Indian Merger Control Regime – The Introduction And Impact Of Deal Value Thresholds

Introduction

On September 9, 2024, the Indian Government notified certain provisions of the Competition (Amendment) Act, 2023 that came into effect on September 10, 2024. One of the most noteworthy provisions pertains to the introduction of deal value thresholds (Deal Value Thresholds) to determine whether a transaction relating to acquisition of control, shares, voting rights or assets of a target entity, merger or amalgamation (Combination) requires to be notified to the Competition Commission of India (CCI) prior to its implementation. The Deal Value Thresholds comprise of a dual test of whether (i) the value of the transaction exceeds INR 2,000 crore (Value Test); and (ii) the target has ‘substantial business operations’ in India (Business Operations Test). Both these tests must be met for a Combination to be notifiable to the CCI under this provision.

The Deal Value Thresholds have been superimposed on an existing de-minimis exemption that exempts a Combination from the CCI notification requirement if the target has either assets of not more than INR 450 crore in India or turnover of not more than INR 1,250 crore in India (De-Minimis Exemption). The primary objective of introducing the Deal Value Thresholds is to target those big-sized deals wherein the target crosses one of the De-Minimis Exemption thresholds by a significant amount, and yet the deal escapes the CCI’s scrutiny simply because the target does not cross the other one. Thus, a transaction that exceeds the Deal Value Thresholds is now notifiable to the CCI even if it falls within the De-Minimis Exemption. This article analyses the Deal Value Thresholds and their overall impact on the merger control analysis.

Value Test

Unlike the De-Minimis Exemption thresholds that are entirely target focused, the Value Test is based on the value of the transaction under review. Ordinarily, this would mean the deal value specified in the deal documents. For example, the deal value of a primary transaction would be the subscription consideration payable by an acquirer to the target under a subscription or an investment agreement. Similarly, a share purchase agreement would contain the sale consideration payable by an acquirer for a secondary acquisition which would constitute the acquisition’s deal value. For undertaking the Value Test, however, the assessment is not so simple. One reason is because it encompasses all kinds of consideration – be it past, present, future, direct, indirect, immediate, deferred, in cash or otherwise. Hence, it’s important to understand how the deal value of a Combination is to be determined.

The Competition Commission of India (Combinations) Regulations, 2024 (Combination Regulations) that replaced the former combination regulations provide guidance on this issue. They include consideration payable under five categories that must be added to the deal value. Unlike the subscription or sale consideration discussed above that is evident, these categories relate to other kinds of consideration that may not be so obvious – either because it’s captured in a separate agreement or is part of a transaction that is interconnected or incidental to the main transaction.

The first category relates to consideration payable for any covenant, undertaking, obligation or restriction imposed on the seller or any other person if it has been agreed separately. This category would include, for example, non-compete fees that an acquirer agrees to pay to the seller – albeit under a separate agreement. It could also include consideration payable under an upside-sharing arrangement that is separately entered into by an acquirer with the promoters or key management of the target to incentivize them by sharing an upside at the time of the acquirer’s exit at a future date.

Another example is consideration payable under a transition services agreement or a consultancy agreement. These agreements are typically found in buyout transactions and are signed separately by the target with the promoters or key management of the target. However, the consideration for providing such services is payable by the acquired target entity – not the acquirer. It’s therefore unclear whether such payments would be characterized as indirect consideration falling in this category. Given that there could be more of such examples, it would be useful for the CCI to provide concrete illustrations through guidance notes or FAQs to better understand this category’s coverage.

The second category covers interconnected steps and transactions regulated by the Combination Regulations. Interconnected transactions, according to the regulations, are those where the ‘ultimate intended effect’ of a transaction is achieved by way of a series of steps or smaller individual transactions which are interconnected, and one (or more) of them is notifiable to the CCI. There are a considerable number of case laws on interconnected transactions that may help transacting parties navigate this category. Further, for the purpose of calculating the transaction value, past transactions are limited to a two-year look-back period from the relevant date.

The third category includes consideration payable during two years from the date the transaction comes into effect for arrangements entered as part of the transaction or incidental thereto. This category covers consideration payable for arrangements that are incidental to the main transaction such as licensing of technology or intellectual property rights, branding, usage or marketing rights or supply of raw materials or finished goods. A significant factor that differentiates this category from others is that it is limited to a finite period of two years post consummation of the deal.

The fourth category relates to consideration payable in connection with call options and shares assuming full exercise of such options. A call option is a right that an acquirer plans at the time of its investment in the target. It gives the acquirer a right to buy the target’s shares at a later specified date. Although this category is limited to call options held by an acquirer, it not only covers those ones that are simply exercisable with the passage of time, but also default call options that are contingent upon the occurrence or non-occurrence of a future event – within the control of the counterparty.

The call option’s exercise price is, at times, linked to some future outcome such as the fair market value of the target’s shares at the time of exercise of the call option. In such cases, however, the call option consideration cannot be determined upfront for assessing the deal value. Pursuant to the CCI’s notice-and-comment rulemaking process, it has issued a general statement (General Statement) clarifying that if the call option’s exercise price is based on a future outcome specified in the deal documents, best estimates should be considered.

