Introducing De Minimis+
The original De Minimis Exemption was introduced in 2011 and later amended by way of a notification in 2016, exempted transactions from a notification requirement if the target enterprise (whose control, shares, voting rights or assets were being acquired) had assets of not more than INR 3.5 billion (~USD 54 million) OR turnover of not more than INR 10 billion (~USD 154 million). Whilst this was a valuable attribute of the Indian merger control regime, it had certain limitations – the De Minimis Exemption was limited to only acquisitions and was calculated on the basis of the total value of assets or turnover of the selling enterprise.
On 29 March 2017, in a major move towards improving India's "Ease of Doing Business Ranking", the Government of India has made significant changes to the Indian merger control regime by way of a notification (De Minimis+ Notification) issued by the Ministry of Corporate Affairs (MCA).
The changes will not only be welcomed by notifying parties, but also by the Competition Commission of India (CCI), which has seen its Combination Division flooded with merger notifications.
What is the De Minimis+ Notification all about?
The Notification, issued by the MCA has significantly:
- expanded the current scope of the existing small target exemption to cover all types of transactions; and
- altered the assessment of jurisdictional thresholds.
We discuss both these topics at Sections A and B, respectively, of this eAlert. Section C of this eAlert discusses the applicability of the notification and some open questions.
Section A – Scope of De Minimis+
What transactions are covered under De Minimis+?
Shedding the earlier artificial distinction drawn in the earlier notifications between acquisitions and mergers, the De Minimis+ Notification applies to both acquisitions and mergers. By doing away with this distinction, the new exemptions have now brought about much awaited clarity and uniformity in its application to transactions.
Section B – Calculating Jurisdictional Thresholds
Are there any changes in the asset and turnover thresholds?
No. The De Minimis+ Notification continues with the thresholds prescribed in the 2016 notification – i.e., for the exemption to apply, the value of assets being acquired, taken control of, merged or amalgamated, should not be more than INR 3.5 billion (~USD 54 million) in India OR turnover should not be greater than INR 10 billion (~USD 154 million) in India. However, as explained below, there are significant changes in the manner in which such thresholds are calculated.
Do I look at the total value of assets or turnover of the enterprise selling the assets or only to value of assets or turnover being transferred?
Previously, the value of assets or turnover of the entity selling the assets was considered in determining the De Minimis Exemption. This meant that large corporates selling assets of insignificant value would have transactions subject to clearance by the CCI.
Now, under the De Minimis+ Notification, if the transaction involves the acquisition, merger or amalgamation of a portion or business division of an enterprise, it is the value of assets and turnover of that portion or business division of the enterprise, which will be relevant for the assessment of notification requirement.
How do I calculate value of assets or turnover for the portion of the business or division being transferred?
The De Minimis+ Notification expressly provides for methodology of calculating the value of target assets or turnover.
For assets – the value will be determined by reference to the book value of the assets being transferred (after deducting depreciation) as reflected in the audited books of account or in the report of the statutory report. The target assets would include all types of assets classes – current, fixed, tangible, and intangibles, if such assets are proposed to be transferred and recorded in the books.
For turnover – the turnover of the portion of the business or division will need to be certified by the enterprise's statutory auditor. However, there is no clarity on the calculation of turnover for those enterprises that do not require a statutory auditor.
Section C – Applicability and Open Questions
When does the De Minimis+ Notification come into effect?
The Notification has come into effect since the date of its publication, that is, 29 March 2017.
When does the De Minimis+ Notification expire?
Midnight of 28 March 2022.
Is the application of the De Minimis+ Notification prospective or retrospective?
The applicability of the Notification is entirely prospective. The De Minimis+ Notification fully replaces the previous notification issued by the MCA in 2016 "except as respects things done or omitted to be done before such date" of the Notification.
What about the 'inbetweeners' – transactions that have been signed but not yet notified?
There are uncertainties concerning transactions, which were signed before the date of the De Minimis+ Notification. The Competition Act imposes an obligation on the parties to file a notice within 30 days from the date of executing definitive documents. The De Minimis+ Notification does not expressly clarify if deals signed prior to the date of publication, would be able to take benefit of this exemption. The CCI has in -informal consultations - taken the view that such combinations do not need to be notified. However, the CCI will continue to review those notices that have been submitted to it, even though, such combinations may be exempt.
Are there any more open questions?
Whilst there will be more questions when these rules are applied in practice, the CCI will have to address and fill the gaps for the following immediate questions:
- The De Minimis+ Notification uses the expression "being... merged or amalgamated into another enterprise". For mergers, this would imply that the applicability of the notification should be tested against the value of assets or business being transferred. Hence, there is ambiguity as to whether the benefit of the De Minimis+ Notification would apply where a larger enterprise (i.e., above the prescribed thresholds) is merged into a smaller enterprise.
- Similarly, it is not clear whether the De Minimis+ Notification requires the joint calculation of the value of assets or turnover where two or more enterprises amalgamate to form another new enterprise.
- As stated above, the CCI will need to give guidance on the calculation of assets or turnover, where the enterprise does not have statutory auditors.
What is the verdict?
All in all, the De Minimis+ Notification is a fundamental transformation, which is not only likely to reduce the number of notifiable transactions, but also effectively reduce approval timelines. Further, this also brings convergence between the rather (in)famous Indian merger control regime and prevalent international practice of looking at value of assets for notification requirements.
Originally published March 2017
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.