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The noteworthy amendment brought by the Indian Competition Regulator is in Deal Value Thresholds (“DVT”) which now forms part of the Indian M&A regime through a conjoint reading of the Act, the Competition (Amendment) Act, 2023 (“Amendment Act”), and the Competition Commission of India (Combinations) Regulations, 2024 (“2024 Combination Regulations”).
The DVT is an additional condition that has been introduced under Section 5 of the Act, which assesses the obligation of prior notifying of transactions to the CCI through a “value of the transaction” test. Through the amendments in the Amendment Act, DVT has been codified in the form of Section 5 (d) of the Act, which is in addition to the Section 5 (a), (b) and (c) threshold analysis that has been prescribed in the existing regime.
Under Section 5(d) of the Act, read with the 2024 Combination Regulations:
The “value of the transaction” (in connection with an acquisition of shares, voting rights, assets or control or a merger or amalgamation) being analyzed must exceed INR 2,000 crores; (“Value Test”) and
The enterprise being acquired, taken control of, merged or amalgamated must have “substantial business operations” in India (“Business Test”).
Let’s delve into understanding of the above newly introduced provisions:
Step 1: Determining Value Test
The components that are to be included within the calculation of the “value of the transaction” have been set out within the 2024 Combination Regulations which are as follows:
Regulation 4(1)(a): Covenants, undertakings, obligations or restrictions imposed on the seller or any person (if such consideration is agreed separately)
Transaction documents shall clearly specify either (a) specify the value of the non- compete covenant clearly, if such value is separate; or (b) specifically provide that the purchase price consideration already accounts for the cost of a non-compete covenant.
Regulation 4(1)(b): Interconnected steps and transactions (provided in Regulations 9(4) and 9(5) of the 2024 Combination Regulations)
The time period that may be considered to interconnect transactions for this component can be taken from Explanation (c), which states that any acquisitions by one of the parties or their group entity, in the enterprise, at any time during the period of 2 years before the relevant date are to be considered as part of the value of the transaction.
Regulation 4(1)(c): Consideration payable during 2 years from the date on which the transaction would come into effect, for arrangements entered into as part of the transaction or incidental thereto
The test of an arrangement falling within this line item is whether such arrangement has been contemplated by the parties as part of the underlying transaction being consummated as on date.
Regulation 4(1)(d): For call option shares and shares and shares to be acquired thereof, assuming full exercise of the option
Where the option price is pre-determined, such pre-determined value is to be considered. If the exercise price is based on future outcomes set out in transaction documents, “best estimate” to be considered.
Regulation 4(1)(e): For consideration payable, as per best estimates, based on the future outcome specified under transaction documents
This component “provides flexibility and certainty by providing that this consideration may be included as per best estimates of the acquirer.” This is to be read with Explanation (h) to understand the scope of “best estimates”.
Step 2: Business Test – Does the enterprise have substantial business operations in India?
Why amendment was brought?
A large number of transactions having a larger deal value were not being notified to the CCI as the enterprise was able to avail exemptions under the De Minimis Exemption.
For an instance let’s take example of acquisition of WhatsApp by Facebook. Facebook acquired 100% of WhatsApp for a deal value which was touted to be approximately USD 19 billion1. Competition regulators in the European Union and the United States of America did scrutinize and assess whether the acquisition impacted competition in their respective jurisdictions, the CCI could not assess this acquisition. Had there been a situation that if DVT was applicable in 2014, Facebook would have had to undertake the Business Test (given that the Value Test is getting satisfied due to the high deal value) for WhatsApp in India to ascertain whether a notification to the CCI was required. If WhatsApp satisfied the Business Test, the transaction would have been notifiable to the CCI owing to the DVT. Thus, the introduction of the DVT was required for the CCI to evaluate transactions that could influence market competition but previously got sheltered through the Previous De Minimis Exemption or De Minimis Exemption, and their lack of residual powers for scrutiny of such non-notifiable deals. By: Maulik Kesariya, Owner / Proprietor at Maulik Kesariya
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