (v) consideration payable for contingencies. Notably, in cases where the transaction value has not been captured completely via company documents, the value determined by the Board of Directors shall be deemed final. In the instance where a precise value cannot be determined with “reasonable certainty,” INR 20 Billion i.e., the threshold value will be presumed for the notifiable party.
Embracing such a comprehensive and catch-all definition provides CCI with widened jurisdiction, this may lead to implementation issues. While this broadened definition may prevent companies from escaping notifiability by unfair means, these ambiguous thresholds also have the potential to increase CCI’s burden as the number of notifiable transactions will substantially increase. This may prove especially difficult due to the CCI already being understaffed. Parties will be required to presume their transaction to be notifiable due to the ambiguity and scope of these regulations to avoid gun-jumping and non-compliance penalties.
There may also arise issues pertaining to calculation of deal value. Per Regulation 4(1)(c), any “incidental transactions” two years prior to the date of the transaction shall be included within DVT. However, no clarifications have been provided for what constitutes an incidental transaction which may lead companies to presume notifiability leading to excess notifications. Another potential issue is the lack of an independent, qualified expert in the process deal-value calculation. Per the Explanation to Regulation 4, if deal value cannot be ascertained, the threshold would be the value deemed by the Board or any such approving authority. The Draft Regulations are absent on an independent expert overseeing these calculations to prevent misrepresentation or fraud.
The second aspect of the DVT is whether the concerned party has substantial business operations in India (“SBoI”). A party will be deemed to have SBoI if (i) it’s number of customers, subscribers or visitors in India in the last 12 months, constitute 10% or more of its global total or; (ii) its gross-merchandise value (GMV) is 10% or more of its global GMV or; (iii) its turnover for the preceding FY is 10% or more of its global turnover overall. There has been an incessant trend of big enterprises[3] acquiring tech start-ups for their market potential. Though these acquisitions are of small monetary value, they provide enterprises significant competitive advantage due to the start-up’s technological innovations. Often referred to as killer acquisitions,[4] these enterprises pre-empt and eliminate fair competition in markets. Thereby, the wide ambit of the SBoI Test, aims to bring such anti-competitive transactions within the notifiability thresholds. However, its wide scope has the potential to lead to multiplicity of insignificant notifications as companies may meet the SBoI thresholds despite having minimal business in India.[5] This will again increase regulatory workload on the already overburdened CCI.
Curiously Absent: Item I Exemptions and Green Channel
The Combination Regulations 2011,[6] provide notification exemptions for transactions that are unlikely to cause an appreciable adverse effect on competition (“AAEC”) under Schedule I of the same. Minority acquisitions, creeping acquisitions and stock-related transactions are some examples of exempted transactions, making them especially important for investors. The new Draft Regulations do not contain Schedule I and any refences to the same have been deleted. While it is plausible that these aforementioned exemptions would be published in a separate series of regulations under Section 63 of the Amended Competition Act, as of now, they have been completely scrapped. The very rationale behind the addendum of Schedule I, was to exempt transactions which do not pose any antitrust concerns. Removing these exemptions will lead to a substantial increase in benign notifications filed before the CCI, especially when read with the new DVT thresholds. Further, the Draft Regulations also do not contain any transitory provisions i.e., they have not clarified whether these Regulations will apply prospectively or retrospectively, leading to apprehension and confusion among potential investors. This does not align with the ease of doing business norms in India.
Another significant change is the absence of the Green Chanel Route in the Draft Regulations.[7] The Green Channel allows for expedited approval of certain transactions which do not include any vertical, horizontal or complementary overlaps. This move has consistently been praised by businesses, as it allows for ease of doing business by fast-tracking the transaction timeline, saving money and services. While this route has been codified under the 2023 Amendment, and under Form I of the Draft Regulations, the requirements to qualify for this exemption have not been expanded upon. The prior regime laid down specific eligibility conditions such as there being absolutely no horizontal/ vertical overlaps etc. The new Draft Regulations do not have any such criteria mentioned; one will have to wait for jurisprudence to develop on the same. For example, CCI FAQs and Orders post the implementation of these Draft Regulations, will help investors and lawyers understand how they will continue to assess Green Channel transactions. Until then, there may exist uncertainty in the market regarding the avail of this exemption.
