Introduction:

The Competition Act, 2002 ("Act") is the primary legislation regulating acquisitions, arrangements, agreements and combinations having an appreciable adverse effect on competition ("AAEC") in India. The Competition Amendment Act, 2023 ("Amendment Act") has brought about a paradigm shift in the regulatory landscape governing combinations in India. Prior to the introduction of the Amendment Act, the Act required only those combinations to be notified where, the value of the assets or the turnover of the parties to the transaction or the group to which the acquired entity would belong post-acquisition, exceeds certain specified threshold limits as specified in the Act (on a domestic or worldwide basis) ("Asset and Turnover Threshold). As a result of the abovementioned criteria, a number of acquisitions especially in the digital sector (such as Facebook's acquisition of WhatsApp, Myntra's acquisition of Flipkart and Ola's acquisition of TaxiforSure) escaped the regulatory lens of the Competition Commission of India ("CCI"), despite such acquisitions having the potential to lead to AAEC. This is because the cost of acquisitions in digital market sector often derives value from data or some business innovation plans held by the target, and these acquisitions fails to to satisfy the Asset and Turnover Threshold traditionally laid down by CCI. In order to address this regulatory lacunae, the Amendment Act has in addition to the Asset and Turnover Threshold, introduced a third independent and standalone criteria, known as the deal value threshold ("DV Threshold"), for determining whether a proposed combination would require prior approval of the CCI.

The DV Threshold inter alia requires both criteria to be fulfilled before the proposed combination would have to be notified to the CCI: (i) the value of any transaction, in connection with acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds INR 2,000 crores; and (ii) the enterprise which is being acquired, taken control of, merged or amalgamated has 'substantial business operations in India'. The Amendment Act did not provide any guidance on the various constituents that would comprise the 'value of the transaction' or the manner in which 'substantial business operations in India' would be determined. These gaps are now attempted to be elucidated in the draft of the Competition Commission of India (Combination) Regulations, 2023 ("Regulations") which have been published for public consultation.

As per Regulation 4, the value of the transaction includes every valuable consideration, whether direct or indirect, immediate or deferred, cash or otherwise, including but not limited to, (i) consideration paid for any covenant, undertaking, obligation in the nature of a non-compete restriction; (ii) any incidental arrangements entered into at any time during two years from the date on which the transaction comes into effect such as technology assistance arrangements, licensing of intellectual property rights, sale of raw materials or providing branding and marketing services; and (iii) for option and securities to be acquired, assuming full exercise of such options. Further, 'an enterprise would be deemed to have 'substantial business operations' in India if firstly, the number of its users, subscribers and customers, at any time during the period of 12 months preceding the relevant date, is 10% or more of its total global users, subscribers or customers. Secondly, if its gross merchandise value in India for the aforesaid period is 10% or more of its global merchandise value, or thirdly its turnover during the preceding financial year in India is 10% or more of its total global turnover.

Analysis:

The CCI has attempted to make the DV Threshold comprehensive and all encompassing. The Regulations have provided clarity vis a vis computation of DV in certain mechanisms commonly employed in M&A transactions such as structures involving deferred consideration or tranche wise sale of securities through inter alia earn out mechanisms and put/call options. However, when delved into deeply it is realised that the Regulations fail to shed light on complex and intricate scenarios involved in M&A transactions.

It is unclear if for an acquisition of a target located abroad, having subsidiaries or affiliates with substantial business operations in India, would the consideration attributable solely to the India leg of the transaction be considered by CCI for the purpose of computing DV Threshold or would the CCI adopt a mechanism akin to the concept of 'deemed international transactions' under tax laws1, and take into consideration the purchase price being paid for the composite transaction as a whole. This is especially relevant in cases wherein the India leg of the transaction forms an integral part of the overall global acquisition.

Further, given the current language of the Amendment Act and DV Threshold, there may be certain transactions that may effectively slip through the cracks of CCI's review. For instance, in certain transactions where the acquirer is purchasing a company, certain allied services may be required from the promoter or promoter run companies, for a certain period post-closing, in order to ensure smooth operations of the business. In such cases, acquirers often acquire the target for a certain consideration, and the remaining consideration is paid to either the promoters or promoter run entities, for the allied services provided to the Company, over a fixed period e.g., 5 years or 7 years. In such cases, even though the composite payments being made to the promoters/promoter run entities for the acquisition and the allied services over the entire period may exceed the DV Threshold, given that one or more of the individual transactions does not amount to a combination, and only payments made during the first 2 years from the closing date of the transaction are taken into consideration for computing the DV Threshold, these transactions may evade the regulatory approval of the CCI.

Similarly, the Regulations do not explicitly set out whether the "value of the transaction" being referred to bears a reference to the equity value being paid by the Investor for the purchase of the target ("Equity Value")2 or the enterprise value ("EV")3 of the target. Though, from a preliminary reading of the Regulations, it implies that only the Equity Value would be taken into consideration by CCI. If that be the case, operational companies, with a sufficiently high debt exposure, having a high EV (exceeding the DV Threshold) but a consequently low Equity Value within the DV Threshold, may scuttle the scrutiny of CCI.

Lastly, in a number of M&A transactions, in addition to a fixed monetary consideration, certain part of the consideration is pegged to subjective and fluctuating factors, such as EBITDA or EV or turnover of the relevant companies at a particular time, such as in case of share swaps or cash free mergers. In such cases neither party may at the time of consummation of the initial transaction be able to affix a definitive number to consideration, in order to determine whether the DV Threshold would be breached. The current approach suggested in Regulation 4(g), to give a notice to the CCI, on the assumption that the DV Threshold has been breached in the aforesaid cases, may not be the most viable. It may lead to administrative inefficiencies, with the already overburdened CCI examining combinations, which may not even be breaching the DV Threshold or causing an AAEC in the relevant industry. It would consequently also lead to an overall increase in the time involved in consummating such M&A transactions, which would typically fall outside the purview of the regulatory approval regime.

Thus, it is imperative that these uncertainties are plugged in the next iteration of the Regulations published after public consultation. If not so addressed, transactions that may not meet the straight jacket DV Threshold, would be left to the vagaries of the regulator.

Conclusion:

The DV Threshold introduced in India has been inspired by similar transaction based thresholds introduced in Germany and Austria. Unfortunately, none of these jurisdictions have been able to conclusively establish that the introduction of a deal value threshold has enabled to them successfully intercept anti-competitive combinations or practices. Therefore, for India to be able to effectively utilise the DV Threshold in order to meet the desired objective, it must be ensured that the DV Threshold tightens the nuts and bolts involved in combinations.

Footnotes

1. A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of this sub-section be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

2. Equity value is generally a sum of the Enterprise value and all the cash and cash equivalents minus the total debt of the Company.

3. Enterprise value is generally a sum of the Company's market capitalization and total debt subtracted by the cash and cash equivalents of the Company.

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