Under the recently released series of notifications to the Competition Act, 2002 (‘Act’), the Central Government has notified[i] imperative changes pertaining to the enforcement of certain provisions, the rules for exemption from combinations, criteria of combination, the minimum value of assets or turnover, and combination regulations. This update briefly seeks to outline the changes brought about by the notifications.
I. Competition Commission of India (Combinations) Regulations, 2024 (‘Combination Regulations’)
The Combination Regulations define ‘parties to the combination’ as persons or enterprises entering into combinations and include the combined entity if the combination has come into effect. The regulations further provide an inclusive mechanism for determining the value of transactions under s. 5 of the Act. It postulates that value shall include every valuable consideration, whether direct or indirect, deferred cash or otherwise, including but not limited-
for any covenant, undertaking, obligation or restriction if such consideration is agreed upon separately;
for all inter-connected steps and transactions as enumerated in Combination Regulations;
payable for 2 years from the date on which the transaction would come into effect for any arrangement entered into a part of the transaction ( e.g., technology assistance agreement, IP licensing, etc.);
for call option and shares to be acquired pursuant to the exercise of such option;
payable as per best estimates based on future outcomes specified under transaction documents.
The Combination Regulations further offer clarification on the calculation of the value of any transaction. Such value of future payments must not be discounted to present value, the ‘value of transaction’ to include a full subscription to the offer in case of an open offer, and the value of the transaction to exclude cost towards legal advice, the fee payable to investment bankers, regulators, and statutory authorities, and in case value is not ascertainable, the deal value threshold of INR 2000 crore to be deemed to be met.
As per the Combination Regulations, an enterprise shall be considered to have substantial business operation in India if:
For the rendering of digital services, the number of users in India is 10% or more of its global users or
Gross merchandise value for a period of 12 months preceding the relevant date in India is ten per cent or more of its global value and more than Rs. 500 crores or
India's turnover during the preceding financial year was 10 per cent or more of its global turnover and more than 500 crore rupees.
The Combination Regulations have further clarified and laid down the procedural requirements pertaining to the form of notice for the proposed combination, failure to file notice, confidentiality request, obligations to file notice, etc.
The notice for the proposed combination shall be filed in Form I of sch. I of Combination Regulations. Further, procedural requirements pertaining to notice, such as a timeline of notice/reply in case the Commission is of the opinion that the combination will have an adverse effect on the market, have been provided. In case the parties fail to provide notice, the Commission may initiate an inquiry and impose a penalty if such a combination is found to have an adverse effect.
In the case of a combination where notice under s. 6A of the Act is required. The acquirer is permitted to avail of economic benefits such as dividends, rights issues, bonus issues, stock splits, buybacks, etc. Further, voting rights can be exercised only in liquidation or insolvency proceedings.
The Combination Regulations further lay down the norms and procedure for filing notice, scrutinizing notice and inquiry, intimating a change in the information provided in the notice, withdrawing notice, terminating proceedings, etc.
II. Competition (Minimum Value of Assets or Turnover) Rules, 2024
This rule provides that for the purpose of s.5(e) of the Act, the value of assets shall be Rs. 450 crores, and the value of turnover shall be Rs. 1,250 crores.
III. Competition (Criteria of Combination) Rules, 2024 (‘Combination Rules’)
The Combination Rules lay down that parties who do not produce or provide similar, identical or substitutable products or services or who are not engaged in any activity relating to production, supply distribution, etc., and service, trade-in product or provision of service which are at different stage or level of production or complementary to each other, may give notice for the purpose of s. 6(4) of the Act.
The Combination Rules define parties to combination and their respective group entities as follows:
i. an ultimate controlling person of the acquirer or other entities forming part of the same group;
ii. the enterprise being acquired and downstream entities forming part of its group
iii. enterprises being merged or amalgamated, their controlling persons, and entities forming part of their group.
Further, an entity is considered to be an affiliate of another enterprise if another enterprise has:
i. ten per cent or more of the shareholding or voting rights in the enterprise or
ii. right or ability to have a representation on the board of directors of the enterprise either as director or observer;
iii. right or ability to access commercially sensitive information.
IV. Competition (Criteria for Exemption of Combinations) Rules, 2024 (‘Exemption Rules’)
The Exemption Rules list the criteria that must be satisfied by the categories of combinations to seek exemption from ss. 6(2), 6(2A) and 6(4) of the Act.
i. Acquisition of shares in the ordinary course of business, including-
an acquisition of unsubscribed shares upon devolvement of an underwriting agreement by an underwriter registered with the Securities Exchange Board of India (‘SEBI’) or other similar authority, provided the acquirer does not gain control of more than 25% of total shares or voting rights
acquisition of shares as a stockbroker registered with SEBI, provided the acquirer does not gain control of more than 25% of the total shares or voting rights.
acquisition of shares as a mutual fund registered with SEBI provided the acquirer does not gain control of more than 10% of the total shares or voting rights.
ii. Acquisition of shares or voting rights solely for investment purposes
iii. Acquisition of shares by the acquirer or its group entities holding shares or voting rights of the enterprise.
iv. In cases (ii) & (iii), the resultant shareholding should not result in more than 25% shareholding or control.
v. Acquisition of additional shares by the acquirer or its group entities that previously held more than 25% of the shares or voting rights, provided it does not hold more than 50% of the shares or voting rights post-acquisition.
vi. Acquisition of shares or voting rights in cases where the acquirer already holds 50%, and the acquisition does not result in a change in control of the enterprise being acquired.
vii. The acquisition of assets in the ordinary course of business includes the acquisition of stock-in-trade, raw materials, stores and spares, trade receivables, or other similar current assets.
viii. The acquisition of assets is not directly related to the business activity of the acquirer or solely as an investment, and it does not lead to control of the acquired enterprise.
ix. Acquisition of shares pursuant to bonus issue, intra-group acquisitions, mergers or amalgamation, not resulting in a change in control.
V. Notification Pertaining to Enforcement of Certain Provisions
The notification brings the following provisions of the Act into force:
i. Ss. 6 to 8 (both inclusive);
ii. Ss. 21 to 24 (both inclusive);
iii. S. 28;
iv. S. 30;
v. S. 34; and
vi. S. 38
Conclusion
The amendments are aimed at streamlining and will likely have an appreciable effect on the competition. Further, with Exemption Regulations, the compliance burden in those specific cases is supposed to be reduced. The clarity on procedural aspects of filing of notices, etc., pertaining to combinations is expected to support ease of doing business and further strengthen the merger control regime.
End Note
[i] Notification No. 07 OF 2024 [F. NO. CCI/CD/Comb. Regl./2024], G.S.R. 547(E) [F. NO. Comp-05/4/2023-Comp-MCA, G.S.R. 548 (E) [F. NO. COMP-05/4/2023-COMP-MCA], G.S.R. 549(E) [F. NO. COMP-05/4/2023-COMP-MCA], S.O. 3846(E) [F. NO. COMP-05/4/2023-COMP-MCA] dated 09.09.2024.
Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.