In brevity, reintroducing a comprehensive framework for Item I Exemptions and Green Channel Route, will have the effect of reducing benign notifications especially in the context of the wide DVT and SBoI thresholds. Thereby, the author proposes reintroducing these exemptions either in the form of separate rules or in the final draft of the 2023 Combination Regulations.
Open Market Acquisitions and Other Sweeping Changes
A welcome change has been the new flexible approach towards open market purchases. This aligns India with international standards, enabling investors to capitalize upon time-sensitive market opportunities, without CCI’s prior approval. Per the Regulations, the acquirer must notify the CCI within 30 days from date of acquisition. Having adopted a practical stance,[8] the CCI is allowing the acquirer to redeem any economic benefits or exercise their acquisition related rights, prior to approval. However, this is all subject to the acquirer not directly, or indirectly “influencing the target’s activities in any manner.” While this is a welcome change in the regime, it will be worthwhile to see how the jurisprudence develops on the interpretation on key terms such as “influence”, especially when there is a lack of specified thresholds on what constitutes decisive or material influence.
The Draft Regulations also provide for timeline changes, substantially expediting the overall timeline of transactions and streamlining the Thirty Lakhs and Form II has been increased to Rupees Ninety Lakhs. This exponential increase may be a reflection of the reduced review timelines and expedited process. Further, the Draft Regulations have also codified the previously informal Pre-Filing Consultation Mechanism which aids parties in structuring their transactions. Moreover, in the instance of any structural modifications or remedies, the parties have to now follow a pre-set format in the Draft Regulations.
Conclusion and the Way Forward
Overall, the Draft Regulations provides a mixed bag of changes, while it signifies a well-intended evolution in the competition regime, it appears to overlook the administrative realities and constraints faced by the CCI. The current absence of exemptions, especially the lack of Schedule I, may lead to an influx of notifications, burdening an already understaffed CCI. While the aim is to capture a broader spectrum of transactions, the regulatory framework needs to strike a balance to prevent over-notification and ensure efficiency. This re-working is essential to achieve the overarching goals of fostering healthy competition, protecting consumer welfare and promoting economic growth in India.
[1] Competition Commission of India, ‘Competition (Amendment) Act, 2023 Salient Features’ (CCI, 2023) <https://cci.gov.in/images/publications_booklet/en/competition-amendment-act-2023-salient-features1684831868.pdf> accessed 3 January 2024.
[2] Competition Commission of Inida, ‘Draft Competition Commission of India (Combinations) Regulations, 2023’ (CCI, 2023) <https://cci.gov.in/images/stakeholderstopicsconsultations/en/draft-combinations-regulations1693891636.pdf> accessed 3 January 2024.
[3] Kashyap H, ‘Big Tech, Startups under CCI Scanner’ (Inc42 Media, 29 March 2023) <https://inc42.com/buzz/big-tech-startups-under-cci-scanner/> accessed 3 January 2024.
[4] Cunningham C, Ederer F and Ma S, ‘Killer Acquisitions’ [2018] SSRN Electronic Journal.
[5] Sakle A and others, ‘Sweeping Changes to Indian Merger Control Regime Imminent: Draft Regulations Published’ (Kluwer Competition Law Blog, 7 September 2023) <https://competitionlawblog.kluwercompetitionlaw.com/2023/09/08/sweeping-changes-to-indian-merger-control-regime-imminent-draft-regulations-published/> accessed 3 January 2024.
[6] CCI, ‘The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011’ (CCI, 2011) <https://cci.gov.in/combination/legal-framwork/regulations/details/1/0> accessed 3 January 2024 .
[7] ‘Green Channel’ (Competition Commission of India) <https://www.cci.gov.in/combination/green-channel-view> accessed 3 January 2024.
[8] Avaantika Kakkar Vijay Pratap Singh Chauhan, ‘CCI’s Draft (Combinations) Regulations: Key Takeaways’ (Competition Law, 1 November 2023) <https://competition.cyrilamarchandblogs.com/2023/11/ccis-draft-combinations-regulations-key-takeaways/> accessed 3 January 2024.