C&M E-ALERT: CCI updates its FAQs on merger control

WHAT HAS HAPPENED?

KEY HIGHLIGHTS OF THE FAQs

CONTROL

Recent legislative amendments gave statutory recognition to the CCI’s practice of using “material influence” as the standard for control. The revised FAQs now offer a clearer and more detailed explanation of what would constitute material influence.

• Not all veto or affirmative rights constitute control: The nature of the rights must be evaluated to determine whether they enable influence over strategic or policy decisions (indicative of control) or merely function as investor protection mechanisms.

• Negotiated rights influencing operational aspects create presumption of control: illustrative lists of rights that ordinarily either trigger or do not trigger a presumption of control have been provided for guidance.

• Board rights may not always imply control: An observer right may not imply material influence. A right to appoint directors may lead to material influence and a presumption of control depending on the specific facts.

  
  

CALCULATING THRESHOLDS

A transaction is notifiable to the CCI only if: (a) asset and turnover thresholds are met, at the level of the parties or their group entities; or (b) the recently introduced deal value thresholds are crossed. The revised FAQs clarify nuances in calculating these thresholds, including how to assess group-level figures and determine deal value.

• Controlled entities must be included for group-level thresholds: The revised FAQS clarify that entities over which a company exercises material influence are to be considered a part of the group for threshold assessments. While the CCI has previously articulated this principle with respect to asset management companies,[1] it has now been explicitly extended to all threshold calculations.

• Net for deal value has been cast wide: It must include all cash and non-cash consideration transferred within 2 years of the transaction that flows “to or at the will of the seller or the target”, aggregated across all interconnected steps. For share swaps, the CCI’s illustration demonstrates that the total value of all shares being exchanged should be included.

• Turnover exclusions have been clarified: The revised FAQs confirm that: (a) export revenue is excluded from turnover in India, even for domestic companies; and (b) turnover typically includes only revenue from operations - however, other income must be included if deemed relevant by the auditor. Insurance companies and banks must include additional items such as premiums and interest.

NOTIFIABILITY AND EXEMPTIONS

• Change in quality or degree of control will be a notifiable event: Any change in the controlling arrangements between shareholders in terms of shareholding thresholds, substantial change in rights, changing nature of control, or entry or exit of new shareholders will be considered a notifiable event. This applies even where the shareholder pattern remains unchanged.

• Exemption for certain financial institutions apply only upon default: Acquisitions by certain financial institutions are exempt from notification if they are, among other things, “pursuant to any covenant of a loan agreement or investment agreement”.

  The revised FAQs clarify that this condition will be satisfied only when the share acquisition results directly from a default under a loan or investment agreement, specifically relating to debt or pure debt instruments.

• Intra-group share acquisitions are exempt: The revised FAQs state that acquisitions of shares within the same group are exempt if it does not result in change of control, although the relevant regulations only explicitly exempt intra-group acquisitions of “assets”.

• Preferential allotments are not exempt from standstill: The revised FAQs clarify that the exemption from standstill obligations (but not notification requirement) for open offers and open market purchases would apply to block and bulk deals, but not preferential allotments.

• Observer right disqualifies exemption for incremental acquisition: Under existing regulations, acquisitions where pre- and post-transaction shareholding or voting rights remain below 25% may be exempt from the obligation to notify. To qualify, among other things, the acquirer or its group entities must not gain access to commercially sensitive information as a result of the acquisition, unless they already have a right to appoint a director to the board of the target.

The revised FAQs clarify that prior access to commercially sensitive information through a pre-existing observer right disqualifies the exemption.

MAPPING OVERLAPS

• Definitions from green channel rules apply more generally: The CCI’s guidance notes to Form I (Notes to Form I) and the rules for availing green channel used differing criteria for group entities and affiliates to be included for mapping overlaps (captured in the table below).

The revised FAQs clarify that definitions under the green channel framework will now

uniformly apply to overlap assessments in general.

• Ultimate controlling person and downstream entities to be considered: The revised FAQs expand the scope of entities for mapping overlaps, going beyond the CCI’s Notes to Form I.

This aligns with the CCI’s recent practice - particularly in considering individual shareholders of acquirers - and is consistent with the green channel rules.

COMMERCIALLY SENSITIVE INFORMATION

The revised FAQs explain that commercially sensitive information often relates to information that is important for an undertaking to protect, maintain or improve its competitive position in the market.

The revised FAQs provide an illustrative list of information that may or may not be commercially sensitive. This has a bearing on:

·       applicability of certain transaction-type exemptions;

·       eligibility for the green channel route; and

·       scope of entities for overlaps mapping.

This list may also serve as a first reference point in an enforcement context.

INTERCONNECTED TRANSACTIONS

• Relaxation on overlaps mapping for interconnected steps that are standalone exempt: Under current regulations, all interconnected steps to a transaction must be notified in a single notice to the CCI, even if some are independently exempt. The revised FAQs clarify that if any interconnected steps qualify for transaction-type exemptions on a standalone basis, acquirers for those particular steps need not disclose any horizontal overlaps, vertical interfaces and complementarity.

  While the CCI may still request such details on a case-by-case basis, this relaxation is a welcome move to ease compliance burdens, especially for innocuous steps that would otherwise be notifiable only on technical grounds.

• Meeting of minds is an important criterion: Apart from reiterating established principles on interconnection, the revised FAQs clarify that acquisitions by investors as part of funding rounds should be considered as interconnected only if there is a mutual understanding between investors to invest in an entity. Merely signing a common agreement will not be enough to establish interconnection.

  However, functionally linked or economically dependent transactions will still be treated as interconnected. Therefore, this clarification may provide only a limited benefit in case of funding rounds.

  

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[1] See the CCI’s decision in Investcorp dated 17 December 2021.

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