The story so far: Striving to further consolidate regulations pertaining to mergers, particularly those relating to the digital ecosystem, the Competition Commission of India (CCI) on September 5 floated a consultation paper proposing the CCI (Combinations) Regulations, 2023. The proposed code would replace the existing regulations, initially formulated in 2011. It would also follow up on the amendments introduced to the Competition Act by the Parliament earlier this year. Comments to the proposed regulations are invited until September 25.
What is the endeavour behind the exercise?
In April this year, the Competition (Amendment) Act, 2023 was enforced following its passage by both Houses of the Parliament. As enumerated when it was first introduced in August 2022, it had taken cognisance of “significant growth of Indian markets and a paradigm shift in the way businesses operate in the last decade.” Thus, the act, also relying on the “experience gained out of functioning of the Commission,” sought to introduce more regulatory certainty and an overall trust-based environment.
Among other things, the amendment introduced a new notification criterion, that is, a deal value threshold of Rs. 2,000 crore, besides requiring that the enterprise being acquired, merged or being amalgamated should have substantial business operations in India. To put it simply, any merger or acquisition exceeding the threshold would mandatorily require CCI approval. This was among the recommendations made by the Standing Committee on Finance assigned the task of examining the bill when it was first introduced.
Taking note of the definition initially accorded to value of transactions, it highlighted that uncertainty about thresholds could potentially bring transactions likely to cause “adverse effects on competition under the merger control mechanism.”
The report notes imperative observations relating to the ‘value of transactions’ in the digital market space, while enumerating the salient features of the bill. It stated that though the enterprises being acquired have minimal assets and turnover, they may have huge potential in terms of valuable data, technologies and market information etc. Hence, there is a necessity for a definite threshold.
An often-cited example of this paradigm was Facebook’s acquisition of WhatsApp which did not require the competition regulator’s clearance for traditional companies.
So, what do the regulations propose?
The most important of the regulations relate to the definitions proposed with respect to ‘value of transaction and criteria for substantial business operations in India’.
The regulations propose that an entity would be deemed to be an ‘enterprise’ with ‘substantial business operations’ in the country should the number of its users, subscribers, customers or visitors, at any point of time during the preceding twelve months constituted 10% or more of its overall global count. This would be cumulative of all products and sources. Additionally, the criterions also entail that gross merchandise value during the same is 10% or more of the global share. The same holds for their turnover in India with respect to its global share.
For perspective, ‘gross merchandise value’ means cash, receivables, or any other consideration either for or facilitating sale of goods and/or provision of services on its own or as an agent or otherwise. It relates directly to any kind of goods sold.
Entities would now also have to enumerate the arrangements entered as part of the transaction or incidental arrangements entered anytime during the preceding two years from the date of the transaction. These could be about technology assistance, licensing of intellectual property rights, usage rights to any product, service or facility, supply of raw materials or finished goods, branding and marketing (a non-exhaustive list.)
How do they help?
Broadly, the proposed regulations address M&As in the digital space and list down definite criterions for easier compliance.
According to Anshuman Sakle, Partner at Khaitan & Co, the overall changes are progressive and have been implemented after much deliberation. “Certain high-value transactions which earlier were able to escape scrutiny would be caught in the CCI’s net and would allow the regulator to assess the impact from transactions in the relevant markets,” he told The Hindu.
Further, according to him, for transactions involving listed targets, there could be “significant ease in compliance”. “Until now, acquirers have faced gun-jumping risks due to the suspensory nature of the law. The exemption involving on-market transactions has long been demanded by the industry and would allow transactions involving listed companies to be structured with greater freedom,” he elaborated. Mr Sakle adds that acquirers would now be able to implement open market purchases at the first instance without risks from a competition law perspective.
The proposals are also expected to bring about an increase in the number of merger filings, which Mr Sakle states would be because of an additional threshold to consider. “We could possibly see an increase in reportable transactions in the technology space. Transactions where acquirers are paying a significant premium could also fall within the regulatory net,” he added.
