Summary: The Competition Act, 2002 governs mergers and acquisitions in India, requiring parties to notify the Competition Commission of India (CCI) within 30 days of a “trigger event,” which is generally the signing of a binding agreement. This requirement aims to prevent anti-competitive practices and monopolies. However, the Ministry of Corporate Affairs (MCA) recognized the burden of this 30-day deadline, leading to its suspension for five years starting in 2017. The suspension was extended again in March 2022, allowing companies to notify the CCI at any point before a transaction is finalized, providing greater flexibility and reducing operational bottlenecks.
Another significant aspect of the Competition Act is the Small Target Exemption, which allows transactions involving companies with assets under INR 350 crore (approximately USD 45.92 million) or an annual turnover below INR 1,000 crore (around USD 131.21 million) to proceed without CCI approval. This exemption has been extended until March 2027, alleviating regulatory burdens for small and medium enterprises. Additionally, the CCI has begun adopting a more lenient approach towards the turnover of foreign subsidiaries, potentially excluding it from exemption calculations. Recent clarifications regarding private equity transactions also emphasize the importance of consulting legal expertise in navigating these evolving regulations. Overall, the changes aim to facilitate smoother merger processes while maintaining necessary scrutiny on larger deals.
The Indian competition law is governed by the Competition Act, 2002. This entails setting conditions for merger and acquisition deals in that before entering a deal, merging parties must obtain consent from the Competition Commission of India, or CCI. Mergers may not adversely affect competition or result in the creation of a monopoly in a market. One of the significant conditions of the Act on companies is that a company must notify the CCI within 30 days of the occurrence of a “trigger event.” Broadly, trigger event would include signing a binding agreement, which would mark the final formal expression of intention of the parties to close the deal.
However, a significant development in 2017 was when the MCA recognized that this statutory requirement was not practically light and suspended the 30 days’ filing deadline for five years. That provided companies with the latitude to file the notice or, rather, to notify the CCI at any time before the transaction was consummated rather than strictly within 30 days of the trigger event.
On March 16, 2022, the MCA further extended this suspension via notification (S.O. 1193(E)), thus knocking off the reinstatement of the 30-day stipulated period till June 28, 2027, with the intention to make business operations less cumbersome and smoother. This has added flexibility to the business because the government now allows firms to notify the CCI at any time after they ink their binding agreements but before the consummation of the deal. This is particularly crucial because amendments to the Competition Act, 2002, can be made only by the Indian Parliament, and until such amendments are made, suspension permits transactions to proceed without unwarranted delays.
Why Was the 30-Day Time Limit Considered Draconian?
Under the old order of things, the time span that firms were expected to prepare the merger notice was considered very short until the 30-day limitation was abolished. It was generally practically impossible for companies to draft a notice and prepare all the relevant papers within the 30 days after signing the deal, especially larger and more complex deals. There was an aspect of high uncertainty that if the deadline was not met then a penalty would be drawn or problems might arise with the transaction. The suspension thus resolves these issues by providing sufficient time to the companies for review and preparatory exercise of their filings so that transactions can be processed in a more smooth manner.
Small Target Exemption: An Important Relief under India’s Competition Regime
An important relief granted under India’s competition regime is Small Target Exemption. This exemption is to relieve the obligation of seeking approval from CCI in relation to smaller transactions. An exemption is provided wherein if the target company (or the business unit being acquired) has assets worth less than INR 350 crore (approximately USD 45.92 million) in India or an annual turnover of less than INR 1,000 crore in India (about USD 131.21 million), no approval from CCI is required for such a transaction.
This exemption greatly lessens the burden for SMEs and other smaller entities, which may not even seriously threaten the marketplace. Mergers and acquisitions targeting such targets are, generally speaking, perceived to be unlikely to harm competition and thus are allowed to close without any antitrust review.
In March 2022, by notification No. S.O. 1192(E), the MCA further extended the Small Target Exemption for another five years up to March 27, 2027. This indeed is a welcome development both by business and legal practitioners, which, as mentioned earlier, will ensure that smaller transactions continue without the bottleneck of CCI approvals, which are time-consuming.
Recent Developments Relating to Foreign Subsidiaries
The CCI has recently begun trending toward a more lenient interpretation. Indeed, it would seem that the turnover of foreign subsidiaries with no connection whatsoever to India would be excluded for purposes of Small Target Exemption thresholds. This becomes particularly relevant for Indian companies with overseas operations. If the turnover generated by foreign subsidiaries has no nexus with India—for example, sales to customers located abroad—the CCI may allow those figures to be excluded from the calculation, increasing the chances of qualifying for the exemption.
This is, however, an area which is still developing and, in particular, the willingness of the CCI to exclude foreign turnover will depend on the facts of each case and the sector in which the business operates. In the circumstances, as there is no settled precedent on this issue, businesses should seek legal advice on such transactions.
In addition to the foreign subsidiary issue, the new order by the CCI in the Invest Corp India/IDFC case has also brought to light how the small target exemption applies with respect to private equity investors. Regarding cases in which the acquirer or the target is a private equity fund or an investment manager, the CCI clarified that full assets and turnover of the companies controlled by the fund should be counted while deciding whether the transaction actually qualifies for the exemption. This covers the complete account and financial statement of the portfolio companies, not just that portion of the assets or turnover that is commensurate with the shareholding of the fund.
However, it is not clear whether this principle applies universally or only in cases where private equity funds are involved. Business subject to such transactions must, therefore, be watchful and obtain professional advice on their specific issues.
One other critical area that the CCI has thus unequivocally addressed in the Phoenix/EQU/GS case is intra-group export sales. This gains particular significance considering the fact that such an issue is more specifically relevant to the IT/ITES sector and, to a lesser extent, other service-based offshoring sectors.
It is on this particular area that the CCI provided with two tests to determine whether intra-group export sales could form part of the calculation while determining applicability to the Small Target Exemption:
Parties Test: Intra-group sales may normally be excluded from the calculation where the entire target group is being purchased, including the parent company. However, if only a portion of the group is being acquired, then intra-group sales should not be entirely omitted altogether.
Location Test: This test takes into account where the sale is going to take place. If it is occurring entirely within India, or if the supply is originating in India and terminating in India, even though it may pass through an offshore entity, then it is probably the sales should be counted. There is a concern with double-counting while trying to reflect an accurate market presence in India.
Conclusion
The extension of the suspension of the 30-day deadline and the renewal of the Small Target Exemption reflect the efforts that the Indian government has undertaken in terms of smoothing out the procedure for the merger approval and not overburdening businesses with procrastinated procedures. In other words, such measures would grant greater flexibility, especially in terms of the smaller transactions, as the larger deals are not being compromised but rather making sure that they get the amount of antitrust scrutiny they need. In this regard, companies will continue to watch these regulations and will be cautious enough to consult proper legal expertise in managing them.
References:
[1] https://www.cci.gov.in/sites/default/files/notification/S.O.%202039%20%28E%29%20-%2029th%20June%202017.pdf
[2] Notification dated March 16, 2022 – S.O. 1193(E); Available at: https://www.egazette.nic.in/WriteReadData/2022/234278.pdf.
[3] Notification dated March 16, 2022 – S.O. 1192(E); Available at: https://egazette.nic.in/WriteReadData/2022/234300.pdf
[4] Section 43-A Order dated December 17, 2021 of the CCI in relation to proceedings against InvestCorp India Asset Managers Private Limited.
[5] Order dated October 25, 2022 in Combination Registration No. 2021/08/863.
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