C&A eAlert: Small Target Exemption to Continue; Merger Notification Thresholds Increased

March 2016

 

The Indian Ministry of Corporate Affairs has issued the much awaited notifications continuing the small target exemption and increasing the merger control thresholds.

 

The notifications are part of the Indian Government’s agenda of improving India’s ranking in the ‘Ease of Doing Business’ ranking. No doubt, the notifying parties will appreciate the Government’s move. More importantly, it will also bring some relief to the Competition Commission of India’s stretched Combination Division, which has been inundated with merger notifications.   

 

This eAlert discusses the changes; and how these may affect proposed transactions.

 

Merger Control Thresholds Increased

 

The Competition Act, 2002 (Competition Act) requires the prior notification and approval of the Competition Commission of India (CCI) certain mergers and acquisitions based on the “size of parties”. India being a suspensory jurisdiction, parties cannot consummate the transaction till they have received the approval of the CCI.

In a notification dated 4 March 2016, the MCA has decided to increase the merger control thresholds by 100% (to those set out in section 5 of the Competition Act).

 

The new merger control thresholds are set out below:

 

Direct Parties Test:  India

 

 

Assets                                                                         Or                                                               Turnover

Combined Indian assets > INR 20 billion                                                                                            Combined Indian turnover > INR 60 billion

(approx. USD 298 million/EUR 271 million)                                                                                        (approx. USD 814 million/EUR 895 million)

 

 

 

    Direct Parties Test: Worldwide & India

 

 

 

Assets                                                                         Or                                                            Turnover

Combined worldwide assets > USD 1 billion                                                                                     Combined worldwide turnover > USD 3 billion

                         +                                                                                                                                                         +     

Combined Indian assets > INR 10 billion                                                                                           Combined Indian turnover > INR 30 billion

(approx. USD 149 million/EUR 135 million)                                                                                       (approx. USD 447 million/EUR 407 million)

 

 

 

Acquiring Group Test: India

 

 

                    Assets                                                                         Or                                                                  Turnover

Combined Indian assets > INR 80 billion                                                                                           Combined Indian turnover > INR 240 billion

(approx. USD 1.19 billion/EUR 1.08 billion)                                                                                       (approx. USD 3.58 billion/EUR 3.25 billion)

 

 

 

  Acquiring Group Test: Worldwide & India

 

 

 

                     Assets                                                                         Or                                                               Turnover

Combined worldwide assets > USD 4 billion                                                                                Combined worldwide turnover > USD 12 billion

                         +                                                                                                                                                      +     

Combined Indian assets > INR 10 billion                                                                                     Combined Indian turnover > INR 30 billion

(approx. USD 149 million/EUR 135 million)                                                                                (approx. USD 447 million/EUR 407 million)

 

 

Small Target Exemption

 

The MCA has decided to not only continue the small target exemption for a period of five years, but has also increased the financial thresholds.

 

The small target exemption (also known as the ‘De Minimis Exemption’) was introduced in 2011 for a period of five years. During the operation of the de minims exemption, merger control rules did not apply to transactions where the target enterprise (whose control, shares, voting rights or assets were being acquired) had either assets less than INR 2.5 bn (~USD 37 million) or turnover less than INR 7.5 bn (~USD 111 million).

 

As per the notification issued yesterday, the small target exemption will continue up to 3 March 2021. Notably, the MCA has also increased the financial thresholds. Per the notification, transactions where the target has assets less than INR 3.5 bn (~USD 52 million) or turnover less than INR 10 bn (~USD 149 million), will not require the prior notification and approval of the Competition Commission of India. These thresholds refer to the financials of the target enterprise (i.e., the legal entity) and not to the value of the assets being transferred.

 

It is believed that the MCA decided to continue with the exemption on the basis of recommendations received by the CCI. 

Critically, the notification misses clarifying the position of mergers and amalgamations; and continues to be limited to acquisition of control, shares, voting rights or assets.

 

Definition of Group 

 

In 2011, the MCA issued a notification exempting enterprises from the calculation of the ‘Group’ thresholds, where the ‘Group’ exercised less than 50% in such enterprises. This exemption has now been extended for another five years.

 

Under the Competition Act, "group" means two or more enterprises which, directly or indirectly, are in a position to:

  • exercise twenty - six percent or more of the voting rights in the other enterprise;

  • appoint more than fifty percent of the members of the board of directors of the other enterprise; or

  • controls the management or affairs of the other enterprise  (including by way of negative control).

 

The effect of the MCA notification is to increase (i) above to fifty percent from twenty-six percent. However, the CCI has consistently taken the view that holding twenty – five percent or more of the total shares or voting rights amounts to ‘controlling the management or affairs of the other enterprise’ (see (iii) above). As such, this exemption has been rendered nugatory; and caution should be taken before relying on the exemption in the calculation of thresholds.

 

Should you have any questions, please contact members of our competition law team.

 

 

Karan Singh Chandhiok
Head, Competition and Dispute Resolution Practice
karan.chandhiok@chandhiok.com

 

Vikram Sobti
Senior Associate
vikram.sobti@chandhiok.com

 

Kalyani Singh
Senior Associate
kalyani.singh@chandhiok.com

 

 

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