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12 August, 2016
We take a look at recent re-notification and revised merger control thresholds to the Competition Act, 2002, and how they will reduce regulatory hurdles for smaller transactions and facilitate ease of doing business in India.
The Competition Act, 2002 (Act), requires mandatory notification to and prior approval of the Competition Commission of India (CCI) for transactions wherecertain prescribed asset or turnover thresholds (Jurisdictional Thresholds) are exceeded. By way of a notification dated 4 March 2011 (2011 Notification), the Ministry of Corporate Affairs (MCA) enhanced the value of asset and turnover as provided in Section 5 of the Act by 50 per cent. In addition to the above, the MCA by way of notification on the same date (including a corrigendum dated 27 May 2011) also introduced a de minimis exemption in case of an acquisition. The said notifications contained a validity period of five years and were set to expire on 3 March 2016.
To facilitate the ease of doing business in India, by way of a series of notifications issued on 4 March 2016, the MCA has re-notified its earlier notifications (with modifications) (2016 Notifications). Importantly, the 2016 Notifications have enhanced the Jurisdictional Thresholds and extended the validity by re-notifying the changes brought about by the 2011 Notification.
Target Exemption: Re-notified with enhanced thresholds
Originally, acquisitions involving target entities with assets below INR 250 crores in India or turnover below INR 750 crores in India, would not require prior notification to and approval of the CCI (alternatively referred to as the de minimus exemption). This exemption was introduced for an initial period of five years.
On 4 March 2016, the MCA has re-notified the de minimis exemption with enhanced thresholds, set out below:
“In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts an enterprise, whose control, shares, voting rights or assets are being acquired has either assets of the value of not more than rupees three hundred and fifty crores in India or turnover of not more than rupees one thousand crores in India from the provisions of section 5 of the said Act for a period of five years from the date of publication of the notification in the Official Gazette.”
Therefore, in addition to extending the term of applicability of the Target Exemption (i.e., until 4 March 2021), the MCA has also increased the asset and turnover thresholds to INR 350 crores and INR 1000 crores, respectively in India, which is expected to result in a reduction of notifiable transactions.
The rationale for this re-notification and revised thresholds is essentially to facilitate ease of doing business in India and reduce regulatory hurdles for smaller M&A transactions. This move is in consonance with the Government of India’s proactive stance on fuelling investments /equity participation into start-ups under the aegis of ‘Startup India’. The re-notification will also ensure that the CCI is not unnecessarily burdened with inconsequential merger filings and is able to focus its resources on transactions which truly have a market impact.
Pertinently, the benefit of the de minimis notification continues to remain inapplicable to mergers and amalgamations.
Enhanced Jurisdictional Thresholds
Earlier, by way of the 2011 Notification, the MCA had increased the Jurisdictional Thresholds set out under Section 5 of the Act by 50%. Pursuant to the 2016 Notifications, the MCA has revised the Jurisdictional Thresholds prescribed under Section 5 of the Act by 100%, to account for inflation. The extract from the 2016 Notification in this regard is provided below:
“In exercise of the powers conferred by sub-section (3) of Section 20 of the Competition Act, 2002 (12 of 2003), the Central Government in consultation with the Competition Commission of India, hereby enhances, on the basis of the wholesale price index, the value of assets and the value of turnover, by hundred per cent for the purposes of section 5 of the said Act, from the date of publication of this notification in the Official Gazette.”
Effectively, all the Jurisdictional Thresholds have doubled, thereby reducing the number of notifiable transactions.
Definition of ‘Group’: Re-notification of the 50% test
The MCA has also re-notified the amendment to the definition of group as set out below:
“In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts the ‘Group’ exercising less than fifty per cent. of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years with effect from the date of publication of this notification in the official gazette.”
By way of background, the MCA had exempted the ‘Group’ exercising less than 50% voting rights in another enterprise from the application of provisions under Section 5 of the Act by way of the 2011 Notification. The current notification extends the validity of the exemption for a further period of five years, i.e. until 4 March 2021. As such, entities exercising less than 50% voting rights in another entity, will continue to not be considered as part of the same ‘group’ for the purpose of Section 5 of the Act. Alternatively, entities exercising 50% or more voting rights will be considered part of the ‘group’.
The extension of the validity of this notification will continue to result in fewer instances of intra-group exemptions from notification being available. However, as a positive, for the purpose of calculating Jurisdictional Thresholds, only assets and turnover of ‘group’ entities will continue to be taken into account to determine if a notification requirement arises.
The year 2016 marked a sharp increase in the number of notifiable transactions – the CCI passed orders in relation to 29 M&A deals in December last year. In view of the increasing number of transactions which were getting notified to the CCI, the notifications are a welcome move by the MCA to enable the CCI to review only those transactions which have the potential to adversely affect competition in India. This will go a long way in streamlining the Indian merger control regime.
For further information, please contact:
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas
cyril.shroff@cyrilshroff.com