The last category includes consideration payable as per best estimates based on a future outcome specified in the transaction documents. Going by the CCI’s General Statement, call option consideration that is linked to a future outcome would fall in this category. The Combination Regulations clarify that the best estimate shall be the estimate of the board of directors, or any other approving authority of the acquirer recorded by it in its approval, and if such best estimate is not recorded, the maximum payable amount shall be considered as the best estimate. The Combination Regulations further clarify that if the transaction value cannot be established with reasonable certainty, then the transaction value would be deemed to have exceeded the Value Test’s threshold.

While undertaking the Value Test, the Combination Regulations permit exclusion of transaction costs such as fees payable to lawyers, investment bankers, regulators or statutory authorities. However, stamp duty has not been expressly excluded. Stamp duty is a transaction cost that is payable to the Indian Government depending on the nature of the agreement and the place of its execution. For asset transactions that involve transfer of immovable property, the stamp duty cost can be significantly high. Hence, its exclusion can be confirmed in the Combination Regulations.

Overlapping Categories

The consideration payable for a transaction may fall under two or more of the above discussed categories. Let’s take an example of royalty payable by an acquirer to a seller who owns certain trademarks under a license agreement. The royalty is agreed as a percentage of sales of the target. The seller concurrently enters into a share sale agreement wherein it agrees to sell its stake to the acquirer. It is evident that the royalty amounts payable by the acquirer will fall in the third category and will need to be added to the sale consideration stated in the share sale agreement. However, the royalty payment could fall in the first category too. That could make a difference while evaluating the Value Test because, unlike the third category that stipulates a limited timeframe of two years, the first one does not have an end date. In this instance, royalty payments beyond the prescribed two-year period may need to be added to the deal value.

To take another overlap example, suppose an investor enters into an investment agreement with the target and its promoter. One year later, the same investor enters into a separate call option agreement with the target’s promoter pursuant to which the investor has the right to call for the promoter’s shares. Furthermore, the call option exercise price is linked to a future outcome. The call option consideration in this case could potentially fall under multiple categories. Transacting parties, therefore, must be mindful of the potential overlaps among these categories while determining the deal value.

Business Operations Test

Under the Combination Regulations, a target is considered to have substantial business operations in India if it exceeds the following thresholds: (i) in respect of digital service providers, if the number of its business or end users in India is 10% or more of its global number of such users; or (ii) if the gross merchandise value (GMV) in India during the twelve months prior to the relevant date is 10% or more of its global GMV and exceeds INR 500 crore; or (iii) if the Indian turnover in the preceding financial year constitutes 10% or more of its global turnover and exceeds INR 500 crore. The INR 500 crore requirement mentioned in points (ii) and (iii) above does not apply to digital service providers.

The Business Operations Test has been designed to ensure that large-sized global acquisitions involving enterprises that do not have substantial business operations in India are not subjected to CCI’s scrutiny just because such acquisitions exceed the Value Test. This seems logical since the primary purpose of the CCI is to prohibit any Combination that has or could have an appreciable adverse effect on competition in India.

Overall Impact

Prior to introduction of the Deal Value Thresholds, the De-Minimis Exemption was a commonly used exemption to avoid triggering the CCI’s notification requirement. Its analysis was straightforward, and more importantly, there was a reasonable degree of certainty that acquirers had while availing this exemption. With the advent of the Deal Value Thresholds, however, the De-Minimis Exemption has lost some of its vigor. That is because an acquirer whose transaction exceeds the Deal Value Thresholds can no longer claim the De-Minimis Exemption. Therefore, if a transaction exceeds the Deal Value Thresholds, it effectively renders the De-Minimis Exemption analysis moot.

Additionally, the new Competition (Criteria for Exemption of Combinations) Rules, 2024 (Exemption Rules) exempt certain Combinations from compliance with the CCI’s notification requirement altogether (Exempt Combinations). An acquirer whose transaction qualifies as an Exempt Combination need not notify the CCI even if such a transaction exceeds the Deal Value Thresholds.

At first glance, it may appear that the Exemption Rules can easily negate the consequences of introduction of the Deal Value Thresholds. Practically, however, such instances would be rare since there are various conditions that an acquirer must satisfy for its transaction to qualify as an Exempt Combination. These conditions include the absence of the acquirer’s ability to exercise ‘material influence’ over the management or affairs or strategic commercial decisions of the target (i.e., the lowest form of control) and the absence of special rights (including a board or observer seat). It is unlikely for first-time acquirers entering into large-value transactions to not have such influence or rights – particularly when the target is unlisted. Therefore, transactions that exceed the Deal Value Thresholds will seldom qualify as Exempt Combinations. Hence, going forward, the Deal Value Thresholds analysis is expected to be the focal point for determining whether a Combination will fall under the CCI’s scanner and require its regulatory nod.

Conclusion

The introduction of the Deal Value Thresholds has, in one fell swoop, changed the landscape of the Indian merger control regime. Transacting parties will now need to carry out a detailed and often complicated review before signing deal documents. In the coming weeks, it would be useful for the CCI to provide concrete illustrations through guidance notes or FAQs of how to calculate the value of a transaction. Till then, acquirers will have to tread with a lot of caution while assessing the Deal Value Thresholds.

Disclaimer: The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the publication.

Authors: 

−    Viral Mehta viral.mehta@nishithdesai.com, Lead - Private Equity and Financial Services Regulatory, Nishith Desai Associates

−    Khyati Dalal khyati.dalal@nishithdesai.com, Leader – Private Equity and M&A, Nishith Desai Associates